On 20th March 2017, in the backdrop of the telecommunication sector struggling under a price war initiated by new entrant Reliance Jio, and amidst dwindling market shares and profitability, Idea and Vodafone India announced a merger of their companies. Consequently, they received the final nod from the National Company Law Tribunal, and the alliance was officiated on 31st August 2018, with the newly merged entity taking the name of Vodafone Idea Limited, thereby creating the largest telecom company in India (in terms of subscribers and revenue) and the second-largest one in the world.

At the time of the merger, the notable companies in the Indian telecom sector were Airtel, BSNL, Reliance Communications, Aircel, Tata Docomo, Telenor; Airtel being the market leader in mobile network operations, followed by Vodafone and Idea. All was well in the sector until the entry of Reliance Jio, which drastically changed the telecom sector with its economical rates for voice calls and data usage. Needless to say, Jio saw an instantaneous hike in its customer base, while other operators struggled in this new pricing framework. Gone were the days of limited talk time, network connectivity issues, and limited use of mobile data due to exorbitant rates.

In response to the new pricing strategy of Jio, other operators were forced to cut down their rates as well, in order to retain their market share. This resulted in an immediate decline in absolute profits due to the lower markup, but it was a cost that they had to incur if they wished to thrive in the market. In this scenario, the grand alliance between Vodafone and Idea would serve to fulfill several issues of mutual interests: the combined operation of the two companies would drastically reduce costs by eliminating duplication of spectrum and infrastructure CAPEX; their shared customer base and revenues would further add to their competitive advantage against Jio. With over 408 million subscribers and over 35% of the total market share, Vodafone Idea became the largest mobile network operator in the country, but not for long.

For several months, Vodafone Idea led the market in terms of revenue and subscribers by a huge margin, but its profits were in a downward spiral, while debt stood at 15 times its profit. The average price of 1GB of 4G data is a mere $0.26 in India, compared to the global average of $8.53; moreover, India’s airwaves are among the costliest in the world, which makes these discounted rates unaffordable for Vodafone Idea, which unlike Jio, does not have a cash-rich parent. Falling share prices reflect pessimistic investor sentiments, this coupled with cut-throat competition and sky-high prices presents a bleak future for the company, and the merger seems to have combined the weaknesses of the two companies more than their strengths.

Airtel has managed to retain its customer base, and since the entry of Jio, it has concentrated on improving its Average Revenue per User, and it leads the charts with an average download speed of 8.7 Mbps. However, the integration of Vodafone and Idea networks has not been as smooth as their merger on paper; multiple outages, complaints of call drops, slow data transfers, and poor coverage have eroded the position of Vodafone as a company offering the best services in the country. Moreover, with the 4G transition, Vodafone Idea could not keep up with Jio’s already available efficient 4G infrastructure, and they could not offer free phone calls bundled with 4G packages without suffering a deep cut in their pockets. All of these factors together contributed to Vodafone Idea losing its market leader position to Jio in the June quarter of 2019 and moving down to the third position. This provides sufficient evidence to conclude that the merger was hasty and short-sighted, and instead of solving each other’s problems, it only consolidated them.

Looking at the changes in the Indian telecom sector from another aspect, it is clear that the market, which had been a monopolistic one till lately, has been slowly turning into an oligopoly, with the number of players down to 5 from 15 in 2012, and 3 players capturing more than 90% of the market share. Although the last 3 years have seen a tremendous increase in internet usage, and the penetration of mobile data services in remote areas of the country that did not previously have access, consumers might soon be facing a different situation. Tariffs for mobile operations have fallen considerably since the entry of Jio, which has introduced users to several new uses of internet, besides the basics (the most subscribed to data packs offering 1GB per day have made people explore the possibility of streaming multiple movies in a day), and all of this has been possible because of their economical rates. However, with the emerging oligopoly structure, it might be possible that the players form a cartel amongst themselves and raise tariffs to increase their own markups; and the internet has become indispensable for those who use it regularly, people will not be ready to compromise on their use. In fact, Jio raised its rates by 40% in December 2019, and it has encourages other firms to do the same, so they can become profitable once again. There is no certainty about the fate of the sector in the foreseeable period; continued availability of cheap services and the threat of an OPEC-like cartel are equally likely, which poses a threat to all users.

The idea behind the Vodafone-Idea merger was to gain a competitive advantage, but it was not meticulously planned and overlooked many vital points that could aggravate their problems and make them more vulnerable. Although it had a good start, the eventual consequences were detrimental to the newly merged identity, and this merger has till now been termed an unsuccessful one.

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