How Much Does Size Matter?

IT’S AN IMPRESSIVE figure, 400 million, the subscriber base that Vodafone and Idea will boast of once these two telecom companies merge. The deal catapults the combine to India’s top spot, leaving the earlier market leader Airtel about 130 million short, and makes Vodafone the world’s second largest connector of calls after China Mobile, which claims 850 million customers.

Size, no doubt, makes business sense. With more than every third Indian mobile number on Vodafone-Idea’s billing roster, just the bragging rights of being No 1 can be exercised to attract customers. And with a wider band of spectrum at its disposal, it could use its airwaves more efficiently to address call- drop disgruntlement. The new entity, in which the UK-based Vodafone will have a 45-per cent stake and the Aditya Birla Group 26 per cent for now (with equal stakes envisioned by 2022), will command a quarter of all airwaves allotted in India after it sells a small bit to comply with regulatory caps.

As rivals, both Vodafone and Idea had been in a financial flap, especially after Reliance Jio stormed the market last year. As partners, they get to share not just resources but also operational costs. The combine’s Chairman Kumar Mangalam Birla has spoken of ‘synergies’ that could save billions of dollars over the next few years.

To what extent, though, does size matter? At first glance, telecom appears to bear the markings of a high-tech sector, which means it ought to display this wonderful phenomenon called ‘increasing returns to scale’ that has enriched digital dreamers since the 1980s. The phrase refers to the tendency of a business that’s ahead to get further ahead, and it works best if the basic idea, sirji, is to make money out of thin air and grey cells. While old industries, the kind that mould raw materials into solid products, tend to reach a point in their expansion after which costs spike and profits tumble, businesses of the infoyug, the sort that sell the inventive output of their wizardry (think of apps), face no such hitch whatsoever. Since the stuff costs virtually nothing to replicate and distribute via the internet, there is no limit on how much can profitably be sold. Freed of the drag of variable costs, one only has to cover business overheads, after which a market leader can expand furiously, pile in the cash and charge way ahead of the pack. The ultimate dream scenario unfolds if the company’s offering also has a ‘network effect’ going for it: that is, if it gains appeal as its user base swells. In rare cases, such as social media apps, the market leader’s allure goes exponential if everyone else gets hooked on. Quitting, then, may require de-addiction. Just think of the death knell that WhatsApp served BlackBerry’s operating system by dropping support for it, thus pushing users to get handsets that run on either Android or Apple’s iOS. It’s proof enough that there is nothing quite like a network play. Unless it stumbles, the service that’s ahead stays well ahead, while the rest scrounge for leftovers. It’s a winner-takes-all game, more or less, and size can spell enormous profits once the scramble for customers is over and a market victor emerges.

The frenzy in the telecom arena suggests that size is a prize here too. The Vodafone-Idea combine has not only leapt ahead of Airtel, it operates what’s undeniably a vast network that uses thin air as an input—enough, it might seem, to get palms being rubbed in anticipation. The trouble is that this air is excruciatingly expensive now, and with its spectrum so severely stretched, every extra customer is a burden. What’s more, its network has no ‘effect’ to speak of. So long as the service on offer has little to set itself apart and switchovers are so easy, no customer is really captive. Meanwhile, telecom charges have crashed even for data packs, thanks to Jio’s aggression, and a recovery could arouse suspicions of a cartel at work. In other words, the big-gets-bigger scenario does not apply.

Yet, in theory, it still could. At a pinch, the combine could perhaps invest in an idea lab and come up with a whizzy application that grants it some sort of network effect, for example. It already has millions of smartphones logged on. India’s telecom regulator does not let operators give customers preferential access to websites, which is just as well for net neutrality, but still, they all seem to have missed a trick or two. An intense bout of rivalry on app innovation—beyond payment gateways—might be exactly what the market needs. Only airwaves are auctioned, after all, not grey cells—thankfully.

About The Author

Aresh Shirali