Vodafone, the largest private mobile phone company in the world, concedes that India is by far the toughest country to do business in. The CEO of its Indian operations, Marten Pieters, tells ET in an exclusive interaction that consolidation is bound to happen as only 3-4 operators can be successful in any market. Pieters says that it is the regulatory and policy uncertainties that have led to the company postponing its proposed initial public offering, and not its multi-billion dollar tax dispute with the government here. The telco is also of the view that most Indian customers are price-sensitive and would, therefore, opt for slower data speeds on a 2G network as it is cheaper to 3G and 4G. Edited excerpts:
Is India the most complicated market you have operated in?Absolutely, I wouldn't be aware of any market that is more complicated. China, for instance, has two operators who have been given free spectrum. Sure, they have been told to do rural rollouts, but China has not regulated tariffs. China Mobile is by far the most profitable company in the world. True, the Chinese government didn't get the money, but what they got was real good networks. India's new NTP says by 2020, we need 600 million broadband users. But how will you do that? It needs huge investments.
Do you expect consolidation to kick in?
It's already happening, as we speak. Uninor has shut four circles, Etisalat has stopped doing business.
Is consolidation also triggered by falling returns?
In a market, maximum 3 to 4 mobile operators can be really successful. The UK and Holland saw the 4th and 5th operators disappear. After all, to make money you need that kind of investment. Why would a customer opt for a network with less quality? Most customers see coverage as the number 1 quality criterion. If you invest only half, network coverage will also be half. It doesn't matter if you have 30% or 5% market share; the expense on network coverage has to be the same. It is also a very FMCG-oriented business, so whether you have 5% market share or more, you have to spend the same amount on branding too.
Aren't those expenses a handful for the operators?
Indeed. Those expenses are fairly huge. My experience says if you don't have 50% market share, it is very hard to make money. We have a very interesting situation in India where the top three players have 65% revenue market share. So what are the others making?
Will Vodafone bid for Uninor's assets?
There are at least 3-to-4 players who would love to be part of the consolidation game. But you don't know what you're buying; you don't know what you're selling. It's impossible to tell what you're getting. Even there, we need more clarity. For instance, we hold airwaves in the 900 MHz band in 10 circles. I would love to have that in circles where we don't have it because it's good spectrum. It would be great if I could buy a guy who has that spectrum in an area (where) I don't have. But I also don't know if in two years it will be taken away from me. So why would I buy if I don't know what I have in two years.
Is Vodafone trying to settle the tax issue with the government?
Vodafone has been very consistently saying that it is committed to India. The issue has been there since year one; and we have still invested . 50,000 crore during that period. From what I've read, the government is also thinking what to do with this hot potato.
Are powerful rivals making it more difficult?
I hope not. I hope we are moving towards a more level playing field. Let's see over time who plans to invest in the country. Vodafone will be among the top one or two. Why would a country want to mistreat a company like that?
What does this do to the IPO?
The tax issue is not related since IPO is a shareholder issue. But spectrum is very relevant and basic, especially since our licence renewal comes up in 2014-15. So, maybe in theory, it is an idea to do an IPO, but it wouldn't be wise right now.
Will Vodafone stall the 2G auction, given that TDSAT rejected its plea against a clause in the draft guidelines, which mandated operators to pay a market-determined price for converting airwaves they hold intoliberalised spectrum for 20 years.
TDSAT has said this is still a proposal, not a final thing, so you can't challenge that till it is final.
What's your take on emerging trends in India's mobile turf?
We don't see a big drop in voice traffic in the foreseeable future. Even in world markets where voice revenue has shrunk significantly, usage hasn't fallen. People treat VoIP services like Skype as a threat, but those have not taken off radically. In India, we have a unique situation where voice calls are so cheap that there isn't much arbitrage in offering it on a different technology. So we expect much of our revenues to come from voice.
Will Vodafone oppose VoIP in India?
We will never do that. These developments happen all over the world. You better just accept the reality and cope with it. We are not nervous as long as it happens to everyone.
But don't you expect data traffic to shoot up?
Data will grow. But since voice is still growing, the equation only shifts slowly. Since data usage needs an ecosystem, it all hinges on applications. And given that India still has issues like literacy, it will take time. The average Indian farmer isn't going to immediately start googling away. He will need a different app to make him switch to a more expensive terminal. But the good news, as was the case with voice, is that the spread of the device — that is mainly a function of price — has been fairly quick. Vodafone is also dropping to price-points where we now think the data market will explode.
Will data usage follow that?
It should, and we have applications to facilitate that. We're aware of the popularity of entertainment services related to sport or music. But a mass switch to mobile video, which could be Bollywood clips, could galvanise data usage and drive up consumption levels. But we are still some time away from finding the right app to trigger that.
Does Vodafone India harbour 4G ambitions?
Not immediately. It's a new technology and will have a future. 3G arrived very late in India, but 4G has come very early. It's still early days as only a few places in US and Europe have gone 4G. So it's kind of jumping ahead of the curve. We first need to develop the whole ecosystem around data usage, around 3G. 4G is giving you the same experience, only faster. Our experience suggests most Indian customers are pricesensitive and opt for slower data speeds on a 2G network as it is cheaper.
It is said users in India skipped technologies and jumped directly to social media. Then how do you justify not investing in 4G?
It has nothing to do with 3G and 4G. You can do whatever you want — internet to social media — on a 2.5 G connection. You only need 3G for watching live TV or video streaming. So 4G will give you a faster time to download a movie. People also say Vodafone is moving into mobile banking. The truth is you can do that on the text messaging platform without even a data connection. But since mobile banking is a new application, people think it is part of the new world. The only real trigger for data usage will be live TV or video. We already have that in Germany, where we deliver 50 channels. But that means a monthly expense of $60-70. Who needs that in India? Worldwide we see a shift from use of voice to a mix of voice and data. Nobody knows why people want to pay for voice but not for data. Which is why voice has very high margin unlike data. So the shift from a very highmargin product to a mix of a high-margin product and a low-margin service takes time. And that is exactly what is happening in Europe.
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