Consolidation in the Indian Telco Sector

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2Q 2017 | IN-4523

The recently announced merger between Vodafone India and Idea Cellular will create a combined entity with nearly 400 million subscribers, making it the largest telco operator in India, subject to regulatory approvals. The Indian telco market is on the cusp of major consolidation. Both operators and subscribers can gain from this consolidation, at least in the foreseeable future.

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Merger of Vodafone India and Idea Cellular


The telco sector in India is composed of over 10 operators serving 1.1 billion mobile subscribers, according to the Telecom Regulatory Authority of India (TRAI). Bharti Airtel was the dominant incumbent and Vodafone India was the second largest operator, with 25% and 20% market shares (by subscribers) respectively. Idea Cellular was ranked in third place with just over 15% market share. The merger of Vodafone India and Idea Cellular, once approved, would give the combined entity around 37% market share and over US$12 billion in sales revenues. EBITDA margins are forecast by India Ratings to be in the range of 28%, or around US$3.5 billion. 

Industry Consolidation


While such a merger may be regarded by many industry analysts to lead to an increase in pricing power and diminished competition, and with the possibility that customers may be worse off because of higher tariffs, this is unlikely to be the case.

The Indian market will see further consolidation moving forward, with many operators opting for the merger/acquisition route to expand. Bharti Airtel announced plans to merge with Telenor, while Reliance Communications is expected to merge with Aircel, MTS, and perhaps even with Tata DOCOMO. Public sector operators Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam (MTNL) are expected to combine their strengths to enjoy the benefits of a larger entity.

At the same time, new entrant Reliance Jio has taken the market by storm in a bid to boost market share via disruptive pricing tactics, forcing the entire industry to revise tariff plans and offers to maintain competitiveness. The consolidation will alter the structure of the market, marking a shift away from its present competitive state, creating a group of strong players focused on product differentiation and branding.  



The merger route is the fastest option to enlarge presence, and appears to be the preferred option by Indian operators that have ample cash balances or access to capital through financial markets. Trends indicate Indian subscribers demand more reliable and high-quality services (strong network coverage, no disruptions, or call drops). Smartphone penetration is growing rapidly in line with rising data consumption. Therefore, operators merging into larger entities will be better placed to make the investments (both CAPEX/OPEX) needed to keep pace with advancing technology and subscriber dynamics.  

According to the Economic Times, Vodafone India has a strong presence in urban metros and Idea Cellular has solid subscriber pockets in rural areas. So, such a merger would present the combined entity with not just a significantly higher subscriber base and market share, but also a larger geographic footprint. Similar mergers are likely to happen in order to gain traction into both urban and rural areas, the latter offering being substantial business opportunities. Economies of scale gained from providing services to a larger customer base can lower costs immensely for the operator. Cost savings may be further accelerated through “economies of scope” when interrelated activities are carried out; for example, logistics, sales, and service outlets may now be shared with excesses being rationalized.  The larger entities may also be able to exercise countervailing power to gain better procurement deals from handset/device makers. The combined entity may indeed choose to pass on these costs savings, in varying degrees, to prepaid subscribers by way of competitive tariffs and postpaid subscribers, by way of attractive bundles and contracts with device options.

The combined entity will be better placed to make the CAPEX investments needed to boost mobile telephony infrastructure (basestations, towers, etc.) and reliability to provide greater value to subscribers. Indeed, Reliance Jio’s entry stimulated industry-wide focus on value enhancement through product and service quality, as well as driving internal efficiency.

Therefore, further consolidation should lead to the development of an oligopolistic telco market in India. Typically, in such a scenario, competing on tariff/price is avoided and the focus is on maintaining greater price stability. Rather than competing on price, the operators will compete on product differentiation, branding, and marketing. Both prepaid and postpaid subscribers should see great offers moving forward. Given that number portability is now allowed, the merged entities will need to drive value and loyalty as customer retention has become paramount. The focus on overall subscriber growth, enticing users to switch from prepaid to postpaid, extending reach, customer service excellence, and attractive pricing must continue. A critical success factor (CSF) will be managing costs efficiently while providing quality elements to drive average revenue per user (ARPU) and making the much-needed investments for long-term growth and profitability. Consolidation may even lead to the inception of more infrastructure alliances to manage costs for the sector as a whole. 


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