The gamble that the Vodafone Group took in buying a controlling stake in Hutchison Essar in 2007 is paying off big time. Its 52 per cent stake purchase for $10.7 billion, which was considered high at the time, is proving to be worth every cent with Vodafone Essar, its Indian operation, emerging as the star performer of the group.

Vodafone Plc ended 2009 with 333 million subscribers, of which 91.4 million were from India. In the quarter ended December 2009, India accounted for nearly 65 per cent of the 9.7 million customers Vodafone added globally. Vodafone Essar’s contribution to the group’s balance sheet too has been impressive. In the quarter ended December 2009, it posted a 13.8 per cent year-on-year jump in revenue to touch $767 million, the highest in percentage terms among all the countries that the firm operates in. In terms of minutes of usage (MoU) too, in the December 2009 quarter, Vodafone Essar accounted for about 45 per cent of Vodafone’s global traffic of 141.3 billion MoUs, up from 37 per cent during the same period in the previous year.

India clearly is a big market for the Vodafone Group. “People want to come here; this is where the growth is. And with 3G coming in, we are even more interested,” says a senior official of Vodafone Plc. “Getting a foothold in India was a strategic step they took when they decided to invest in India at the valuations at which they did,” observes Romal Shetty, national telecom head, KPMG.

Looking at a long-term involvement in the country, the group recently increased its stake in its Indian operation by 6 per cent through an indirect stake purchase from minority shareholders Asim Ghosh and Analjit Singh. As a result, the group increased its aggregate direct and indirect equity interest in Vodafone Essar from 52 to 58 per cent.

Operating in all 23 telecom circles in the country, Vodafone Essar has 93,000 base stations covering 72 per cent of the population. It provides 2G services in the 900 MHz and 1800 MHz bands and offers both prepaid and post-paid mobile phone services. “The company enjoys a strong presence in many metros and Category A high-value circles. It leads in circles like Mumbai, Kolkata and Gujarat,” says Kunal Bajaj, managing director, BDA India.

Operation, strategy and branding
The company began operations in India in 1994 when Hutchison Telecom, the leading stakeholder then, picked up a cellular licence for Mumbai. Following several mergers and transitions, it transformed into an all-India player over the years and is today the second largest company in the country in revenue terms and the third largest in subscriber terms. As of January 2010, the company has a subscriber base of over 94 million, closely trailing Reliance Communications (RCOM) (96 million subscribers) and Bharti Airtel (121.7 million subscribers).

The company seems to have hit on a winning formula in its operations and business approach, which has helped it establish a strong brand presence, attract users and maximise its revenue per user. Over the years, it has established itself as a well-managed, professionally run company. Having been associated with the Indian telecom industry right from the beginning, it has learnt the ropes well.

Vodafone Essar has also benefited from the tremendous scale and international experience of its formidable global parent, Vodafone, the world’s largest telecom operator by revenue with operations in more than 30 countries.

“It is the only international brand in the market today. Apart from MTS, none of the new players is selling its services under its international brand. Nor do the Airtels, Ideas and RCOMs have a presence across such a vast market as Vodafone does,” observes industry analyst Mahesh Uppal, director, ComFirst.

The company’s business plan has hinged primarily on tapping high-value users. It has a strong presence in the large enterprise segment. “Vodafone Essar also has a greater percentage of high-paying post-paid subscribers (6.1 per cent) compared to Airtel’s 4.7 per cent and Idea’s 4.2 per cent, as of December 2009,” says Bajaj. It is, therefore, not surprising that today, when the industry’s ARPU is being impacted due to frequent tariff cuts, Vodafone Essar has suffered only minimal damage with its ARPU currently standing at Rs 209 a month.

The other area where the company scores well is marketing and branding, which, according to analysts, have always been well executed. Its earlier pug-andchild advertisement still has top-of-themind recall and in the ZooZoos, the company has another winner. In a recent media interview, Vittorio Colao, Vodafone Group CEO, noted that he would like to bring in greater competency into India and export its entrepreneurship. He said that the ZooZoos concept was so good that it would be great to export that creativity and approach to the rest of the group.

Single-track operations
While most of its peers have become integrated telecom service providers, Vodafone Essar has steadfastly remained a pure-play GSM operator since its inception. Till recently, the company was not even a pan-Indian operator and yet had made its place among the top three telecom companies in the country.

“The company is focused and is doing very well. It has all the advantages of the incumbents in many circles. Since it started early, it has the best of spectrum with higher capacity, ” observes Uppal.

However, some analysts believe Vodafone’s mobile-only model, which once seemed far-sighted, can become limiting in the intensely competitive sector in the long run. “This approach could seriously hinder the company’s growth. The new players coming into the market are already proving to be a challenge. Vodafone should look to provide the entire gamut of telecom services,” says Shetty.

To this end the company has obtained national and international long distance (NLD and ILD) licences. Mid-2009, the Foreign Investment Promotion Board also granted it a national internet service provider (ISP) licence; earlier, Vodafone held an ISP licence for only the Gujarat circle.

