The much talked about Vodafone-Idea merger will create India’s largest telecom company by subscriber base and revenue market share (RMS). With roughly 400 million customers, the new entity will possess the superior infrastructure and technologies required to meet India’s rising demand for data.
To achieve the projected synergies and maximise the merger’s value, the following aspects need to be considered:
— Strategic rationalisation of network infrastructure (addressing tower overlaps to prevent loss in customer loyalty)
— Charting out the optimal way to shed revenues (merger and acquisition rules require that any merged entity shouldn't more than 50 per cent of the RMS)
— Lowering capex by re-deploying overlapping equipment from rationalised sites. Higher spectrum availability and larger single radio access network (RAN) deployment can support the same.
— Both companies serve different ends of the customer spectrum in terms of urban and rural sides. Integrating service centres and back-end offices may lead to distribution efficiencies while serving the larger subscriber base.
— Streamlining regional and nationwide IT systems and evolving to a single IT system for the new entity can help in realising the merger’s full value.
Don’t merge the brands
Vodafone and Idea may anticipate some dis-synergies, such as regulatory restrictions, cultural mismatches and differences in tariff and billing structures. But most of these can be tackled by retaining the two brands as they are.
The management should not merge the brands.
The telecom industry in India, though quite mature, is plagued with connectivity issues and competitive price-points. Hence the brand becomes the differentiator. There is a connection that customers associate with the image that comes from long years of use and familiarity, and this is best left undisturbed,
The key reason behind the merger is to share resources that result in greater RMS, sharing of R&D and exploiting economies of scale. Because both brands are positioned to cater to vastly different audiences, it makes less sense to combine them, just for marketing economies of scale.
The fact that the user base of each company is distinct from the other’s will provide the merged entity an opportunity to flank the other brands in the market. To attack market leader Airtel, Idea can attack at the rural end of the market while Vodafone can pose stiff competition at the urban end.
In effect, both brands can strike a balance and it does not make sense to fold one under the other.
Additionally, this gives unhappy subscribers the option of selecting either of the two firms rather than going for a third network provider.
A new brand requires new and expensive dealer promotions, which is unadvisable in such a competitive market. Also, the infrastructure behind the two companies would have to merge. Consumers might not get impacted but they may feel disoriented if the images change. Integrating tariff systems would be tricky. Lastly, a cultural force-fit could prove fatal for the merger.
Strategies the merged entity must consider
1. The Anita McGahan framework, which analyses disruption in the telecom industry, says that progressive change is happening.
In such a situation, the entity needs to carve out distinct positions based on expertise, and build resources and capabilities steadily and incrementally.
There is no need to get into price-cutting. The entity should develop a system of interrelated activities that have compounding effects on profits
2. According to an IBEF report, the tele-density in urban India in 2017 stood at 168.21 while that for the rural regions was only 57.04. Thus the new entity should prioritise rural markets for incremental revenue.
3. In August 2017, 70.8 million mobile banking transactions were made. Thus the company should also focus on this space and design a mobile wallet system that will lead to an overhaul of Vodafone m-Pesa. A mobile wallet could be an important revenue generator. (Jio does not operate in this space.)
4. Green Telecom reduces a company’s carbon footprint and generates significant cost savings.
5. In line with the Centre’s Smart City initiative, the new entity can tap into IoT applications and potential 5G sites, which would help in gathering and sharing data.
6. Outsourcing functions such as network maintenance and IT operations.
7. Innovative marketing strategies, based on the success of the Zoozoos and the ‘What an Idea, Sirji’ series.
8. Using capabilities to go digital in the domains of vehicle management, asset management, healthcare and enterprise networking.
All these strategies together will propel the merged entity as the top service provider and help it compete with Jio’s aggressive data schemes.
(The winners are second-year students of IIM Kozhikode, pursuing their PGDM)