My friend Vikash Jha and I were discussing why after the FB-Jio deal, more Big Tech companies should consider investing in Indian telcos. There were talks of Google considering an investment in Voda Idea and just yesterday we also heard that Amazon is in talks to buy a $2B stake in Bharti Airtel.
Reposting the article here.
FB – Jio platform has 4 core aspects to it: Jio telecom rights – Distribution capability, FB – Tech capability, Reliance – Retail capability and WhatsApp – Reach, loyal user base & payment capabilities. However, the entities involved are still only 2 (FB and Reliance) with mostly centralized decision making structures reducing the complexity in synchronising the various moving pieces of this platform.
Now, replicating this strategy is hard and needs all these capabilities to come together. Clearly there is no immediate name which comes to mind, hence a congregation of 3 or 4 similar players will have to come together which most likely might result in some efficiency loss or even downright failure of the project. But is still worth trying.
For example, with rumours of Google putting money in Vodafone Idea, at least 2 of the 4 ingredients are addressed (telecom rights, tech competence), Google Pay can counter WhatsApp Pay but you still need good retail coverage. A strong communications platform can be a huge plus but the strategy can be executed without it as well.
In this post, I argue that Big Tech should seriously consider investing in India telcos even if the business strategy may be hazier than the FB-Jio model at the moment. Here’s why:
1. Telecom is the biggest strategic asset in a country like India where smartphones are emerging as the most powerful distribution channel for certain high volume and value products such as Fintech, EdTech, Content, Media etc. You can’t sit on the sidelines and let a big market like India go away especially since these big tech companies also lost China in the last 2 decades. I wouldn’t be surprised if the next election will be fought on the promise of a free smartphone for everyone!
2. Signalling a deep commitment to Indian markets early is important and the effects can be of significant consequence. It is most likely going to be a long drawn competitive scenario played out in phases over the next two odd decades. In such a scenario the first mover can consolidate market monopolising tactics if there is no imminent threat with sufficient credibility and reserve firepower to it. Early signalling can affect a lot of change in sequential moves and market evolution.
3. Cost of the call option at $100Mn (5% stake in Vodafone Idea) or even $1Bn is not too high compared to the cost of the alternative i.e having less or no say in India’s emerging platform play. Cash reserve positions of five largest tech companies as of early 2020 (approximate figures): Apple $150Bn, Microsoft $135Bn, Alphabet (Google) $120Bn, Amazon $50Bn, FB $50Bn, is huge. Just to reiterate, that’s approximately 18-20% of India’s GDP. Deploying such large quantum of money consistently in high NPV projects was already hard but has become even harder now (a long drawn global recession is the most likely scenario post Covid). Very few countries/geographies such as India offer sound business opportunities both domestically and as a gateway to SE Asia – home to 25% (India and SE Asia combined) of the world’s population. People are seeking upward social mobility and consumption patterns are evolving.
4. Conglomerate diversification has always been a growth strategy for thriving in the long term (Ex:3M, GE, Tata, Berkshire Hathaway etc) . The current scenario offers Big Tech a great opportunity to diversify and diversify big, planting seeds for growth over the next few decades.
So then, what is the biggest risk?
In my opinion the biggest risk is of Vodafone Idea not surviving the current market pressure from Airtel and Jio. Current user base of Vodafone Idea at 350mn is a very strong number but fast depleting according to reports. They have an outstanding AGR due of approximately INR 55,000 cr+ ($7.5Bn) while Jio has no dues to pay and Airtel has around INR 25,000 cr ($3.5 Bn) to be paid.
This has a few implications for this deal:
Firstly, from a business perspective – investor firms (hypothetically, let’s say Google) should be okay in paying money to clear off the dues and propping up Vodafone Idea as a significant 3rd player in the market.
Airtel and Vodafone-Idea have been pleading to the government for reducing the AGR dues, some movements have happened but no significant relief has been offered. Keep in mind Jio has no dues and hence no need to join this cause, which means there is no united voice from telecom players (largest emerging player Jio doesn’t care). A large company investing in Vodafone Idea is only going to exacerbate the problem since the government will view it as an opportunity to recover the full amount (government is in dire need of it from any and all sources) and the probability of reduction in AGR dues thus becomes close to zero.
Second, $100Mn (quoted amount in Google – Vodafone Idea deal) doesn’t appear meaningful enough to save Vodafone Idea, hence the amount should be increased or more private equity investors should join the deal subsequently at higher valuations providing long term comfort to the company. Precedence of private equity joining the Jio deal is already set and the players who did not participate in the Jio deal would be looking for an opportunity; someone will have to lead the way and show full commitment.
To conclude, big tech firms should use the current market dynamics to invest in Vodafone Idea with strong reserves for subsequent infusions as increasing capital immediately might not be possible at current market cap for Vodafone Idea. But even more important will be the market commentary post deal to show extreme confidence in their strategy and commitment. Half hearted measures would not suffice in taking on a refined strategy of FB, Jio and the suite of PE investors.
Image credits: Business Today