While the NLD licence will help the company cut costs since it will no longer need to pay other mobile operators to carry its STD voice traffic, its interest in an ISP licence is somewhat inexplicable. According to market speculation, the ISP licence will support the pure-play operator’s interest in bidding for a broadband wireless access licence and will open up another revenue stream.

Impact of the price war
The ongoing tariff war has taken a serious toll on operator bottom lines. It all began in mid-2009 when Tata Teleservices Limited (TTSL) sparked off a tariff war by introducing a per-second billing plan along with its GSM service launch. Subscribers flocked to it in hordes, forcing its rivals to come up with similar plans. TTSL overtook Bharti Airtel and Vodafone Essar in mobile subscriber additions for six straight months (till end-January).

Today, the competition in the segment is perhaps at its warmest with RCOM and TTSL having entered the GSM space in combat mode, and new players rolling out services at rock-bottom prices (Re 0.01 per second).

All this has seriously impacted the revenue of most service providers. And Vodafone Essar is no exception. “It faces the same challenge as most of its rivals. Voice revenues are under pressure as tariffs have dropped very low,” says Uppal. According to a senior official of the Vodafone Group, while the company can handle price wars, the problem lies in the fact that there are too many operators in the Indian market. In no other country are there more than five-six operators. For Vodafone, the idea is to keep tariffs at par with those of its rivals, but not necessarily initiate a tariff cut.

A related issue is network congestion.”Players like Vodafone, Bharti and Idea are facing severe network issues in terms of rising levels of congestion. For them the situation can be described thus: if they add more subscribers, their networks become congested, and if they do not, they become uncompetitive. So, they are caught in a bit of a bind,” says Uppal.

Company snapshot
CEO: Marten Pieters
Presence: All India
Mobile subscribers: 94.14 million (January 2010)
Shareholding (December 2009): Vodafone Plc 58 per cent,Essar Group  33 per cent, Analjit Singh 3.87 per cent,Asim Ghosh ? 2.39 per cent and IDFC  2.74 per cent

Areas of concern
With voice revenues under pressure, analysts believe that it is time to shift the focus to data services. “Vodafone needs to increase the proportion of its value-added services (VAS) as a percentage of total revenues, from the current 10 per cent to about 20 per cent,” says Shetty.

Bajaj agrees that Vodafone needs to increase its VAS revenues, which have been stagnating at 9.1 per cent of the total revenues since December 2008. In comparison, Idea Cellular’s VAS contribution has gone up from 9.5 per cent in the quarter ended December 2008 to 11.2 per cent in December 2009. “If voice usage is not growing, VAS should be looked at as a key enabler. Unfortunately, even the ZooZoo ads could not convert their popularity into high VAS usage,” Bajaj remarks.

The company has taken some initiatives in this direction. It has recently partnered with Radio Mirchi to launch a new service called Vodafone’s Mirchi Callertune. The service allows Vodafone postpaid and prepaid subscribers to download songs run on the radio channel and set them as their caller tune. The service is available in 32 cities where Radio Mirchi services are currently operational.

Vodafone Essar, in partnership with digital content provider Arvato Mobile, unveiled its first application store on February 15, 2010. The launch came a few weeks after arch rival Airtel launched its application store. RCOM too is expected to launch its application store soon. The Vodafone Mobile Applications Store offers over 800 applications in entertainment, utility, finance, social networking and gaming. The company, which claims to have registered over 10,000 downloads at these stores, is scouting for more VAS partners to enhance its applications.

Besides higher VAS and data usage, analysts believe that Vodafone also needs to increase its focus on customer service. “The company can get its customer service up to world-class levels as it has done in Western Europe and elsewhere,” says Shetty.

Churn is the other debilitating factor for operators in the current competitive climate, and this is only likely to increase with the introduction of mobile number portability. Vodafone recorded a much higher annualised churn in 2009, in both its prepaid (38.9 per cent) and post-paid (26 per cent) segments.

To counter the impact of the churn, analysts say that Vodafone Essar, which is perceived as catering mainly to upper-end customers, needs to focus more sharply on the rural segment. With the next level of growth expected to come from Tier II and Tier III cities, the company will have to rework some of its strategies. Besides, as Bajaj points out, “Vodafone is a relatively late entrant into some of the Category B and C circles. These circles are seeing very high growth and Airtel, RCOM and TTSL have already built a strong presence here.” Vodafone will, therefore, have to fight much harder to gain market share and retain users.

Senior company officials are, however, not too distressed. They claim that the company has strategies in place as well as plans for heavy investments in networks and innovative packages for the rural areas. Their services have been well received in many small towns and cities as they offer tariff schemes that are not only competitive but are customised for users. Vodafone has also tied up with Chinese handset maker ZTE for low-cost phones.

The company, moreover, needs to manage its interface with government departments. Since the time the company was part of Hutchison Telecom, it has had a series of run-ins with various regulatory authorities. Recently, the company faced investigations by the revenue department over its decision to spin off its tower business into Ortus Infratel. Prior to that, it was involved in litigation with the IT department over the payment of corporate gains tax post acquiring Hutchison’s stake ?? an issue that is yet to be resolved.

