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In the end, most telecom firms will have to be national operators: Pieters

Vodafone India’s CEO Marten Pieters on how the firm plans to tackle the next phase of telecommunications
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First Published: Tue, Nov 20 2012. 06 07 PM IST
Martin Pieters say spectrum-scarcity issue is a major concern today. Photo: Pradeep Gaur/Mint
Martin Pieters say spectrum-scarcity issue is a major concern today. Photo: Pradeep Gaur/Mint
Updated: Wed, Nov 21 2012. 12 27 AM IST
New Delhi: After admitting that the planned initial public offering of Vodafone India Ltd will be delayed due to the uncertainty in the sector and the overall market, chief executive Marten Pieters explains in an interview how his company plans on tackling what is being called the next phase of telecommunications in India. Edited excerpts:
The Indian telecom sector is headed for a consolidation. Given the latest spectrum auction has created a couple of smaller, more local operators, what do you expect the market will look like post the consolidation?
In the end, most operators will have to be national operators. Especially if you see what the government is trying to achieve—one nation, one network—as they said in the policy document. In that concept, a local operator will have difficulty as most operators will be national operators.
You will see maximum five-six operators, depending on what happens to the state-owned operators. You see now there is a bucket of operators in which there are some that are big enough to survive—Bharti (Airtel), us, Idea. And then you have a bucket of operators that are unsustainable. I’m not talking about the small ones with very few customers, but the ones in between, hovering around 6-8% market share. That is unsustainable in the longer term.
It will be very difficult for the larger ones to swallow the smaller ones because the M&A (mergers and acquisitions) rules limit what an operator can do. The other issue is the economic one. It doesn’t make sense for us to buy someone who has more or less than what we already have—we have a network, towers, etc.
And if we have to pay for spectrum, then what is really interesting then? There is revenue you would get (from the acquired subscribers), but you would also get a lot of value destruction with towers that you don’t need. Towers are the biggest cost in the industry. You would have to see how you could make that work financially.
We are seeing Bharti’s Ebitda (earnings before interest, taxes, depreciation and amortization) margin falling steadily and yours rising. Where do you see the key performance indices such as Ebitda margin, Arpu (average revenue per user), revenue per minute, revenue market share, in the short term?
We are still far away from Bharti’s Ebitda margin. Theirs might be falling and ours might be going up. I would love to be where they are. It’s not that they are bad and we are good. But we are closing that gap, which is necessary as we were too low. When the industry goes back to five-six players, you will see more rational pricing and Ebitda margins will come up because the revenue will go up.
In this industry, a minimum margin you need to achieve is 30% or you simply can’t pay for future investments. It’s a capital-intensive industry and it never stops. Every year we have invested about Rs.4,000 crore or even more a few years ago and it will not stop. Now we are doing huge IPfication (conversion to Internet Protocol-based networks) of our backhaul networks. We invest enormous amounts of money in technology, but nobody sees it. You don’t hear the difference when you use your phone, but it’s a huge investment for us. We need it in the future for the data.
Broadband is underdeveloped in India. We need a lot more investment in broadband that will be paid for by the industry. We need free cash flows to invest in the future and that can only happen if your margins are at a healthy level and your balance sheet is not weak. We now have a pretty nice free cash flow, but the biggest part of that goes to the bank as interest.
So post consolidation, minutes would come back to your network, and profitability is likely to rise. Would you still need to raise tariffs?
From an operating perspective, we’ve reached scale—revenue growth is driving scale in the business. We have become much more rational in terms of customer acquisition costs and the new subscriber norms will further help that. Scale then drives efficiencies around operating costs and reduces our fixed costs as a percentage of total costs.
I don’t see the minutes coming back post consolidation. Consolidation for me is existing players would come together. If some players completely disappear and go broke, then the minutes would come back. But that is unlikely to happen. The bigger players are too big to go broke and they will not simply disappear. They will consolidate, which means the minutes will still be there. The overall minutes in the market would still be the same. If there is a serious price increase, then there might be some form of reverse elasticity happening and the minutes might go down. We have to see. Last quarter, minutes came down, but that was more seasonality.
There is elasticity in tariffs. There is always elasticity in tariffs. We saw that with the 3G pricing last year, where we went from pay as you use—from Rs.10 per megabit to Rs.2. Three months later, the volumes were five times as much.
What tariff do you see the market going towards?
Our average revenue per minute is 44 paise. The average of the industry is around 35 paise. That means that the other guys would have to bring their tariffs up to 44 and then maybe we can see about moving to 48. I will still be able to charge some form of a premium because I have a good brand, very good customer service, roll-out in all areas, etc. It’s not that we need to go from 44 to 54, it is the other guys that have to come to a normal tariff. For us, 35 is sustainable because we have the scale. Someone else with half the scale would not be sustainable at 44. So it needs to come up.
In every circle, we still have 8-10 operators. For example, when Tata (DoCoMo) started with the 1 paisa per second (tariff) three years ago, the industry ignored it because they (Tata) were smart and said it was an introductory tariff. When we looked at it, it was so devastatingly bad for the balance sheet that we decided to wait and watch. We thought they would reverse it after three months. They never reversed it, so the whole industry moved. By the time we moved, they had 7% market share in Karnataka.
