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New Delhi: Vodafone Group Plc. is spending $1 billion to upgrade its network and retail stores in India as it counts on surging data use to drive growth in a market where the average customer spends about $3 a month.

While the network is being upgraded for faster services, the roll-out is being constrained by low revenue and limited wireless spectrum, Vodafone India chief executive officer Marten Pieters said in an interview. The company won’t consider an initial public offering (IPO) of the unit, India’s second-largest wireless operator, until it has greater certainty about its access to airwaves.

Vodafone is using cash from the $130 billion sale of its stake in US operator Verizon Wireless to invest in its international networks and drive expansion in emerging markets as Europe nears saturation. India, the world’s second-largest mobile market by users, is set to overtake the UK as the company’s largest source of revenue. Laying new fibre to connect its base stations will drive data demand, Pieters said.

“It’s all about data," Pieters said on 26 September. “That’s the most exciting thing we see. If the customer gives me $2 or $3 a month, it’s very difficult for me to build a good network. Where in the rest of the world they get $20, $40, or even $60 or $80 in the US"

Within two years, the company expects to have third-generation technology in every service area in India, double what it has now. The company plans to test fourth-generation services on long term evolution (LTE) technology for the first time next year, Pieters said.

Smartphone growth

Newbury, England-based Vodafone has 169 million customers in India and posted 376 billion ($6.1 billion) in service revenue last year. The average revenue per user (Arpu) is 203 ($3.29) a month, compared to 202 at Bharti Airtel Ltd, India’s largest mobile phone operator, and 181 at Idea Cellular Ltd, the no. 3 carrier.

India is the fastest-growing smartphone market in the world driven by the availability of cheap devices with most people getting online through mobile networks, according to Pieters.

Given the state of India’s roads, Vodafone expects more consumers in the nation, especially those outside cities, to use the Internet to shop, access entertainment and other services.

“Logistics and availability of services in India is a big problem," said Pieters. Online retail has “taken off because there’s no alternative."

Spectrum battle

The company’s sales from 3G networks nearly tripled last year and data demand helped the Indian business increase service revenue by 10.3%. That compares with a 9.1% decline for Europe, where Italy slumped 17% and Spain dropped 13%.

Vodafone shares have dropped 15% this year, valuing the company at about £54 billion ($86 billion). That compares with the 3.7% decline in the MSCI World/Telecommunication Services Index.

Improving the company’s access to wireless spectrum and ensuring it has enough for services in a market where airwaves are divided up among eight mobile phone operators is critical to developing the business, Pieters said.

“The problem is the same across the industry, not just for Vodafone," said Nitin Soni, director of Asia-Pacific corporate ratings at Fitch Ratings in Singapore. “You have to pay a lot of money for not much spectrum."

Spectrum risks

India raised almost $10 billion from an auction of wireless spectrum in February. Vodafone said it spent 196 billion in the auction—including for airwaves in the key cities of Mumbai, New Delhi and Kolkata—with about 56 billion payable this fiscal year. Some of the spectrum will be used for 4G service, the company said.

In July, a government regulator recommended mobile carriers share spectrum to lower costs.

Low spectrum holdings will constrain growth in data, especially in large cities, Pieters said.

Vodafone has wireless spectrum covering 83% of the country, including in Mumbai, New Delhi and Bengaluru. In seven of the company’s service areas, its spectrum allocations are up for auction in February.

Vodafone has taken legal action to extend its licences with India’s Supreme Court to hear the case in November.

If Vodafone isn’t able to extend or buy spectrum in two of its expiring service areas where it has no alternative access to airwaves, the company would be forced to abandon its business.

“We don’t even know what we’re going to have to pay for that spectrum, and we don’t even know if we’ll be able to buy it," Pieters said. “It’s unheard of that you put up for auction spectrum that is in use by an operator. It is unheard of and unacceptable."

Resolving those holdings are a prerequisite before the company can consider an IPO of shares in India.

“It’s impossible to stand up on a stage and say I’m going to sell this share, but I don’t actually know if I’ll have that business," Pieters said. Bloomberg

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