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Vodafone India: Enters the 4G club

May 12, 2016
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The year 2015 ended on a high note for Vodafone India, as the operator marked its entry into the country’s 4G space. The service launch was initiated in Kochi, Kerala, in December 2015, following which the operator upped its game taking these services to four more licensed circles. Vodafone is utilising its recently acquired liberalised spectrum in the 1800 MHz band to launch 4G services in its licensed circles. Currently, these services are available in select cities across Kerala, Karnataka, as well as in Mumbai, Kolkata and Delhi-NCR.

Vodafone joins the 4G bandwagon at a time when competition in the country’s data space is heating up. Growth in voice services has slowed down over time while data services have become central to operator strategies. Reportedly, the explosion in data traffic will soon take its share in the service revenues of incumbents to 50 per cent from below 20 per cent at present. Growing data usage, coupled with higher data ARPUs, is contributing significantly towards reviving sector profitability. In such a scenario, all operators want to capitalise on the opportunity that 3G and 4G technologies present. Mobile broadband services channelled through these high speed networks can transform the lives of millions in the country, and at the same time, generate billions in revenues for operators. This was a key motivation that led players such as Vodafone and Idea Cellular, which did not buy broadband wireless access spectrum in 2010, to buy liberalised spectrum in the 1800 MHz band during the March 2015 auction. Both these operators are now using this spectrum to offer high speed 4G services. Vodafone’s 4G services currently account for around 50 per cent of the company’s total data revenues and 30 per cent of the industry’s revenue.

The country’s 4G ecosystem is still evolving, a key reason behind Vodafone’s decision to carry out a phased roll-out. Having launched the first round of services in key markets, the operator is likely to adopt a conservative approach and wait for the market to gain traction before undertaking a mass roll-out. It, however, will have to step up its efforts once Reliance Jio Infocomm Limited (RJIL) enters the market later this year.

Meanwhile, Vodafone is very optimistic about its 3G uptake and intends to focus on strengthening its 3G foothold while establishing its 4G presence. By the end of the December 2015 quarter, the operator had a 3G subscriber base of 26 million. 3G users form the primary customer base for 4G services for all operators and nurturing these subscribers can help them acquire a bigger share of the 4G pie in the long run.

Besides its foray into the 4G space, it has been business as usual for Vodafone India during 2015 as well as in 2016 so far. The operator is regularly making investments in network upgradation to improve its service quality. Since March 2015, it has made sizeable investments across its high data user circles. It has invested over Rs 3.5 billion and Rs 5 billion in upgrading its network in the Kerala and Mumbai circles respectively.

The operator has also reportedly charted out a plan to get listed on the Indian bourses. It has asked investment bankers to submit requests of proposals to manage its initial public offering (IPO). Vodafone is looking to raise up to $2 billion through this process. The funds are likely to give a major boost to the company's network upgradation and expansion plans to better position itself in the 4G market. They will also go a long way in easing the company's cash position, especially with spectrum auctions slated for later this year.

tele.net takes a look at Vodafone India’s performance in the country’s telecom market, its key growth drivers, 4G plans as well as the way forward…

Strong business metrics

Vodafone India is the country’s second largest telecom service provider, catering to about one-fifth of the Indian wireless market, second only to Bharti Airtel. Its strategies, including targeting high-value customers, offering a strong enterprise portfolio and innovating on branding and marketing, have been instrumental in driving strong operational and financial performance over the years.

The company reported a marginal increase of 0.46 per cent in its year-on-year service revenues for the quarter ended December 2015. Its revenues grew from £1,098 million for the quarter ended December 2014 to £1,103 million for the quarter ended December 2015. The increase in revenues was primarily due to the growth in its customer base, minutes of usage (MoUs) and data traffic.

Vodafone’s mobile subscriber base increased by 8.36 per cent from 178.67 million in October-December 2014 to 193.6 million in the corresponding period in 2015. The total MoUs on the operator’s network increased by 7.46 per cent from 168.62 billion to 181.2 billion during the same period, while data usage increased from 51,889 TB to 85,231 TB. Meanwhile, the operator’s ARPU fell by 7.41 per cent from Rs 189 to Rs 175.

In terms of rural operations, Vodafone catered to about 23.43 per cent of the total rural user base as of December 2015. The company attributes its success in rural areas to its aggressive marketing strategies and a customised distribution model aimed at shoring up sales in the rural market.

While the company has been faring well on the operational and financial fronts, industry challenges continue to be a stumbling block. Limited spectrum availability at exorbitant prices, low returns on assets, shutdown of sites in major cities owing to radiation concerns, penalties for call drops and issues related to fibre roll-out have become key areas of concern.

Key focus areas

•           3G as a key growth driver: Even as Vodafone is strengthening its plans for the 4G segment, 3G continues to feature as a key priority area for the operator. 3G has been a driving force for increased data usage on the operator’s network, which shot up by 65 per cent between the quarter ended December 2014 and the corresponding quarter in 2015. In addition, 3G outdoor population coverage in targeted urban areas went up from below 90 per cent to 94 per cent during the same period.

•           Network upgradation and expansion: Vodafone will continue to make significant investments to expand, upgrade and modernise its network. Also, with the call drop issue reaching alarming proportions, easing congestion in the existing networks is a top priority for most operators. During 2015-16, Vodafone set up a total of 30,000 2G, 3G and 4G cells sites to expand and upgrade its coverage of both voice and data across the country.

