Voda-gone? Why it happened
How intense competition and poor regulation killed the world's cheapest data
Data in India is cheap.
It costs $0.26 for one GB of data in India versus $9.89 in China and $3.50 in Brazil.[1]
The story of data prices in India could be written in two phases. Before Jio and After Jio.
Before Jio, the industry was cartel-like, with high prices, low competition and low consumer welfare overall. Customers paid close to ₹268 per GB in 2014 and ₹226 per GB in 2015 compared to ₹75 in 2016. [2]
All of that is set to change. The country's third largest telecom company Vodafone Idea has to pay close to 5 times its market capitalization in license fees. The market which was already an oligopoly will now probably transform to a duopoly.
This post will explain why it happened, and what can happen now.
Why did this happen?
Before 2009, the government used to give licenses for the spectrum on a First Come First Serve Basis. The people who came first, got the license at the choice of the Telecom Ministry. Such a system gives large discretionary powers to one individual.
The Telecom Minister could decide who gets the license and who does not by pure arbitrariness. One would naturally expect corruption here with companies paying ministers for the license.
That was exactly what happened. The Comptroller and Auditor General of India (CAG) noted that there was substantial corruption amounting to a ₹1.76 trillion loss to the exchequer.
Since then spectrum licenses have been auctioned off to the highest bidder. On May 24, 2010, there was an auction for the 4G spectrum where a small unknown company called Infotel bid and won the All-India spectrum rights.
On the day the results were announced, Reliance bought Infotel and along with it, got the rights to the All-India 4G spectrum. Other companies got licenses for particular cities like Mumbai, Delhi and Bangalore. *
For almost 6 years Reliance was in stealth mode developing its network. These 6 years were the golden years for Airtel. Airtel had revenue growth of 20% in 2012 which went between the range of 11 and 5% from 2011 to 2016.
Despite the sky high prices, Vodafone was struggling to make a profit in India. It had high capex costs and high interest charges making it financially unviable to be in India. Along with that it had a tax dispute with the government of $2.5 billion.
Even before the entry of Jio, Vodafone had never made a profit in India. In fact it was doing so poorly, that it had racked up £800 million in losses since it entered the market. [5] The British parent wrote down the value of its Indian subsidiary by 66% in 2016 even before Jio entered. [5] Vodafone had debt of 81,00 crore in 2016 compared to just 44,000 crore in revenue.
In short even without competition Vodafone was dying a slow death. Competition made it far worse for them.
Then came Jio
I believe that these are the absolute lowest data rates anywhere in the world
Mukesh Ambani launching Jio
Mukesh Ambani launched it on the 5th of September 2016.
It was a shock to the telecom industry which till then had enjoyed high profits, and no competition.
In 2014 it cost ₹268 for one GB of data. In 2015 it cost ₹226 for the same.
Jio reduced the price of data to ₹75 a GB. That is a 66% price drop in the average price paid per GB of data.
The effect was seen clearly on competitors's income statements. Airtel has had 3 continuous years of negative sales growth as have Vodafone and Idea.
Competition in the telecom sector was brutal. Just before the launch Airtel and Vodafone both cut prices. Airtel cut prices by 80%.[4] In anticipation of Jio in August 2016, Vodafone cut prices by 67%.
But you cannot make money by selling 10 rupees for 6 rupees. Especially when your competitors can produce the same 10 rupees for just 6 rupees. You are not only at a massive cost disadvantage, but also face a lack of market power because the other company is the price setter.
The Band-aid: Merging with Idea
To borrow from Tolstoy -
All unsuccessful telecom companies are unsuccessful in their own way; all successful companies are alike.
The two unsuccessful companies here had the same problem: They had a large debt load, high costs of production, and their customers were being snatched away by a hungry competitor with an endless appetite.
It was a marriage made on the steps of bankruptcy court. Both the companies were like two sinking sailors clinging to each other for help.
The merged entity made money in all 22 cities it operated in, with Vodafone contributing 12 and Idea contributing 10 of those cities with no overlap. The combined management was optimistic about the cost savings quoting it to be around $10 billion.[6] The number was an estimate by the Vodafone CEO.
Like many estimates this was at best a dream. At worst it could have been called selling false hopes to the shareholders so that they could get their capital for the new company.
Vodafone Idea has been a disappointment since it began. The company has had profits decline by almost ₹2 billion and its stock price has declined by 78%. The company's stock was at ₹29.81 on 31 August 2018, and on 28th February 2020, the stock is worth just ₹3.80.
It is safe to say that the future is bleak for Vodafone Idea.
The AGR Judgement
The previous half of this was about a company that delivered value to billions of customers and reducing the profits of its competitors. But the next half is a tragedy where companies are stifled by the government.
All the companies in this passage - Airtel, Jio, and Vodafone-Idea - sell mobile data and cellular services (that is normal calls). To sell a service that offers calls in India you must get a license from the Department of Telecom. The Department generally gives these licenses at will given the suitability of the licensee.
In 1994, the government under the new National Telecom Policy allowed private entry into the telecom sector but required companies to pay a fixed fee as part of the license.
But in 1999, the government changed the fee from fixed to a percentage of adjusted gross revenue (AGR). When the government defined AGR in 1999 it was all gross revenue except costs from the public telephone network, roaming costs, sales tax and services tax.
If a company sold products apart from telecom, like internet connectivity the government counted that as part of gross revenue. If the companies got money from interest in the bank accounts the government counted that as gross revenue too. Had the telecom companies known that in 1999, they would have reduced their investments in the telecom sector.
But the companies don't agree. They say that for a telecom license, telecom revenue must be considered. How much they earn in other things like selling mobile data should not be considered at all.
They fought it out in a telecom appellate panel in 2015 and the telecom companies won. The government appealed to the Supreme Court and now in 2020 the Court agreed with the government and said that the companies had to pay around 8% of almost all their revenue to the government as a license fee.
All the companies are under considerable stress because of the high debt load and high competition in the sector.
Now they have to pay a large sum of money to the government along with fines and interest on the fines. The total figure for all the companies adds up to ₹1.76 lakh crore (US$ 25 billion).
Can they pay this back?
Jio has already paid its share of the AGR dues (195 crores), and Airtel says that it can definitely pay the money. But the only one which is not confident about it is Vodafone Idea.
Vodafone Idea owes around ₹53,000 crores to the government. They can pay only 3500 crores of that. Which means that 94% of their dues are unpaid.
To give you some context:-
There is a ₹52,965 crore hole in Vodafone Idea's balance sheet. And they have to either get the government to indefinitely delay it or file for bankruptcy.
In the end my prediction is that Vodafone Idea is gone. It was nice while it lasted. The Indian telecom market will transform into a duopoly, with higher prices and lower quality.
*The exact mechanics of this confuse me too. If Jio got an All India 4G license it means that they had the license to use the 2 to 8 GHz spectrum all over India. If Airtel got the Mumbai license, does that mean that there is some clash between Jio's and Airtel's 4G in Mumbai?
[1]https://medium.com/swlh/the-economics-behind-indias-super-cheap-0-26-per-gb-mobile-data-40f28bdd7774
[2]https://main.trai.gov.in/sites/default/files/YPIRReport04052018.pdf Page 65
[3]https://www.indiatoday.in/technology/features/story/reliance-jio-4g-data-plans-prices-how-it-is-different-and-everything-you-need-to-know-338517-2016-09-01 I took the average of the ₹ per GB in this page to get 143
[5]https://www.ft.com/content/88124934-acb7-11e6-9cb3-bb8207902122