We have learnt the hard way that you cannot leave anyone alone with a low tariff. I don’t care who it is that is doing it, we will follow as that is the only way to protect your revenue market share. The market needs to stop dropping to this crazy low prices—the moment someone does it, I have do it also. We can try to play smart in certain pockets, but in general we have to go to the lowest point in the market. It is a very price-sensitive market and you will lose customers.
Why not lead in tariff hikes rather than wait for others?
We are not following. The moment the guy offering the lowest (tariffs) goes up, then everyone will go up. There is always someone being desperate for a bit of revenue market share that is doing this. Even the biggest player in the market has played this game in the last few quarters because they openly said we have had revenue market share losses for several quarters. I understand that you can’t keep losing market share. The moment you get to a five-player market, the need to do that is not so important.
If you are a new player coming from zero percent market share, you can’t live with that. So you fight to get to 10% and then 15%, where you can relax a bit. A new guy coming in after this will eventually give up, as you can see happening now. The guys who continue fighting know they can never sustain at 6-7% market share.
Currently, it seems that it’s the discounts that are keeping the average tariff down. All the operators seem to be working towards reducing these discounts. Can you remove all discounts from the market?
No you can’t. The problem is if the discounts are at too low a level, then it’s a problem for the whole industry. Even when there are five players, then it’s difficult when you are number five. Five players become four and then three. Very few markets in the world now have even five players left. The US, the wealthiest market in the world, has four national operators.
The customer (in India) pays the least in the world. So the customer may believe he has a problem, but he does not have a problem—the industry has a problem. The problem of the industry is if that cannot be resolved, then even the government will have a problem and in the end the customer will have a problem because there will not be broadband in India.
The government wants 600 million broadband connections by 2020. Do you think BSNL (Bharat Sanchar Nigam Ltd) is going to build it for them, with Rs.8,000 crore loss now? It needs to come from us—the Bhartis and the Vodafones—those who still have access to capital. Why would anyone give us the money if the returns were negative or so bad?
Will we ever see all telcos becoming data providers first and voice providers secondary?
From the technology perspective, voice will move to become data. Ten years out, it will all be voice over IP. The problem we have today is a spectrum-scarcity issue. With so little spectrum, freeing up spectrum for data will cost me so many voice customers that give me a really nice margin compared to a data customer. Financially, it’s a really big problem. Over time if it all becomes data, then it doesn’t matter. In Europe, they don’t have that problem because they’re all sitting on loads of spectrum and are able to give the customer a lot of options and services at very low prices.
Here we have to be very decisive to whom we are going to sell it, depending on the profile of the customer. Even on voice, I would rather sell a 60 paise minute than a 20 paise minute. Data is more expensive to provide because it uses more network capacity.
We know that a data revolution is coming. But it seems to be taking a little too long. Given so much money has gone into 3G, why is the uptake so low. What is holding data back?
Look at BWA (broadband wireless access). Players paid $2.5 billion (around Rs.13,725 crore today) and bought the spectrum nationwide. How many have started business? The problem is then for whom? Does the consumer get the service? No. Does the government get a licence fee? No, because there is no revenue. Why is the guy not building a network? Because he has figured out that every dollar he puts in the ground is never going to give him a return. So he finds it better to limit his investment to the money already put in rather than put another $5 billion.
We are not disappointed about 3G. It’s a 20-year right. We need the ecosystem. When we first started, only 3% of the total subscribers in the Vodafone system had 3G terminals. Now it has gone up to 5.7%. About 5.5% of our customers have smartphones that can be used for 3G services. That doesn’t mean that everyone does it. People buy an iPhone and use it like an ordinary phone. Our focus is now to get these people to use the data service.
We don’t know if the operators are doing enough but they try hard. We are revamping all our shops to make it a house of smartphones—where you can get all the necessary advice and people can get the right help. There is a lot of effort going in but it is at a very low level and takes time.
We are not unhappy about 3G. The price would be lower if the price we paid for the spectrum was substantially lower.
In China, the government gives the spectrum for free, which is really good for the customer as the operator will not charge for the spectrum. But that is China.
If we had paid half of what we paid in Delhi and Mumbai, the consumer pricing would not be substantially lower. Consumer pricing is driven by competition and not by what you paid for the spectrum. Spectrum investment is a cost that once you’ve paid for it, you just need to recover it.
The focus is on superior usage and superior Arpus on 3G. We are seeing a 50% increase in revenues every quarter.
People in India are very aspirational. That will drive uptake. It is an educational process and requires investment, which we are doing.
What we need to find out is what the Indian consumer is willing to pay for superior quality. Two years ago, you could buy 2 gigabits of data for Rs.1,900. We can never ever produce 2GB of 2G for that amount. We started out with data at six times the level it is now. The reality is you can never ever use that much data. The reality is that it would be difficult to use even 1GB of 2G data. Now customers are figuring out what exactly their usage is. Even on smart phones, the average usage is 500 megabits. We need to figure out what is the price point to charge for this usage. We are all learning—it’s new and nobody knows and you can’t say it’s the same as it’s in the West. In the West, they bundle it and the consumer doesn’t care less to arbitrage for a dollar. Here they arbitrage for a rupee.
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First Published: Tue, Nov 20 2012. 06 07 PM IST
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