Indian government strives to save its dwindling telco industry

Government officials have reportedly been having meetings to figure out how the prospects for Vodafone Idea can be improved and three-way competition can be preserved.

Rumours have been circling the Indian telco space over recent weeks as it appears the industry is sleep-walking towards the death of Vodafone Idea and the creation of a defacto duopoly. One potential outcome in the immediate future would be invoking banking guarantees, a precursor to termination of telecom licences, according to the Economic Times, though this would be a worrying move.

With finance and telecoms ministers meeting in private, the objective could be to preserve a level of competition which is deemed adequate. Three private telcos should be considered the absolute minimum, though this is arguably too few for a nation the size of India. If the status quo is to continue concessions will have to be made.

What is actually being discussed behind closed doors remains to be seen, though reports are suggesting the Indian Government is seeking remedies to the precarious situation. This may well mean deferred or staggered repayments for the €7 billion spectrum bill being faced by both Vodafone Idea and Bharti Airtel.

The seriousness of the situation in India should not be taken lightly, though whether the Indian Government has the foresight to appreciate the damage which could be done in pursuing immediate repayment remains to be seen.

Vodafone Group CEO Nick Reid has repeatedly stated he would not be prepared to invest more capital in the market, or at least the vast sums which are being discussed today. It does appear Vodafone is prepared to wrap-up the joint venture between itself and Idea Cellular. Reid is perhaps looking at the big picture.

Vodafone is under pressure in several markets across the world. In the UK, it is spending significantly to bolster its current market share, while both Spain and Italy are presenting challenging environments thanks to heightened competition. India offers great potential, but $7 billion is a significant investment to remain in the hunt. At some point, executives will have to question when the end is nigh.

The ‘Chase Theory’ is usually associated with compulsive gambling, but it is also applicable here. As one of the simplest forms of gambling, the punter doubles down to recoup losses in pursuit of a theoretical gain. India is a market which offers great rewards due to a massive population and rapid digitisation, but it is proving to be a very costly pursuit. The last thing Reid will want to do is bankrupt his business chasing the hypothetical pot of gold at the end of the rainbow.

If the Indian Government does not introduce some flexibility into its mindset in dealing with the telcos, the market will soon devolve into a defacto duopoly. Admittedly, there are two state-owned telcos still in the fray, but these are providing next to no genuine competition. For a sustainable and healthy telecoms industry in India, the existence of Vodafone Idea should be considered priority number one.

The trickiest aspect of this discussion will be how to maintain credibility as an authority; the Indian Government needs to help Vodafone Idea, but it cannot be held to ransom by divas in the telecoms space.

Indian Supreme Court takes another step towards telco duopoly

The Indian Supreme Court has rejected a plea from Vodafone Idea and Bharti Airtel to defer disputed spectrum licence fee payments, making the collapse of Vodafone Idea a realistic outcome.

While the dispute has been on-going for more than a decade, it has intensified considerably over the last few months. Vodafone Idea and Bharti Airtel are liable for roughly $7 billion each in payments, thanks to penalty fees and interests, and have been attempting to negotiate better terms.

The plea to the India Supreme Court, where the telcos asked for interest fees to be dropped and the sum to be payable over a ten-year period, has now been officially rejected. Vodafone Idea and Bharti Airtel now have until March 13 to make the payments to the Indian Government in full.

The question which now remains is whether the death of the Vodafone Idea business is anything more than a matter of time.

The dispute in question concerns license fees which the telcos are liable for. As part of the licence, the India Government is entitled to a slice of the profits, though what this percentage is and what it is a percentage of is the centre of the argument. As this disagreement has been on-going for more than a decade, the penalty and interest fees have been adding up to an eye-watering amount.

Despite pleas to ease the financial burden of these penalties, the Indian Government and regulator have remained stubbornly resolute. Now it appears in might be a case of ‘cutting off the nose to spite the face’.

The Indian Government has always looked quite self-serving when it comes to working alongside the telecommunications industry. It has seemingly looked at the market as a short-term money-tree, as opposed to a long-term stimulant to the greater economy. Spectrum auctions are another example of this, with the valuable, scarce and limited resource often going unsold at auctions as the telcos complain of the financial commitments.

Now the greediness of the Indian Government is seemingly coming back to haunt it as the threat of competition being dwindled to a duopoly, a very dangerous position to be in, becomes much more realistic.

At the time of writing, shares in Vodafone Idea were down 22%. Vodafone Group CEO Nick Reid has already suggested the business would not be prepared to invest anymore capital in India without assistance from the Government, with the latest ruling adding another nail in the coffin. The financial liabilities being placed on Vodafone Idea could very realistically cause the firm to shut up shop in the near future.

