Market Insight

Merger of Vodafone and Idea progresses as Jio’s latest ‘Free’ offer is revealed as a feature phone

July 26, 2017

Seth Wallis-Jones Seth Wallis-Jones Principal Analyst, Telecommunications
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The merger of Vodafone and Idea Cellular has been unconditionally approved by The Competition Commission of India (CCI) with phase one approval pushing the deal closer to completing by the target deadline in 2018.

  • Approval was granted by the CCI, approval from the Department of Telecoms and the National Company Law Tribunal is still pending
  • While this will create the largest operator by a significant margin, the regulator concluded there would be no appreciable adverse effect on competition in a highly competitive market
  • The finding is likely to hinge on the perception of “adverse” in market recognised as in need of consolidation following the entry of cost cutting Reliance Jio, which launched its latest free offer this week – an advanced LTE capable feature phone

Our Analysis

Shake out set to shape up a difficult market

CCI approval was required based on the size of the transaction and the potential impact on competition. Levels of competition have however been widely recognised as high in a market currently with 11 operators, while incoming operator Reliance Jio has pushed down prices and slashed profits across the industry since launching in the second half of 2016, with Vodafone writing down the value of the Indian business by €5 billion in November 2016. Operators (and the State Bank of India) have suddenly recognised high levels of debt across the industry in the light of falling revenues as they cut tariffs to compete with Jio. The industry has sought allowances from the government in the form of deferring payments for spectrum with a five year moratorium and fifteen year repayment, extending the existing two year moratorium / ten year repayment period.  Reductions to the 5% Universal Service Obligation Fund and lower Goods and Sales Taxes were also sought.  

While these efforts have so far not been effective, consolidation is the key strategy open to operators facing this conundrum as operators seek to generate new efficiencies. The shake out of smaller players over the last couple of years therefore continues with the merger of the major players - Vodafone and Idea, Telenor’s sale of its Indian unit to Bharti Airtel, and Reliance Communications which will tie up with both Aircel and MTS Sistema India, leaving seven mainly national players in the market. However, State owned BSNL and MTNL may again face pressure to merge their geographically distinct operations while Tata, with under 4% market share, is also likely to face pressure to consolidate, leaving just five large nation operators – Vodafone with over 407 million subscribers or 34.5% of the market (TRAI data for May 2017), Bharti Airtel with 327 million subscribers, Reliance Communications with 177 million subscribers, Reliance Jio with 117 million subscribers and the state owned entity with 107 million subscribers.  

Jio's latest free offer

However the shape of the market could continue to change rapidly. Jio is continuing to rapidly gain subscribers with net-adds of 4.8 million in May, even after the regulator advised the withdrawal of the ‘Jio Summer Surprise’ offer at the beginning of April.  While Jio has faced various pressure to reign in the largely free of charge tariffs that drove initial subscriber acquisition, CEO Mukesh Ambani launched the company’s latest move this week with the announcement of the JioPhone – marketed as free with a three-year refundable security deposit of INR1,500 ($23.30).

While details are not yet available, the handset is a feature phone with a hard keyboard and a 2.4” QVGA display that will make using the baked-in Jio media apps (among others such as Facebook) a viable experience. It will also feature a cable-out connection allowing users to stream content onto TV screens - subject to paying a higher monthly fee for the service. Other features are reported to include NFC hardware that should be enabled through a future update. The phone has been developed in a partnership with Qualcomm India, using the 205 platform with which Qualcomm has targeted pushing LTE into feature phones. That platform runs a Linux based system on a 1.1GHz dual-core processor and Adreno 304 GPU, a LTE Cat. 4 modem offering speeds up to 150/50Mbps alongside support for WCDMA, TD-SCDMA and GSM networks, Wifi b/g/n and VoWiFI as well as VoLTE, Bluetooth 4.1, Glonass / Beidou / GPS / A-GPS location tracking and cameras up to 3MP.  While one of the first to use the platform, Spreadtrum and Lava announced the launch of India’s first LTE / VoLTE feature phone, the Lava Connect M1, for February 2017.

Other approvals to follow

The deal between Vodafone and Idea still requires approval from the department of Telecommunications which is the point where the merged entity should be required to give up, sell or share spectrum assets in circles where it exceeds limits, set at 25% overall and 50% of a specific band. These would be breached in a number of states by any merger between these two entities. In the 900 MHz and 2,500 MHz bands the band level limits would be in breach in Gujarat and Maharastra. Based on assigned spectrum, the overall spectrum cap would also be exceeded in 15 of the 22 circles which would require a major disposal of spectrum. That is particularly the case in Kolkata, Mumbai and Delhi where combined holdings exceed 38% of assigned spectrum.

There are also limits on market share set at 50% of subscribers or gross revenue share in any one circle. Based on the latest May 2017 subscriber figures from the TRAI the merged entity does not quite reach 50% share in any market, partly due to the rapidly growth in market share gained by newcomer Reliance Jio, though several markets still come close, such as Maharashtra at 49.2% of subscribers, Kerala on 47.4%, and Gujarat on 46.1%. Those circles may still exceed limits on revenue share and require action from the DoT, though given the rapid rise of Jio and high levels of price competition, a slight slackening of competitive effort may be all that is required to achieve this within the one year deadline. In one other hurdle, the structure of the deal will also require approvals from the National Company Law Tribunal, a newly constituted body that has taken over the role of adjudicating under the Companies Act from the High Courts since June 2016.


Asia India
Research by Market
Mobile & Telecom
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