Feb 28, 2017 08:24 AM IST | Source: CNBC-TV18

CNBC-TV18 Exclusive: Vodafone ex-CEO Sarin on how telcos can survive amid competition

The Indian telecom industry needs to consolidate to enable economies of scale and spectrum availability, but pricing power can only come through innovation says, Arun Sarin, Former Global CEO of Vodafone, sharing his view on the likely merger of Vodafone and Idea Cellular in an interview with CNBC-TV18.

The Indian telecom industry needs to consolidate to enable economies of scale and spectrum availability, but pricing power can only come through innovation says Arun Sarin, Former Global CEO of Vodafone.

In an interview with CNBC-TV18, Sarin shared his views on the likely merger of Vodafone and Idea Cellular.

Freebies launched by Reliance Jio in September sent the telecom industry scampering for mergers and acquisitions to build size and take on the competition. 

Sarin believes, eventually, the industry will be left with just three players – Jio, Bharti Airtel, and Vodafone - cornering 90 percent of the market share. This, he says, would be good for the customer as the companies will compete aggressively on pricing. Currently, there are about 13 players in the industry. 

Merger of Vodafone and Idea will create one of the largest telecom companies in the country both in terms of revenue and subscribers. Last week, Bharti Airtel announced acquisition of Telenor India marking the exit of Telenor from the country.

Even as Sarin acknowledged that Reliance Jio’s free offers may have a near-term negative impact on incumbents’ revenues, Sarin said Jio "has the right vision for what mobile companies should be in the coming years.” But he noted the incumbents are also catching up swiftly now. 

He believes as the industry evolves over the coming years, voice and text will become parts of bundled products with data at its centre.

People with higher data usage will need to buy more expensive bundles than the ones with low usage, he said.

While consolidation in the industry is expected to bring cost efficiencies, improved quality of service and better pricing discipline, there are also widespread concerns it may trigger job losses. Analysts estimate that the sector, which employs 2.2 million people directly and 1.8 million indirectly indirectly, can be faced with nearly 30- percent job losses in the coming years. 

Below is the transcript of Arun Sarin's interview to Shereen Bhan on CNBC-TV18.

Q: You played a big role in the Hutchison-Vodafone deal, you spent a lot of time here in India spearheading that. Does the possibility of a Vodafone—Idea proposed merger come as a surprise at all to you because consolidation has been spoken of for so long now? How do you now see the telecom landscape panning out post this merger?

A: From what we have spoken in past and I have for many years tells that the Indian telecom market needed to consolidate because the business has economy as a scale and the business needs spectrum and by the combinations that I am reading about in the newspapers, they all make sense to me.

And of course, this being brought to the fore because Reliance Jio is being as effective in its early days as they are weak and the Jio platform has 4G connectivity and has many other services associated with it and actually, they have the right view and vision for what a mobile company should be and could be in the coming years. All the others are sort of now playing catch up and finding partners so that they too, can be successful in the coming years.

But at the end of the day, it is likely that they will be re-participants in the Indian market that will have 90 percent of the market share. It will be Jio and it will be Airtel and it will be Vodafone block. So, these three names, you can expect to see here for a long time and this is going to be good for the customer because they will all compete aggressively just as Jio has in its early days.

Q: So you are saying that you expect the market to consolidate down to about three players and that it is going to be good for customers. But what about telecom companies themselves? One part is consolidation, but when you look at the other side of the story and that is the financial health of telecom companies themselves, do you see any sort of pricing power return to the sector any time soon?

A: There has to be a balance of pricing power meaning enough competitors that the customer is getting a good deal, but the price is not being so low that you cannot earn a reasonable cost of capital on the equipment and the spectrum that you are paying for. So, that is the balance that has to be struck here. Typically, pricing power in this industry comes when there is innovation, when you are doing something different, when there is a wireless broadband pipe being available for a reasonable cost or there are services that are being bundled on top of this that can extract some value and provide services for the customers. That game still needs to be played out in the coming years.

Q: Vodafone has taken a 6.3 billion pound hit on its Indian operations. So, in that context, do you think things are going to get a lot worse, there is going to be much more pain before we see any sort of sanity return?

A: If the pricing on Jio is free, then in the near-term there is a downward drop on everybody's average revenue per user (ARPU) and everybody's revenues But it is not reasonable to think that the price will be zero forever. So, when that price comes up to a marketeering price then you will see better economics for all the other players. So, as you point out, in the near-term, it is slightly negative and in the medium-term it will be whatever the market bears given the investment that everybody is making.

Q: How do you see the pricing model change in an era of free voice calls, over-the-top content (OTT) operators like Whatsapp? Bharti brought in the minutes factory model. How do you now see pricing models evolve from here on?

A: The pricing market is that you would buy a bundle, either an unlimited bundle or a big bundle or a medium sized bundle for USD 5 or USD 4 or USD 3 equivalent and you will get different amounts of data while voice and text and everything else will be bundled into that bundle. That is the way this pricing is going to go. So, if you are a very heavy user, you will be buying the larger bundle and if you are a slightly lower user, you will buy a smaller bundle, but voice and data will come as part of those two bundles.

Q: So, as the market moves towards more data driven, I come back again to that proposed mega merger. As the former Global CEO of Vodafone, what would you be cautious about? What would be the red flags that you would watch out for as this mega merger gets underway?

A: The main point is a level playing field and the same rules for everybody. The Telecom Ministry and the Telecom Regulator have set rules. In my view, the rules are for everybody and you need to follow them without exception. Whether it has to do with interconnect, whether it has to do with revenue share, whether it has to do with accounting, all of those things should be played out and then let the market figure out where it settles. Very hard for regulator or others is going to be pointing to a certain number, then the number will be the number where everybody feels that the customer is getting a good deal and the shareholders are earning a reasonable rate of return.

Q: What do you think is going on in Vittorio Colao's mind at this point in time?

A: I have no idea but I know you know how to reach him.

(Disclosure: Reliance Jio is part of Reliance Industries which owns Network18 and

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