When Mukesh Ambali’s Jio entered the telecom market last year with free voice calls for life and free data for a limited period, it was clear that a shake-up was imminent in the market. At one point, India’s telecom market had close to a dozen players but competitive intensity had already whittled this number down to three large ones – Bharti Airtel, Vodafone India and Idea Cellular – and less than half a dozen fringe players. So when Jio trooped in with a promise of unlimited freebies and a known appetite to absorb losses, it was apparent that the telecom market pecking order had to change to survive.
India is the world’s second-biggest mobile phone market by subscribers, behind China, but high competition in the crowded market has traditionally kept profits under pressure for all players. With competition rising due to Jio entry, consolidation is the only way forward. In this scenario, whispers of a possible merger between Vodafone and Idea have been doing the rounds for months – they were finally confirmed by Vodafone only last week.
If these discussions do fructify into a merger, the new entity will be the undisputed leader of India’s telecom market in terms of subscribers. And the biggest loser in this scenario would obviously be the long standing telecom czar, Bharti Airtel. Jio, whose arrival triggered an industry-wide consolidation, will also find the going tough in future since customer acquisition will become tougher.
So Why Are Vodafone And Idea Cellular Exploring A Merger At All?
The country’s number one telco by subscribers is Bharti Airtel, with Vodafone a close second and Idea coming in at number three. A merger between Bharti Airtel and either of the remaining two would have caused trouble as India’s merger and acquisition rules allow a merger, only if the percentage of adjusted gross revenue market share of the merged entity does not exceed 50 per cent in any particular telecom circle. The guidelines also specify that the combined entity should have less than 50 per cent of spectrum in each band individually in addition to having less than 25 per cent of the spectrum allocated to all operators in all bands in all circles.
So in the event that Bharti Airtel and Vodafone, say, explored a merger, these caps would have been violated in a large number of circles. The only other option was for the number two and three to explore synergies – which is what is happening right now.
How Does This Merger Benefit Vodafone And Idea?
Vodafone Plc has had to write down close to $5.5 billion in India, has been talking of a listing on Indian bourses with little success and has never been profitable in the world’s second largest telecom market. If a merger were to happen, it gets to not only perhaps reduce its losses but also gets to list on the bourses since Idea is already listed, without having to undergo the initial public offer (IPO) process. For Idea too, a merger makes sense. Analysts say it has been weighed down by debt of over Rs 40,000 crore and a merger would enable a re-rating, possible increase in market cap.
Why Has Jio’s Arrival Spooked The Market So Fast?
Jio came with its freebies, including lifetime free voice calls and cheap data plans, but the heat has been on for all three players even before its arrival. Now, thanks to the freebies, margin pressures have only increased.
This article shows how market leader Bharti Airtel suffered in the third quarter due to increased competitive intensity. Third quarter net profit slumped 55 per cent from a year earlier as its voice and data businesses felt the full impact of Jio’s free services. Revenue fell 3 per cent as data and voice rates fell and more subscribers left the operator. Bharti Airtel managing director and chief executive Gopal Vittal said: “The quarter has seen turbulence due to the continued predatory pricing by a new operator…This has led to an unprecedented year-on-year revenue decline for the industry, pressure on margins and a serious impact on the financial health of the sector.”
Rivals including Bharti Airtel were forced to slash effective data rates and offer free voice calling on some plans across price segments. Telcos had started cutting tariffs even before Jio’s launch, hurting key operational metrics such as average revenue per user (ARPU) and average revenue per minute (ARPM). Even after cutting data rates sharply, the company’s data customer base fell 12.4 per cent quarter on quarter, pulling down data usage by 3.5 per cent.
What Kind Of Muscle Will The Merged Entity Have?
