'No one killed Vodafone India': Rise of "Crony Capitalism" in India (being transformed to an authoritarian state)

[Sukla Sen]

That's precisely what's called crony capitalism. As distinct from the standard variety.

The (already or to-be) authoritarian regime (actively) promotes its handpicked cronies at the cost of others - including the established biggies, under the (cover of) "rules" and, also, by bending, or even trashing, the "rules" - one of the defining markers of (substantive) "democracy".

The rates of rise of Adani and Ambani, under the Modi regime as compared to their peers speak for themselves; not to miss, both are, inter alia, Gujaratis.

<<Vi was worth US$23 billion when it was born in 2017 from the merger between Vodafone India and Idea. It’s worth only about one-tenth of that today, though it still has nearly 120 million subscribers and a 24% market share.>>

Vodafone and Aditya Birla are walking away from Vi’s sunk costs and handing over their keys. But to whom?

Rohin Dharmakumar, The Ken

A uniquely Indian telecom crisis that’s been simmering since 2003 and bubbling since 2019 boiled over this week. 

Vi (formerly Vodafone India), India’s third-largest mobile operator, said it had had enough of the Indian telecom market game. It wanted out.

Both of the majority shareholders of Vi made it clear they did not see a future in running the business for the normal reason that businesses run for—making profits.

First Nick Read, the CEO of Vodafone—which owns nearly half of Vi—used plain English to say he did not see a future in Vi. “I want to make it very clear, we are not putting any additional equity into India,” he said.

Then Kumar Mangalam Birla, the chairman of India’s Aditya Birla Group, which is the second-largest shareholder in Vi, offered to give away his shareholding in Vi free of cost to the government if they wanted it. Then he stepped down as Vi’s non-executive director and non-executive chairman. The company’s stock tanked 38%.

Even Vodafone is said to have offered its share in Vi to anyone who’ll have them, free of cost.

If you’re thinking this is crazy and unprecedented, you’re both right and wrong.

You’re right because Vi was worth US$23 billion when it was born in 2017 from the merger between Vodafone India and Idea, two rival telecom operators. Even though it’s worth only about one-tenth of that today, it still has nearly 120 million subscribers and a 24% market share. Tens of billions of dollars have gone into it as investments. 

Such businesses aren’t just “given” away. This is unprecedented.

But you’re also wrong because, from Vodafone’s and Aditya Birla Group’s point of view, Vi only offers the prospect of billions of dollars of further losses. The hope of earning profits in the future, even if impossibly hard, is what drives businesses. But the prospect of guaranteed and catastrophic losses in the future is a better motivator.

The sunk cost fallacy reasoning states that further investments or commitments are justified because the resources already invested will be lost otherwise. Therefore, the sunk cost fallacy is a mistake in reasoning in which the sunk costs of an activity are considered when deciding whether to continue with the activity. This is also often known as “throwing good money after bad.” The Sunk Cost Fallacy

To get a sense of the “bad money” that Vodafone alone has invested in India, consider the fact that it had invested over US$15 billion between 2007 and 2016. Post the Vodafone-Idea merger (which led to Vi), they committed to invest another US$8 billion.

The “good money” that they don’t want to now throw includes nearly US$8 billion of backdated license fees, interest, penalty and interest on penalty it owes the Indian government and over US$3 billion of debt.

(After a while, the billions stop registering with Vi).

There is absolutely zero prospect of Vi ever making profits as things stand. So, why bother?

But who does Vi hand over the keys to its house to?

Neither of the top two players—Jio and Bharti Airtel—will want or be permitted to buy Vi. 

Leaving—drum roll—the government as both the largest creditor and the potential buyer (since it runs loss-making public telco BSNL). A “lose-lose” situation if there ever was one.

Airtel’s CEO Gopal Vittal is right when he says India needs three players. But can a government that has always seen the telecom sector as the golden goose that lays license fee eggs every year, learn to see it as a business where profits and survival matter?

In a word: no.

Which is why investors have already started accepting the new reality of Indian telecom: a duopoly. Airtel’s stock is soaring. And it feels confident enough to raise prices. 

Indian telecom is a zombie death away from being a duopoly. It’s been coming.

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P.S. Here’s a nostalgic sampling of some of our back issues from our weekly newsletter, The Nutgraf, chronicling this impending implosion 

Well, “sector” may be a misnomer because, for all practical purposes, there are just 2.75 players. The leading two, Reliance Jio and Bharti Airtel, each count as 1. The third private player, Vodafone Idea, is at best a 0.5, tottering, as it is, on the verge of collapse. And the state-owned BSNL is the final 0.25, beset with outdated networks, bureaucratic decision-making, and a large workforce. There is No Alternative

Because now there isn’t an iota of doubt in anyone’s minds that Indian telecom is effectively a two-player race. Here’s a comparison of the stock prices of Bharti Airtel and Vodafone Idea, the only two operators from the 1999 vintage still standing. While both were saddled with additional dues of between $5-6 billion each, Bharti Airtel’s stock was largely flat as compared to Vodafone-Idea’s precipitous drop.

Because investors are now crystal clear that Bharti Airtel is the second duopoly player in Indian telecom. The first is Reliance Jio, which, in three short years, has become the number one player in terms of subscribers and revenue. And because of its young age, its retrospective fine was a mere $6 million. Third was poor Vodafone-Idea. In April this year, its parents Vodafone and Aditya Birla Group infused Rs 20,000 crore (close to $3 billion) as additional equity. And now it’s saddled with additional retrospective dues of nearly double that. Back to the future of Indian Telecom

Just ten years ago, India’s telecom market was crowded. There were nearly 10-11 players at any point—all jockeying for dominance. There were regional players as well. Aircel in Tamil Nadu. Orange in Mumbai. And so on. But soon, the market consolidated. Some merged. Others went bankrupt. The Wikipedia entry for defunct mobile operators in India looks like it’s written by George RR Martin. All this in the last ten years. The Reliance Jio camel is inside the tent