For the Indian telecommunications industry, this would be a disaster.

Telco Market share
Reliance Jio 32%
Vodafone Idea 29%
Bharti Airtel 28%
BSNL 10%
MBNL 0.2%

BSNL and MBNL are effectively being propped up by the Government currently, meaning the market has in-effect three mobile players. There of course used to be much more competition, but thanks to the Reliance Jio pricing disruption, Telenor, Tata and Reliance Communications exited the market, while Vodafone and Idea Cellular merged into a single entity in 2018. Competition is at a very weak point, and it now looks like it will become even more feeble.

If Vodafone was to cash in its chips, Idea Cellular will unlikely be able to revive its business. The merger was driven by survival after all, meaning the collapse of the third major MNO. A market duopoly is not healthy, especially when one of the competitors is already battered and bruised and facing the same monstrous fine as Vodafone Idea.

Bharti Airtel has suffered as much as any other telco since the arrival of Reliance Jio. As India is the domestic market of the telco, it is highly unlikely doors will close, but the Supreme Court decision will also hold Bharti Airtel to payments of roughly $7 billion. As the market heads towards an informal duopoly, the former-market leader could be weaker than ever.

On the other hand, as Reliance Jio only entered the market in 2016 its own spectrum fee bill is considerably less. It is still an uncomfortable amount, though the firm managed to sell off its tower assets to settle the amount. It might be a bit poorer for the saga, but it is in a considerably healthier position than any of its rivals.

The Indian authorities have done what can only be described an atrocious, amateur and absent-minded job of managing its telecommunications industry over the last few years. It seemingly favoured Reliance Jio to the long-term detriment of competition, was unable to price spectrum appropriately for decades, and in this example, is stubbornly demanding its dues. The authorities cannot be held to ransom by a diva-like demands of telcos, but the risk of a Vodafone Idea collapse is very high.

Vodafone Idea looks to be at breaking point, Bharti Airtel doesn’t have two rupees to rub together and Reliance Jio is laughing. The Indian Government is proving to be incompetent at managing a healthy and sustainable telco market.

The death of Vodafone Idea starting to become a real prospect

Vodafone Group CEO Nick Read has reiterated his vow that no fresh funds would be injected into the Indian joint venture with Idea Cellular, painting a dreary picture for competition in the market.

As it stands, Vodafone Idea owes the Indian Government roughly $7.4 billion in spectrum fees, overdue payments and fines. Bharti Airtel is in a similar position, with both telcos pressing the authorities for relief. To date, the authorities are not budging, potentially undermining any commercial objectives for Vodafone in the region.

According to The Economic Times, Read has demanded the Government waive the penalties and interest payments, while also allowing Vodafone Idea to repay the principle sum over a period of ten years. Only if these demands are met, will Vodafone commit to continue the joint venture with Idea Cellular and push additional funds into the market.

This is a very stern statement from Read and one the Indian authorities should take very seriously. Numerous telcos have already left the market, and while it cannot be held to ransom by another, the competition landscape is looking suspect already.

The main issue here is a dispute over licence fees paid on spectrum assets. The telcos and the Government have different opinions on how much should be paid. This argument has been on-going for more than a decade, hence the ridiculous sums which Vodafone Idea and Bharti Airtel are being asked to pay. As Reliance Jio only came into existence in 2016, its own bill is much more palatable.

With extraordinary pressures already being placed on the spreadsheets thanks to the Reliance Jio disruption by undercutting existing pricing models, as well as a drive towards modernising infrastructure, this bill is the last thing the telcos need.

For Vodafone, you can see the predicament. There is a fortune to be made in India, but how much pain and expense can the business go through to realise it. The firm is facing difficulties in several other markets also; how many headaches can Nick Read tolerate at once? India might prove to be one migraine too far.

The beginning of the end: VodafoneZiggo switches off 3G network

The Vodafone and Liberty joint-venture VodafoneZiggo decided to switch off its 3G network to bring “The Netherlands much faster, safer and stabler mobile internet.”

In a release called “End of the 3G era”, VodafoneZiggo announced that “as of February 4th 2020, Vodafone will take its 3G network off the air.” The company, one of the first mobile operators to switch off 3G, explained the main rationale behind the decision is to free up frequencies for 4G, so that consumers currently only served by 3G networks can enjoy mobile internet “a fraction better”. Deploying 5G in the future on the frequencies made available is also on the card.

VodafoneZiggo warned those consumers that have held on to their phones since before its 4G service went live in 2013 that they may lose internet connections on their phones. It also suggested old SIM users order new SIMs with 4G enabled.