Moreover, the company’s leadership is not very visible. “One does not see or hear from them a whole lot in comparison to, say, a Bharti official, where one is familiar with the men behind the brand. They should make an effort to be more visible,” notes Uppal.

Future plans
 Going forward, 3G is one area the company will strongly focus on, leveraging the expertise of its global parent. It will definitely aim to acquire a pan-Indian 3G licence. In 2009, the company raised a Rs 100 billion loan from the State Bank of India to arm itself for the 3G spectrum auctions. “It is one of the few companies to have rolled out 3G services across Europe,” Shetty points out. “When 3G comes to India, it will bring in the technology and its wide exposure in this field.”

Vodafone is also in talks with Apple to launch the 3G iPad in India, but it is guarded on what type of plans it will offer for the device. While Apple has positioned the 3G iPad as a device for the prepaid wireless broadband market, it is believed that Vodafone may subsidise the touchscreen tablet through a contract plan in order to lower its upfront cost.

Also on the anvil are plans to sell off its indirect 4.39 per cent stake in Bharti Airtel. The company will, moreover, look to get listed, but this would depend on whether the Ruias of the Essar Group, who own 33 per cent stake in the company, decide to exercise their put option ?? they have a one-year window (May 2010 to mid-2011) ?? and on when and how much of the put option is exercised.

Overall, Vodafone will employ more of the same strategies it has been using to pitch for higher revenues, more subscribers, bigger VAS revenues and a strong brand value. Despite some grey areas, industry experts predict that five years from now, Vodafone Essar will continue to be a top-league player and hold its own in a heavily competitive environment.

What is the one attribute that keeps Vodafone ahead of most of its rivals in this highly competitive market?

At Vodafone, we listen to our customers daily and place them at the heart of everything we do. Our brand identity, “Power to you”, expresses our desire to offer our customers better choices and empower them with unique advantages. We develop our services and products based on a deep understanding of our customers’ needs and constantly aim to provide them with superior and innovative offerings.

What is the biggest challenge that the company faces today?

The biggest challenge we face today is inadequate spectrum. It is quite noteworthy that we are able to extract so much performance out of so little spectrum. Limited spectrum, which is fragmented across so many players, leads to huge loss of efficiency. We have estimated that fragmenting the same amount of spectrum across 10 operators instead of four, roughly halves the total capacity of the network, severely limiting customers’ experience. This situation needs to be corrected.

After the roll out of services in all circles, what is Vodafone Essar’s next step?

We are focused on meeting the different needs of our customers across 22 circles. India being such a diverse country means that the requirements of every market are varied. In matured circles, we aim to introduce and support new data services, whereas in new markets, we are more focused on increasing our customer base by providing superior voice-based services. Rural India is a huge potential market with a population of over 700 million and a massive economy.

How would you rate the company’s performance?

Our growth rate, both in terms of customer acquisition and revenue, has been phenomenal in the past few years. Our market share has also increased consistently. We have adapted well in an industry that’s moved from a growth phase to one in which costs and efficiency have become top priorities. We have accelerated innovation through various initiatives like establishing an infrastructure company, Indus, with two other operators, to develop shared towers and sites. This innovation accelerates rural rollout. We have also used our global purchasing power to introduce very low-cost handsets in the Indian market. In the past few years, we have also strengthened our commitment by extending operations from 16 circles to all 22 circles.

What growth trends do you foresee in the Indian telecom industry?

India is one of the fastest-growing telecom markets in the world; however, the telecom sector is yet to tap the unexplored potential that exists in the rural areas. If telecom operators are successful in making inroads into these areas, by 2012, rural users will account for over 60 per cent of the total telecom subscriber base.

In the metros, there is a substantial demand for 3G services and mobile number portability. 3G has a long-term business case, which needs policy certainty. The returns to the government on the auction would be maximised if long-term policy decisions that are in the interests of the sector are made in a time.

Do you expect consolidation in the industry? What are the advantages of such consolidation?

Due to historical licensing decisions, India has become the most competitive mobile market in the world – hyper-competitive would be the best description. In the short term, policy-makers and consumers don’t see the costs because prices look low. However, fragmented spectrum allocations have raised the costs and reduced capacity across the industry.

However, in the interest of the whole industry, it is important the M&A rules are changed to facilitate consolidation. Today, there are restrictive conditions, for example, the need to surrender the acquired company’s spectrum, which effectively prohibits consolidation. These restrictions should be removed so that consolidation can take place as per market forces. That will benefit the entire industry as well as consumers.

Amid fierce price wars and sustainability concerns, consolidation will result in synergies in infrastructure, human resources and spectrum. This will bring down costs and improve quality of service, given the availability of spectrum and increased infrastructure investment.

Where do you see Vodafone Essar two years from now?

We are focusing on leveraging the Vodafone brand, scale and cost efficiency through disciplined capital expenditure. We will continue to aim towards introducing globally benchmarked products and services. The economic prospects for India remain attractive and we are wellpositioned to benefit from the long-term opportunity in India.

What are your company’s plans for 3G?

I cannot reveal our commercial or bid strategy, considering the auctioning process for 3G spectrum has already commenced.