Data services set to drive Vodafone in India; debt not a problem

Written by Nikita Upadhyay | Nikita Upadhyay | Baiju Kalesh | Mumbai | Updated: Nov 9 2011, 08:40am hrs
Vodafone India, the countrys second-largest mobile telephony company by subscribers and revenues, is drawing up a new business plan to capture the next growth phase in a market where data is quietly eating into the voice revenue pie.

I see this year as the inflection point in the life of the industry, says Samaresh Parida, director (strategy), Vodafone India. If you look back last three years, look at successful companies and look three years ahead, then the rules of the game would be completely different from what they used to be.

The Indian subsidiary of the British company had, in April, freed itself from the shackles of hostile Indian partner Essar Group by purchasing its 33% stake for $5 billion, paid R11,617 crore to buy third-generation radio waves or spectrum and stuck to metro and A class territories or circles.

Debt has never been a issue for us, says Parida. The company gains courage from its parent sitting on 6.2 billion, some of which it is ready to pump into India. But it has to catch up fast as India's 350 million youth spends more time browsing internet on mobile phones on a daily basis.

Mobile telephony companies are grappling with high costs to acquire subscribers, lower tariffs squeezing average revenue per user and heavy debt to purchase 3G licence and roll out a 3G network.

For the industry as a whole, Arpu has been falling over the last three years to Rs 100 from Rs 250. Vodafone's Arpu at Rs 168 is much below that of market leader Bharti Airtel, which stood at Rs 183 in September quarter.

Vodafone India, with Rs 650 crore operating free cash flow, is no more sticking to earning more from its voice subscribers, and instead will derive more from data and mobile payments which it pioneered in Kenya.

Consultants say the shift in strategy is laden with risks. Potential risks for the growth of data service revenue in India include slow development of content and irrational pricing, wrote analysts Suresh Mahadevan, Jinjin Wang and Varun Ahuja at foreign brokerage UBS Equity Research in a report released on May 4, 2011. Additional spectrum is needed to realise data growth potential in India, and slower-than-expected progress on allocating additional spectrum would likely hamper data growth in India.

However, Vodafone is not new to taking such risks. They have faced the same challenges as others of falling mobile voice prices, driven by competition and regulation, said Robin Bienenstock, senior analyst, European & Latin American Telecommunications at London-based Sanford C Bernstein, an investment-management firm, in an email response.

Vodafone is relying on its past success in both developed and developing markets to grow in India. One way to arrest revenue fall is to club voice and data, say foreign analysts tracking Vodafone Plc.

Tiered and bundled data plans which allow subscribers access a large data allowance if they also buy a large minutes or short messaging service allowance is being introduced, says Bienenstock of Sanford C Bernstein. This way, the operator is ambivalent to the customers' usage habits; they can use voice, SMS or data applications and the operator still gets paid.

Voice has got saturated and mostly penetrated, although rural opportunities are there, but it won't be a big thing, says Parida, who joined the company in 2008 after a two-decade stint with aerated soft drink maker PepsiCo. In the coming times, data would become a big piece and bigger driver of revenues.

Vodafone's rivals like Reliance Communications are consciously shifting its portfolio to data, without compromising on voice.

Balancing of portfolio between voice and data will not happen by reducing on voice but by increasing voice and exploding data consumption, Syed Safawi, president wireless business, RCom said in an earlier interaction with FE in September. Currently, non-voice revenues constitute about 20% of RCom's wireless revenues, but Safawi aspires to take that to around 35-40% in the coming few years.

Data users have more than doubled as more young subscribers browse internet on the go, download movies and music. Analysts say data will take off in India because of higher data transfer speed facilitated by 3G, falling smartphone prices, richer applications and operators offering price based promotional offers to trigger initial trails of data services.

When I say data, its not 3G alone; a lot of it is still in 2G and this is going to explode, says Parida who honed his skills under PepsiCo chairman Indra Nooyi. Once it reaches the inflection point, it will take off. Data contributed 16.28% or Rs 1,230 crore to Vodafone's revenue in the fiscal September ended quarter from Rs 950 crore in the same period previous year.

Both handset data and mobile data cards will definitely grow says Parida. That is one big piece in the strategy in terms of our investment.

Vodafone's second strategy hinges on mobile payments. Today, we have about 100 million internet users in India and around 50% use mobile phone to access internet, says Parida. We see this number outstripping the computer number.

Rivals have moved much faster than Vodafone in mobile payment offers. Market leader Bharti Airtel was the first off the block to enable cashless payment via mobile phones for its subscribers.

Companies should know what they want to do, says Neeraj Aggarwal, partner & director, BCG India. Do they want to offer a prepaid wallet or a mobile account linked to a bank account, or both

BCG estimates that $350 billion payments and banking transactions could flow through mobile phones by 2015, while credit and debit card transactions are roughly $235 billion today.

Vodafone is betting on leveraging its global success in India. The company was the first to launch mobile payments in Kenya in 2007 under M-Pesa. Now 10% of the country's GDP is transacted through it.

Mobile devices reduce the cost to serve customers by 50-70%, making it possible to offer financial services to a vast population once considered unprofitable, wrote consultants Christopher P Beshouri and Jon Gravrk in Mckinsey Quarterly Review released on February 2010.

The analysts expect 360 million to use mobile money by 2012 from 45 million now and could generate $5 billion revenues every year in direct revenue and extra $3 billion in indirect revenue, higher average per user for traditional voice and short message service.

Vodafone is relying on mobile banking to revolutionise small savings, money transfers, utility and subsidy and even National Rural Employment Guarantee Scheme (NREGS) payments.

The mobile phone can be a poor mans credit card, says Parida. The key to this business is to generate a large volume of transactions, since the transaction values will be small.

Mobile-enabled business correspondents, who are authorised to conduct business on behalf of banks, can serve a customer 8-15% cheaper, a transaction much below the present $1-1.5 at a branch, consultants Neeraj Aggarwal, Nimisha Jain and Arvind Subramanian at BCG India wrote in a report released in July 2011.

For customers willing to conduct banking directly on their mobile phones, the cost for a transaction drops to less than 1%.

However, Parida says there are hurdles to grow e-commerce in India. Large opportunities exist in small payments, says Parida, The regulatory environment must keep pace with the technologies.

We need to change to give way to these developments, he added.