3G, first switched on by NTT DoCoMo in 2001, has been using 900MHz and 1800MHz in Europe and Asia Pacific, the frequencies that are valuable for mobile operators to roll out newer generations of wireless technologies to large proportions of the population. Meanwhile, the 384kbit/s data rate supported by 3G does not allow too much mobile internet to run on it.

It was only when 4G, with much higher data rate (theoretically up to 100Mbps downlink), was widely deployed did the whole mobile internet ecosystem start to flourish. So, it makes sense for the operators to drop the curtain on 3G and refarm these frequencies for 4G and 5G, which will generate higher returns.

Ironically although 3G went live 10 years after the first GSM network was launched (in 1991 in Finland), we may see 2G networks last longer. It is not so much that many people are still making phone calls or sending text messages over 2G, as it is powering large wide area IoT networks, such as utility metering, thanks to 2G’s low power consumption and wide coverage. The industry has also recognised this generational skip. For example, some Open RAN compatible radio products have been designed to support both 2G and 4G without bothering about 3G.

Vodafone claims removing Huawei from its European cores will cost €200 million

Vodafone group reported solid Q4 2019 numbers for Europe but says it  will have to blow €200 million on swapping Huawei out of many of its network cores.

Group revenues were up 7% year-on-year, driven by a 10% jump in Europe, which in turn was helped by the Liberty Global acquisition. Having said that, organic service revenue growth was flat, which is probably why the Vodafone share price is unmoved by the results. An additional factor will be an unchanged outlook.

“I am pleased with the pace at which we have executed our commercial and strategic priorities, which has allowed us to maintain our momentum in the quarter,” said Group Chief Exec Nick Read. “Competition in Europe remains challenging, primarily in the value segment, however we continued to improve customer loyalty and to grow in broadband, and we achieved good growth in Africa. We expect a further gradual improvement in service revenue growth in Q4, led by Europe.

“We have recently announced the proposed sale of our stake in Vodafone Egypt, which simplifies the Group into two scaled regional platforms – Europe and sub-Saharan Africa – and reduces our net debt. We have also appointed the senior management team for our European TowerCo, and we are preparing for a potential IPO in early 2021.”

The juicy bit of the quarterly presentation concerned Huawei, inevitably, with Vodafone detailing the implications of the recent decisions made by the UK and the EU on its business. The good news is that Vodafone UK is already complying by the restrictions, so no adjustments are needed. In parts of Europe, however, there are bits of Huawei gear in the core, which will apparently cost around €200 million to rip and replace.

We spoke to telecoms Analyst John Strand and he was keen to flag up the wording on the last part of the above slide, noting the €200 million number was just a ‘position’, rather than a piece of hard accounting. He also noted that, in the UK, BT has said the cost of replacing Huawei is essentially priced into regular network investment, so why is Vodafone implying this is extra cost. That whole section of the slide could be interpreted as laying the ground to get compensation from the EU and to lobby against quotas in countries where it has a lot of Huawei in the RAN, like Germany.

Other than that, the hell that is the Indian telecoms market remains a major issue. “In October, the Supreme Court gave an adverse judgement in the adjusted gross revenue (“AGR”) case against the industry,” said the Vodafone report. “The outlook for Vodafone Idea Limited (“VIL”) remains critical. VIL is actively seeking various forms of relief from the Indian Government to ensure that the rate and level of payments it makes to the Indian Government is sustainable and it can meet its other commitments as they fall due.

“In November, the Department of Telecommunications granted a two-year spectrum moratorium to the industry. In January, the Supreme Court rejected the review petition filed by VIL and other industry participants in relation to the AGR judgement. Both VIL and Bharti Airtel Limited have subsequently filed modification petitions, which are expected to be heard imminently, to request the Court to order the Department of Telecommunications to determine a payment schedule in relation to AGR dues and other reliefs.”

So Vodafone seems to be keen on state aid pretty much everywhere. To be fair a lot of the special circumstances it finds itself in have been brought about by state activity, but it still needs to be strategic about how often it extends the begging bowl. If governments and regulators start to perceive Vodafone as excessively opportunistic, they’re likely to lose sympathy fast.

Vodafone claims dynamic spectrum sharing first

The point of DSS is to allow smooth transitioning between 4G and 5G by allowing them to share the same spectrum, dynamically.

Vodafone reckons it’s the first to demonstrate this handy tech over a couple of low frequency bands (700 and 800 MHz). It announced it on a blog late last week, but kept so quiet about it that we only just found out. As if to demonstrate the folly of a complete Huawei ban, the Chinese vendor was involved, but so was Ericsson and, inevitably, Qualcomm.

