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Summary:

The day after announcing it is going to spend $11.1 billion to buy its way into one of the fastest growing wireless markets, Vodafone is getting a bit of a reality check. Moody’s Investor Service is contemplating cutting its bond ratings on the telecom giant, citing […]

The day after announcing it is going to spend $11.1 billion to buy its way into one of the fastest growing wireless markets, Vodafone is getting a bit of a reality check. Moody’s Investor Service is contemplating cutting its bond ratings on the telecom giant, citing that risks outweigh the benefits of this money. There is a silver lining, and it is called broadband.

Vodafone can diversify into fixed line telephony, and start offering broadband (ADSL2+) services to the Hutch-Essar subscriber base, given their skew towards the upper crust of the telephony market. It can also help boost the ARPU from current $8 or so a month. Offering broadband, and then bundling it with a Wi-Fi-enabled residential gateway that can also support voice services.

By offering higher speeds – not a difficult task, the best you can get is 2 megabits per second (with limits) – and bundling it with a flat rate calling plan from home, it can prove to be quite attractive to price sensitive customers. Actually, chasing this converged services strategy isn’t new to Vodafone. The company has been rolling out fixed line services like broadband in Germany, and has also partnered with BT in UK.

The company can work with other incumbents and lease lines or even build its own infrastructure. Surely, the wireline roll out in major metros is going to cost a lot less than the 3G build out. Hutch Essar doesn’t have wireline operations as of now, so Vodafone has a chance to start with a clean slate, and raise the bar by offering higher speeds and competitively priced bundles.

The key to Vodafone making a go of it is the availability of the dual mode phones. Given that I have seen many Indians walking around with Nokia N-Series phones, there seems to be willingness to spend on premium handsets. Nokia is a pretty strong brand here, and has thoroughly thrashed Motorola and others. Still for the strategy to be successful, there needs to be availability of dual mode phones that are in the $75-to-$100 price range.

The best part, the company has time on its side. In a chat with senior investment professionals, it was noted that the Indian economic boom started with telephony, spread to food, clothing, white goods, and transportation, and more recently to real estate, as reflected by the hot housing market.

The next phase would see many spend their disposable incomes on stuff for the home, like flat screen (or larger) televisions, and personal computers.

If the Indian economy continues to grow at its recent scorching speed, then 2008 is the year one should expect PC sales to boom in the country. Corporate buying has driven PC sales in recent months. Some forecasts estimate that PC sales will be around 6.5 million for the financial year 2006-2007. As PC sales start to ramp up the Internet penetration, and demand for broadband is also going to go up.

Though the Indian government had declared 2007 the Year of the Broadband, they might be a year too soon. And that’s just the kind of breathing Vodafone might need to get into the broadband business.

  1. Will Vodafone’s entry into India be smooth ? coz the state owned telcos are already trying hard for market share .

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  2. Vodafone has very aggressive growth plans for India. Vodafone, is targeting a marketshare of 20-25% (around 125 mln) in India by 2012, indicating that it has its eyes set on market leadership. Arun Sarin, CEO of Vodafone, on Tuesday said the country is likely to have 500 million wireless customers by 2012, a quarter of which it hopes to have. Sarin was addressing reporters at the 3GSM World Congress in Barcelona on Tuesday.

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  3. voda does not own the copper line in india and bsnl and mtnl will not allow sharing. building copper line last mile is VERY expensive in india due to congested and old building ducts. it costs Rs25-40K to build out one wireline!!!If it was as easy as you say why doesnt RCOM and Bharti do it!

    voda does to have the truck roll to do an overlay, nor do they have a backbone.

    why will they get into broadband ??? i dont underd

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  4. Fixed line phones are difficult and expensive, especially in India. The way to go is wireless. A little bit of rain or too hot a weather or kite flying etc ruin the connection. getting the service folks to fix it qill take another day, not to bring into account the high cost of laying down cable lines and the risk of getting them stolen (copper cable is very expensive. people also steal overhead railway copper cables!)

    Hutch-Vodafone will have to go to the masses, something that Hutch has NOT been focussing on. Hutch was always focussed on the premium customer and there arent too many o them in the country. Airtel and Reliance have a huge chunk of the rural masses. Thats where the numbers are.. They have low ARPU, but you have the numbers.

    HV also has to get heavily into wireless data and look at large corporate deals, that Reliance has managed. Talk wireless Data Cards, and Reliance is synonymous with it.

    i dont like Hutch’s data plans. They are too expensive. And I am forever online through Airtel. Hutch has to consider this…

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  5. in fact this post was made from my Nokia E61+Opera Mini on Airtel

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  6. Rolling out broadband in India is very expensive and time consuming. Roads have to be dug up to lay cable. No ducts. BSNL is driving the prices down in broadband. I expect broadband to ARPU to settle around $5 in about 2 years. Maybe Vodafone should get HSDPA or WiMax and provide wireless broadband.

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  7. Om, there are so many things wrong with your assessment of the ‘mobile outlook’ in India, and not just in this post.

    As so many pointed out, laying down copper is virtually out of question, as a relative business case in comparison to BWA. Otherwise, why do you think there is so much hype around WIMAX and other BWA technologies in context of developing countries? Can’t others figure out the simple math of costs for wiring the countries?

