What happens to subscribers if Vodafone Idea dies, and other key questions

As Vodafone Idea hurtles towards bankruptcy, the question is whether the government should rescue the beleaguered company? Even if it decides to do so, will an emergency bailout be sufficient to save the company from an astronomical debt of Rs 1.8 lakh crore, recurring business losses worth thousands of crores of rupees every month, and flight of high-paying customers?

What is the case for a government bailout?
Biggest dent from the failure of Vodafone Idea will be to the exchequer – especially keeping in mind the negligible proceeds received after the collapse of Anil Ambani’s Reliance Communications as well as Aircel.

The company’s dues to government include deferred spectrum liability worth Rs 96,300 crore, AGR liability (post SC judgment) of Rs 61,000 crore, and a large portion of PSU bank liabilities from total borrowings/loans of Rs 23,100 crore. Add to this the potential interest loss on these payments, and the total government payment setback could be as high as a whopping Rs 2 lakh crore.


But what has brought the company to such dire straits?
If the government does hand out a fresh revival package, this would be the third that the telecom industry will receive since 2017. Its business financials were hit hard when Mukesh Ambani made an aggressive entry into the mobile business in September of 2016, making voice charges free for consumers and deeply slashing the data prices.

This really hurt the incumbents Bharti Airtel, Vodafone India, and Idea Cellular (the last two merged as a countermeasure in 2018), as they used to realise nearly 75% of their revenues from voice which Jio had made free.

While the 4G-only Jio saw a business case for driving higher data and content consumption, others’ business models still revolved around squeezing consumers on voice and data tariffs, unmindful of the larger trend towards data, streaming and OTT services that was being played out across most of the developed world.

Has regulatory management also been poor?
Sunil Mittal could pull his company out of the depths of distress after the initial business shock, but Vodafone Idea (run by the Aditya Birla group and the highly-experienced Vodafone) failed to do so. The company slipped, and slipped fast.

If poor business strategies of Vodafone Idea management are to be blamed, so is the telecom department’s inept handling. When the established companies started slipping down swiftly, they should have checked the chances of any predatory practices after the entry of a deep-pocketed challenger. Government’s clumsy policies have also been for all to see in the poor management of state-owned BSNL and MTNL.

Why should the Indian consumer be worried?
From being the biggest telecom company in India post their merger with over 40 crore customers, today Vodafone Idea is the third-largest, still with a sizeable 26.8 crore consumers. If it files for bankruptcy, there will be a near-panic situation as customers will scramble to migrate to Jio or Airtel or BSNL/MTNL.

However, the sudden influx of such a large number of subscribers will surely stretch the already-crunched spectrum base, and quality of services will suffer.

Less competition will mean companies will have the comfort and elbow room to raise tariffs once again. At around 14GB per month per consumer, Indians today are among the highest consumers of data, heralding a near-digital revolution. Higher data prices can slow this surge.

Most big markets such as the US, China and Korea have more than two players, which are required for a healthy competitive landscape and also for handling large user bases plus expensive technology upgrades.

What are the 3 scenarios for India’s telecom future?
One, Vodafone Idea and even Airtel have time and again spoken of the need to have a ‘floor price’ for voice and data tariffs. Jio doesn’t agree here. But if the government does, consumers would still be the losers.

Two, merger with BSNL/MTNL. Except that the state-owned PSUs are themselves a big drag on government finances and have not shown an iota of a turnaround despite a recent mega Rs 70,000 crore package.

Three, entry of a new player into India’s telecom market. Here entry barriers include a sky-high investment threshold, average revenue per user that is among the lowest in the world, exorbitantly priced spectrum, very high levies, deep policy uncertainty, and local players who are strongly entrenched.