The specific first was the simultaneous use of two bands on one 5G NSA device. Only the 700 MHz band did any dynamic sharing, however, with the other one used as an ‘anchor’ whatever that means. Light Reading attempted to shed some light on it here. It looks like DSS has never been a thing before, so this is quite a big deal.

Outside of technological milestone gathering, this matters because it should minimise the disruption caused by the switch to 5G. For operators it means that, in terms of spectrum, they don’t have to hold on with one hand before letting go of the other and will effectively make refarming a thing of the past, at least in theory.

Italian telcos fined for pricing collusion

Telecom Italia, Fastweb, Vodafone and Wind Tre have been fined a total of €228 million after an investigation found the four telcos had co-ordinated price hikes for consumers in 2017.

The complaints against the four telcos had been raised by Iliad, a fifth service provider in the market, as well as Onlus CODES Association and Altroconsumo, two consumer rights groups. The investigation has now been formally concluded with Telecom Italia taking a €114 million fine, Vodafone €60 million, Wind Tre €39 million and Fastweb €14 million.

Telcos are of course allowed to raise prices as they see fit, though when it is done in such a collective manner to prevent churn and competition, regulatory authorities will become nervous.

In this case, the Italian Competition Authority (AGCM) found the telcos aligned their commercial activities which violates item 137 of the Italian consumer code, though it is somewhat of a complicated story.

The Italian telco decided to move from a monthly billing cycle to a 28-day one in 2017, though as the prices were not decreased during this transition. Consumer and advocacy protests focused on the 8.6% price hike which would be experience over the course of the year, as the telcos were effectively creating a thirteenth billing month.

In 2018, the telcos decided to pivot back to the monthly billing standard, though there would be a price increase to compensate for the shift. The consumers were back to square one but were paying more for the pleasure.

The AGCM has now concluded the co-ordination between the telcos allowed each to keep the inflated tariffs, made it unnecessarily difficult to compare tariffs and unfairly prevented the consumer from searching for a better deal.

While it is very difficult to 100% guarantee the consumer will be safeguarded from underhanded and nefarious corporate practices, the AGCM is at least dishing out fines which will make a material impact on the spreadsheets. The telcos will of course be able to afford these fines, but the amount will certainly make them think twice about trying this sort of thing again.

80% of Brits would support a regulated drone industry

Four in five UK residents would support the development of drone technology if the appropriate safeguards have been put in place.

While the report from Vodafone certainly lays the PR paint on heavy, targeting the drone usecases which very few people would be able to disagree with. 86% of the respondents to the survey agree with the use of drone for emergency response, 79% for police assistance and 61% for environmental conservation.

“Drones can provide crucial information to emergency services responding to incidents,” said Vodafone UK CEO Nick Jeffery. “They can assess fires, deliver medical supplies, and help businesses survey hazardous conditions such as construction sites, power lines and our own mobile masts quicker and more safely.

“On the flip side, rogue drones can pose security risks. By working in collaboration with government, the public sector and regulators, we can shape legislation to ensure the transition from a consumer toy to a vital support service while protecting our critical infrastructure.”

While emergency response and safety critical applications will certainly add benefit to the digital economy of tomorrow, it would be remiss to ignore the commercial applications of the technology.

For years, companies like Amazon or Dominos have been imagining a world where drone delivery is a reality. This a technological step forward which could not only simplify the process of getting certain goods from A to B, but from a financial perspective, remove the biggest overhead for these companies; employees.

Funnily enough, the prospect of redundancies or the skies being littered with delivery drones was not raised in the report.

As a technology, drones have been largely ignored but there are certainly benefits to the economy and society. For medical services, drones could be used to deliver prescriptions to those who find it difficult to leave the home, security can be enhanced at key locations and home delivery could be affordable for small businesses.

PricewaterhouseCoopers (PwC) suggests drones could add as much as £42 billion to UK GDP by 2030, as well as £16 billion in annual cost savings. The Department of Transport has predicted the number of licensed drones could grow from 100,000 in 2022 to up to 900,000 by 2050, not to mention the roads might be a bit clearer if some of the delivery vans or mopeds are removed.

There are of course benefits to the emergence of drones as a technology to aid with logistics and transportation, but it is also very fair to point out the negative consequences. Some jobs will be lost and we will have to get used to the whizzing and whirring of drones above our heads.

Could Iliad Italia be a victim of Corporate Darwinism?

Iliad’s Italian business unit has lodged complaints with Italian and European regulators regarding network sharing deals, but could these objections be effectively ignored?