The company has also recently signed a pact to buy YOU Broadband for around Rs 4 billion, and the transaction is now awaiting the approval of the Foreign Investment Promotion Board. The deal will result in the amalgamation of YOU Broadband’s over 3,000 km of optic fibre and 6,000 km of last mile fibre-to-the-home across 12 cities with Vodafone’s network. YOU’s fibre in Mumbai, which is a key data market for Vodafone, will help the operator in addressing connectivity issues and providing seamless delivery of services. The acquisition is expected to increase Vodafone’s competitiveness in high-data-consuming cities. It would also give the operator an opportunity to improve customer retention by offering bundles of fixed and mobile services in several circles.

•           Enterprise business: The Vodafone Business Services (VBS) segment was established in 2012 and has since witnessed exemplary growth. It operates across four key verticals – very large global enterprises, large companies, the government, and small and medium enterprises (SMEs) – and currently has a base of over 5,500 wireline data links. Over the years, VBS has fine-tuned its strategies to better tap the enterprise market. In a recent attempt, the company has decided to adopt a three-pronged approach focusing on coverage, intelligence and automation to double its channel network during 2016-17. It has launched three SME-focused initiatives, which include information and communications technology (ICT) cloud-based offerings, six new vertical propositions specific to an industry, and Ready Business 2.0, a value proposition empowering SMEs to meet their business challenges. Currently, SMEs are the fastest growing segment in the VBS portfolio and their role is likely to increase as government programmes such as Digital India and Smart Cities gain traction. Therefore, VBS aims to enhance its SME reach through its new channel strategy, strengthening the width of coverage with primary channel partners and leveraging the infrastructure available in the market. In addition, VBS plans to empower its existing select high performing retailers to enable them to work with SME customers for addressing their ICT needs.

•           Robust retail channels: Vodafone India has a robust retail channel comprising around 9,800 branded retail stores. Depending on their location, these stores are organised in a three-tiered structure. In metro cities, the company follows a hub-and-spoke model with larger units and has over 700 stores. Of these, about 200 are global design stores, which, apart from offering a slew of regular services, familiarise customers with the wide range of apps that smartphones offer. In addition, there are over 3,400 Vodafone mini stores, similar in functionality but closer to the consumer’s location. Finally, in small towns and villages, the company has 5,800 rural stores or lal dukaans as Vodafone calls them. The company was also the first to launch Angel stores in India. These retail stores are managed and run exclusively by women. Currently, Vodafone operates over 34 Angel stores across the country.

4G – Next steps

The Vodafone Group’s 4G services are now available across 20 countries globally. In India, the operator has recently concluded the first phase of its 4G roll-out. It is currently expanding its 4G reach and coverage within the five circles where these services have been launched. The company adopted the strategy of pre-selling 4G SIMs, thus making these cards available in a circle before the service went live for a seamless shift to 4G. For instance, its 4G SIMs in the Delhi circle were made available days before the commercial launch. Customers who upgraded to 4G-ready SIMs were given 1 GB of 4G internet free at the time of the launch. In addition, tariffs have been reduced to bring them at par with 3G offerings.

As for a pan-Indian 4G presence, the company plans to play a wait-and-watch game and make a complete 4G commercial roll-out in the remaining 17 circles only after sufficient traction is seen in those circles. However, it may have to reconsider this conservative approach given Bharti Airtel’s 4G push and the looming threat from RJIL’s entry.

Bharti Airtel, which has 4G spectrum in 15 circles, has deployed the services across more than 350 towns. Meanwhile, Idea Cellular has completed the 4G service roll-out in all of its 10 licensed circles. RJIL’s potential service launch later this year is also expected to have a market disrupting effect. Industry analysts believe that Vodafone’s limited 4G spectrum holdings compared to those of other incumbents have put it in a more vulnerable position vis-à-vis RJIL. RJIL’s internet arm is expected to bundle data with content as well as unleash a tariff war in the data space. Incumbents fear that even after having a first-mover advantage in many circles vis-à-vis RJIL, the volume growth can be easily negated if the price erosion is too high. In such a scenario, wider reach and retention of high-value customers will be important to safeguard Vodafone’s 4G market share.

Moreover, the operator has sufficient quantum of spectrum – at least 8 MHz of 1800 MHz spectrum in each of the circles where it has launched the services. It also has enough spectrum in the Punjab and Tamil Nadu circles, and initiating a service launch will not be a Herculean task. Vodafone is likely to begin its next phase of 4G deployments in Haryana and Uttar Pradesh (East) where it bought spectrum during the March 2015 auctions. Its acquisition of YOU Broadband will also add capacity to its transmission network and help support high speed services.

In addition, Vodafone has plans to launch voice over LTE (VoLTE) services and has partnered with Nokia for IP multimedia subsystem-based VoLTE technology deployment.

Going forward

 Over the years, Vodafone has successfully managed to reduce its gap with the country’s leading operator Bharti Airtel to emerge as the strongest contender for the top slot in the wireless space. It has also received a strong response to its 4G offerings. With data becoming the biggest growth driver for operators, an astute data strategy focused on 4G will help Vodafone drive profitability and growth in the long run.

It would be interesting to see how the next few months unfold for the operator with the upcoming spectrum auction and competition in the data space heating up.

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