As Jio continues to extend its freebies, consolidation could well be a necessity as both Vodafone and Idea will need to protect revenues, profitability and valuations. Fitch Ratings said in a note to clients last week that a planned merger between Vodafone and Idea should help them withstand intense price competition in the market. The ratings agency said it expects the merger could improve the combined EBITDA margin by 250-350 basis points due to cost savings – mainly on network and marketing expenses. The combined entity will also have a more balanced subscriber mix, as Vodafone is strong in urban areas whereas Idea focuses more on the rural mass market. “We estimate the merger would create an entity with 390 million subscribers, a leading revenue market share of around 40 per cent, revenue of $11-12 billion and an EBITDA margin of about 28 per cent to 30 per cent,” the Fitch analysts said.
Will This Merger Be Easy To Achieve?
As with any mega corporate deal, possible merger between Vodafone’s Indian operations and Idea would face challenges. As explained earlier, M&A norms may cause some trouble. Brokerage firm CLSA has pointed out earlier that a merger of these two companies would breach the revenue market share ceiling in five out of 22 telecom circles. But a telecom market expert says the knotty problem of revenue market share cap breach may get resolved once Jio – which is offering free services till now – begins charging and the revenue market share dynamics shift. All in all, a merger will work as long as both partners work out a solution to the M&A caps. Of course, the usual merger issues such as valuation, which partner gets to control how much in the new entity and which gets to run the new entity will also need to be resolved as the talks progress.
Is The Telecom Industry Game For Further Consolidation?
If the Vodafone-Idea merger happens, then the merged entity and Bharti will together control over 70 per cent of India’s telecom market share by revenue. This obviously spells doom for remaining small players. Industry estimates peg post-merger market share for Tata Teleservices at 6.5 per cent, BSNL and MTNL combine at 5 per cent, Aircel at 5.7 per cent and Sistema at 4 per cent. Reliance Communications (RComm) is estimated to be close to Sistema’s share at 4.2 per cent.
It then becomes incumbent upon these small players to either unleash another round of consolidation or wind up. Tata Teleservices is embroiled in a legal tangle with its Japanese equity partner DoCoMo and this alone may prevent any near term consolidation.
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The United Nations has shaped so much of global co-operation and regulation that we wouldn’t recognise our world today without the UN’s pervasive role in it. So many small details of our lives – such as postage and copyright laws – are subject to international co-operation nurtured by the UN.
In its 75th year, however, the UN is in a difficult moment as the world faces climate crisis, a global pandemic, great power competition, trade wars, economic depression and a wider breakdown in international co-operation.
Still, the UN has faced tough times before – over many decades during the Cold War, the Security Council was crippled by deep tensions between the US and the Soviet Union. The UN is not as sidelined or divided today as it was then. However, as the relationship between China and the US sours, the achievements of global co-operation are being eroded.
The way in which people speak about the UN often implies a level of coherence and bureaucratic independence that the UN rarely possesses. A failure of the UN is normally better understood as a failure of international co-operation.
We see this recently in the UN’s inability to deal with crises from the ethnic cleansing of the Rohingya Muslims in Myanmar, to civil conflict in Syria, and the failure of the Security Council to adopt a COVID-19 resolution calling for ceasefires in conflict zones and a co-operative international response to the pandemic.
The UN administration is not primarily to blame for these failures; rather, the problem is the great powers – in the case of COVID-19, China and the US – refusing to co-operate.
Where states fail to agree, the UN is powerless to act.
Marking the 75th anniversary of the official formation of the UN, when 50 founding nations signed the UN Charter on June 26, 1945, we look at some of its key triumphs and resounding failures.
Five successes
1. Peacekeeping
The United Nations was created with the goal of being a collective security organisation. The UN Charter establishes that the use of force is only lawful either in self-defence or if authorised by the UN Security Council. The Security Council’s five permanent members, being China, US, UK, Russia and France, can veto any such resolution.
The UN’s consistent role in seeking to manage conflict is one of its greatest successes.
A key component of this role is peacekeeping. The UN under its second secretary-general, the Swedish statesman Dag Hammarskjöld – who was posthumously awarded the Nobel Peace prize after he died in a suspicious plane crash – created the concept of peacekeeping. Hammarskjöld was responding to the 1956 Suez Crisis, in which the US opposed the invasion of Egypt by its allies Israel, France and the UK.