While network sharing is a proposition which offers great benefits to cash-strapped telcos in pursuit of the eye-wateringly expensive 5G connectivity dream, it is not without its opponents and critics. Some regulators have become very defensive about the progressive idea, while there are telcos being left out of discussions who are objecting also.

In Belgium, Telenet has raised concerns over a tie-up between Orange and Proximus, while the European Commission prevented O2 and T-Mobile from expanding an existing agreement to include 5G in the Czech Republic. Both of these network sharing partnerships have been halted in the pursuit of maintaining attractive levels of competition, but Iliad’s objections might fall on deaf ears.

Iliad is objecting to network sharing agreements between Wind Tre and Fastweb, as well as another between Telecom Italia and Vodafone Italia. Iliad is the only major telco in Italy not to be in a network sharing discussion. If these partnerships bear fruit, efficiencies will be realised, meaning competitor funds can be redirected elsewhere.

If this is a prediction of the future, Iliad will be in a weakened position to compete in the Italian market, and financial pressures could become too much to justify the venture. Iliad could become a victim of Corporate Darwinism.

The competition versus consolidation conundrum

Competition has been somewhat of a difficult topic of conversation between the regulators and telcos in recent years, primarily because of the polar-opposite opinions on market consolidation. The telcos would like to consolidate to achieve scaled economics, while the regulators want to preserve the number of telcos in each of the markets to maintain competition and encourage investment.

There are pros and cons on either side of the fence, though the regulators do not seem to be shifting. This argument has knock-on effects for network sharing agreements.

Ovum’s Dario Talmesio points out, network sharing could be viewed as consolidation through the backdoor. Combined assets reduces the number of independent networks in the market, and potentially reduces investments and competition.

In the Czech O2 and T-Mobile case, the European Commission suggested as there were only three major players in the market, further combination of assets between two of the parties would present too much of a risk of the third being squeezed out. The same case has been presented by Telenet to the national regulator in Belgium.

Regulators are sensitive to any propositions which would negatively impact competition in a market, but what about markets where the number of telcos could actually be reduced?

How much is too much competition?

While there is no official stance on the number of telcos in a market, the European Commission does not generally approve activities which would reduce the number of telcos below four. Vetoing the O2/Three merger in the UK, or Telia/Telenor in Denmark are two examples, but this might not be the case in Italy.

If regulators were to allow the network sharing agreements to proceed, Iliad would certainly be in a very precarious position, though there would still be four mobile service providers in the country; Telecom Italia, Vodafone Italia, Wind Tre and a Fastweb proposition enabled by its agreement with Wind Tre. This might be deemed enough competition in Italy to maintain a healthy market for the consumer and a financially sustainable one for the telcos.

The four telcos named above are venturing into untested waters here. This presents a new question for the regulators to answer on competition. Theoretically, suitable levels of competition are being sustained, and this network sharing dynamic has been approved by regulators in the past.

In the UK, Three and EE have formed MBNL, while Vodafone and O2 have CTIL. These are passive infrastructure sharing joint ventures, focusing on the rural environments. It is a similar situation which would be created in Italy, and the UK does have a sustainable telco industry. It is evidence that the dynamic could work, with or without Iliad in the mix.

Could this be a case of Corporate Darwinism?

Corporate Darwinism occurs when a market evolves to such a degree that players are either irrelevant or uncompetitive, and therefore go out of business.

The best example of this is Blockbusters. Once a dominant player in the movie rental business, as the distribution of content moved online the proposition of Blockbusters was no-longer relevant, therefore the company did not survive. This is an example of a market evolving to such a degree that the business was no-longer relevant.

The Iliad example is perhaps one where the market evolves to such a degree that the business is no-longer competitive.

If the four remaining mobile service providers have network sharing initiatives driving network deployment, investments can be more intelligently spend (a) on the network, or (b) in other areas of the business.

The shared networks might have a greater geographical footprint, have future-proofed technology and higher performance specs. Theoretically, Iliad would churn subscribers to higher quality rivals. Also, as less money is being spent on network deployment, tariffs could be lower, but profitability could be maintained. Or, more cash could be invested in value-add propositions for products. Rival offerings could look more attractive than Iliad products.

If regulators approve the network sharing agreements between Telecom Italia and Vodafone Italia, alongside Wind Tre and Fastweb, Iliad would find itself in a very difficult position. It become difficult to see the telco surviving in the long-term.

Unfortunately for Iliad, there is a coherent argument to approve the partnerships to drive towards a more sustainable telecoms industry, allowing the telcos to realise efficiencies ahead of the vast expenditure of 5G. The consumer would benefit, as would enterprise customers and the Italian economy on the whole. It might be a case of letting Iliad die out for the greater good of the Italian telecoms sector.