    As for your repeated use of ‘low ARPU’ in context of Hutch (or Indian) ARPUs…well, first of all, from my knowledge, Hutch has amongst the highest ARPUs in India. Secondly, you have to look at them in context of India conditions (yesterday e.g. you plugged in US churn rate somewhere in the argument). The ARPU is low, but so are the costs per sub, fixed as well as variable. And ever heard of the long tail? Or the Prahland theory?

    Sorry, didn’t mean to be harsh…just a tad frustrated with your continuous missing the mark.

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  8. Manish

    thanks for your missing the point. Vodafone will have to offer something other than just voice if it needs to jack up the ARPU. It can do it many different ways, though I think the broadband is the way to go. If not copper, then through some other means, when ready and available, and it has to be much better than current offer.

    You talk about MTNL/BSNL not allowing line sharing, but Airtel has the wireline infrastructure that can be used. And by the way – my focus on the piece above for offering broadband is in major metros, not everywhere. Basically be a redliner and not worry too much about it.

    I don’t think 3G is going to happen anytime soon, and it is certainly not going to be cheap.

    As for the chrun rate, I was using the churn rate offered by HTIL, which happend to be 1.5%^ – up from 1.4% from the previous quarter. ARPU is low, and is declining for Hutch – it is a problem.

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  9. There are lots of private players that can lease out their fiber infrastructure. But the point is whether we need another land line player or not. I don’t think we need. Unless you have plans to go country wide, you don’t want to put your money in a crowded place. Mind you, TATA, Reliance and Bharati have been in this area for long enough now. Vodafone can do lots of other things like providing wireless access points at public places. In US, T-Mobile has this kind of service. Data connections is also another market. Sprint, Verizon and others provide this service in US.

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  10. Om:

    “Vodafone will have to offer something other than just voice if it needs to jack up the ARPU. It can do it many different ways, though I think the broadband is the way to go. If not copper, then through some other means, when ready and available, and it has to be much better than current offer.”

    • Not just Vodafone, but everyone has to offer something other than voice to increase the ARPU. Thats a no-brainer if you talk to anyone in Indian telecom sector!

    Whether broadband is the way to go or not is to be see. I disagree on that one, but we can wait and watch. Also, with the kind of investment pressure already on Vodafone, do you think they can afford to sink deeper into the broadband quagmire in India?

    But perhaps WIMAX can change that in future, although I would be surprised if Hutch/Vodafone plays that game.

    If you mean BWA as in WCDMA/IHSPA then being the GSM players, they are already the lead contenders for being into that sector in India. But I guess you did not mean this when you said broadband.

    “You talk about MTNL/BSNL not allowing line sharing, but Airtel has the wireline infrastructure that can be used.”

    • No I did not talk about MTNL/BSNL not allowing sharing :-) But now that you do mention it, Airtel has invested heavily, and for long, in building whatever wireline infra they have in big cities. Sharing that with a cut-throat competitor is not same as sharing towers in rural areas for building common cellular coverage – something which both are not fully ready/capable to do alone.

    And you see…this is the kind of ‘missing the point’ that I talk about when I say your Indian mobile perspective is off target.

    “And by the way – my focus on the piece above for offering broadband is in major metros, not everywhere. Basically be a redliner and not worry too much about it.”

    • Ok, point taken. But then, even if they do offer broadband in big metros (even if through BWA) the numbers are going to be too small to make a difference in top line significantly, atleast in next 2-3 years.

    “I don’t think 3G is going to happen anytime soon, and it is certainly not going to be cheap.”

    • I don’t think we were debating this, but lets see. I think 3G would happen next year. After all, most of the operators are ready with their home-work, and are basically waiting for spectrum issues to be sorted out.

    “As for the chrun rate, I was using the churn rate offered by HTIL, which happend to be 1.5%^ – up from 1.4% from the previous quarter. ARPU is low, and is declining for Hutch – it is a problem.”

    • Yes but the point was, looking at it from India perspective, when trying to give the right picture to your readers. Comparing with US churn rate is pointless. And a change in 0.1 percentage point is highly unlikely to be a cause for worry. Some of it may also be due to entry of a new player (Idea) in a few new circles. How does their churn compare with Airtel, Reliance? I would be surprised if they are faring any worse.

    As for ARPU, yes its low, but as I said, they are still better than most competitors (from my last knowledge, but I need to reconfirm). And anyway, if there is any one operator in India who looks beyond voice, then its Hutch. Try to find out their non-voice ratio in their ARPU.

    Also, how does their ARPU compare with rivals? Is their’s is declining, what about others? If they all decline, then isn’t it less of a worry?

    And btw, as fart as I know, declining ARPU in India is fairly well explained by the growth of subscribers. When you start reaching beyond the top-end consumer segments, then obviously it would bring in a lot of low ARPU users. That is not really a bad thing, because the ARPU from older subscribers is not falling (and neither are call rate – check out the Indian call rates in last 1-1.5 years. And I don’t mean international rates, because that is another game).

    And I say it isnt a bad thing because with this obvious reach-out for lower segments, the operators are passing on the low ARPU pressures to infra vendors. Atleast to some extent.

    Anyway, the bigger point was, I tend to follow your analysis pretty well. But in case of Indian telecom, I find it not analytical enough. Will keep reading anyway, though :-)

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