UN peacekeeping missions involve the use of impartial and armed UN forces, drawn from member states, to stabilise fragile situations. “The essence of peacekeeping is the use of soldiers as a catalyst for peace rather than as the instruments of war,” said then UN Secretary-General Javier Pérez de Cuéllar, when the forces won the 1988 Nobel Peace Prize following missions in conflict zones in the Middle East, Africa, Asia, Central America and Europe.
However, peacekeeping also counts among the UN’s major failures.
2. Law of the Sea
Negotiated between 1973 and 1982, the UN Convention on the Law of the Sea (UNCLOS) set up the current international law of the seas. It defines states’ rights and creates concepts such as exclusive economic zones, as well as procedures for the settling of disputes, new arrangements for governing deep sea bed mining, and importantly, new provisions for the protection of marine resources and ocean conservation.
Mostly, countries have abided by the convention. There are various disputes that China has over the East and South China Seas which present a conflict between power and law, in that although UNCLOS creates mechanisms for resolving disputes, a powerful state isn’t necessarily going to submit to those mechanisms.
Secondly, on the conservation front, although UNCLOS is a huge step forward, it has failed to adequately protect oceans that are outside any state’s control. Ocean ecosystems have been dramatically transformed through overfishing. This is an ecological catastrophe that UNCLOS has slowed, but failed to address comprehensively.
3. Decolonisation
The idea of racial equality and of a people’s right to self-determination was discussed in the wake of World War I and rejected. After World War II, however, those principles were endorsed within the UN system, and the Trusteeship Council, which monitored the process of decolonisation, was one of the initial bodies of the UN.
Although many national independence movements only won liberation through bloody conflicts, the UN has overseen a process of decolonisation that has transformed international politics. In 1945, around one third of the world’s population lived under colonial rule. Today, there are less than 2 million people living in colonies.
When it comes to the world’s First Nations, however, the UN generally has done little to address their concerns, aside from the non-binding UN Declaration on the Rights of Indigenous Peoples of 2007.
4. Human rights
The Human Rights Declaration of 1948 for the first time set out fundamental human rights to be universally protected, recognising that the “inherent dignity and of the equal and inalienable rights of all members of the human family is the foundation of freedom, justice and peace in the world”.
Since 1948, 10 human rights treaties have been adopted – including conventions on the rights of children and migrant workers, and against torture and discrimination based on gender and race – each monitored by its own committee of independent experts.
The language of human rights has created a new framework for thinking about the relationship between the individual, the state and the international system. Although some people would prefer that political movements focus on ‘liberation’ rather than ‘rights’, the idea of human rights has made the individual person a focus of national and international attention.
5. Free trade
Depending on your politics, you might view the World Trade Organisation as a huge success, or a huge failure.
The WTO creates a near-binding system of international trade law with a clear and efficient dispute resolution process.
The majority Australian consensus is that the WTO is a success because it has been good for Australian famers especially, through its winding back of subsidies and tariffs.
However, the WTO enabled an era of globalisation which is now politically controversial.
Recently, the US has sought to disrupt the system. In addition to the trade war with China, the Trump Administration has also refused to appoint tribunal members to the WTO’s Appellate Body, so it has crippled the dispute resolution process. Of course, the Trump Administration is not the first to take issue with China’s trade strategies, which include subsidises for ‘State Owned Enterprises’ and demands that foreign firms transfer intellectual property in exchange for market access.
The existence of the UN has created a forum where nations can discuss new problems, and climate change is one of them. The Intergovernmental Panel on Climate Change (IPCC) was set up in 1988 to assess climate science and provide policymakers with assessments and options. In 1992, the UN Framework Convention on Climate Change created a permanent forum for negotiations.
However, despite an international scientific body in the IPCC, and 165 signatory nations to the climate treaty, global greenhouse gas emissions have continued to increase.
Under the Paris Agreement, even if every country meets its greenhouse gas emission targets we are still on track for ‘dangerous warming’. Yet, no major country is even on track to meet its targets; while emissions will probably decline this year as a result of COVID-19, atmospheric concentrations of greenhouse gases will still increase.
This illustrates a core conundrum of the UN in that it opens the possibility of global cooperation, but is unable to constrain states from pursuing their narrowly conceived self-interests. Deep co-operation remains challenging.
Five failures of the UN
1. Peacekeeping
During the Bosnian War, Dutch peacekeeping forces stationed in the town of Srebrenica, declared a ‘safe area’ by the UN in 1993, failed in 1995 to stop the massacre of more than 8000 Muslim men and boys by Bosnian Serb forces. This is one of the most widely discussed examples of the failures of international peacekeeping operations.
On the massacre’s 10th anniversary, then UN Secretary General Kofi Annan wrote that the UN had “made serious errors of judgement, rooted in a philosophy of impartiality”, contributing to a mass murder that would “haunt our history forever”.
If you look at some of the other infamous failures of peacekeeping missions – in places such as Rwanda, Somalia and Angola – it is the limited powers given to peacekeeping operations that have resulted in those failures.
2. The invasion of Iraq
The invasion of Iraq by the US in 2003, which was unlawful and without Security Council authorisation, reflects the fact that the UN is has very limited capacity to constrain the actions of great powers.
The Security Council designers created the veto power so that any of the five permanent members could reject a Council resolution, so in that way it is programmed to fail when a great power really wants to do something that the international community generally condemns.
In the case of the Iraq invasion, the US didn’t veto a resolution, but rather sought authorisation that it did not get. The UN, if you go by the idea of collective security, should have responded by defending Iraq against this unlawful use of force.
The invasion proved a humanitarian disaster with the loss of more than 400,000 lives, and many believe that it led to the emergence of the terrorist Islamic State.
3. Refugee crises
The UN brokered the 1951 Refugee Convention to address the plight of people displaced in Europe due to World War II; years later, the 1967 Protocol removed time and geographical restrictions so that the Convention can now apply universally (although many countries in Asia have refused to sign it, owing in part to its Eurocentric origins).
Despite these treaties, and the work of the UN High Commission for Refugees, there is somewhere between 30 and 40 million refugees, many of them, such as many Palestinians, living for decades outside their homelands. This is in addition to more than 40 million people displaced within their own countries.
While for a long time refugee numbers were reducing, in recent years, particularly driven by the Syrian conflict, there have been increases in the number of people being displaced.
During the COVID-19 crisis, boatloads of Rohingya refugees were turned away by port after port. This tragedy has echoes of pre-World War II when ships of Jewish refugees fleeing Nazi Germany were refused entry by multiple countries.
And as a catastrophe of a different kind looms, there is no international framework in place for responding to people who will be displaced by rising seas and other effects of climate change.
4. Conflicts without end
Across the world, there is a shopping list of unresolved civil conflicts and disputed territories.
Palestine and Kashmir are two of the longest-running failures of the UN to resolve disputed lands. More recent, ongoing conflicts include the civil wars in Syria and Yemen.
The common denominator of unresolved conflicts is either division among the great powers, or a lack of international interest due to the geopolitical stakes not being sufficiently high. For instance, the inaction during the Rwandan civil war in the 1990s was not due to a division among great powers, but rather a lack of political will to engage.
In Syria, by contrast, Russia and the US have opposing interests and back opposing sides: Russia backs the government of the Syrian dictator Bashar al-Assad, whereas the US does not.
5. Acting like it’s 1945
The UN is increasingly out of step with the reality of geopolitics today.
The permanent members of the Security Council reflect the division of power internationally at the end of World War II. The continuing exclusion of Germany, Japan, and rising powers such as India and Indonesia, reflects the failure to reflect the changing balance of power.
Also, bodies such as the IMF and the World Bank, which are part of the UN system, continue to be dominated by the West. In response, China has created potential rival institutions such as the Asian Infrastructure Investment Bank.
Western domination of UN institutions undermines their credibility. However, a more fundamental problem is that institutions designed in 1945 are a poor fit with the systemic global challenges – of which climate change is foremost – that we face today.