Rival telecommunications companies Vodafone Group Plc and Idea Cellular Ltd. agreed to a merger in India that is expected to finalize in 2018. This decision arose from the intense price war in the world’s second-largest mobile phone market, and this larger operator will have 395 million subscribers, more than market leader Bharti Airtel Ltd. Due to extreme competition in the country, Idea lost money last year for the first time in ten years. Vodafone faces similar struggles with profitability, but four years from the agreement, the merger will save $2.1 billion per year on costs and investments. The $23.2 billion deal values Vodafone India at $12.4 billion and Idea Cellular at $10.8 billion.
Vodafone’s expansion over time as a holding company allows it to relinquish partial control of its most troubled assets. The merger helps redeem the company’s expensive “bet” on India, which saw it continue to decrease in value and accumulate debt, by moving an unprofitable business off its balance sheet and providing potential for growth. Competitors will most likely follow in the footsteps of Vodafone and Idea, because “the logic behind telecoms mergers is indisputable. In effect mobile telecoms is infrastructure and the winner in such a market is the business with the greatest market share. They can put the biggest volume of users through their infrastructure, which is effectively fixed cost, minimizing cost per user.”
Vodafone CEO Vittorio Colao believes that this merger will trigger mobile network growth in India. He thinks the new network will bring strong 4G networks to more locations throughout the country and revolutionize “Digital India”. He says, “this is a transformational deal that changes, at the same time, the prospect and future of Vodafone and Idea in India, but also the industrial structure in India.” Due to the size of the new company, new technologies can be explored without the risk of losing too much money. Mobile money services and other technologies can now come to India and make life easier for its citizens.
This past Thursday, Snap Inc published its initial public offering filing. Snapchat’s parent company filed the paperwork this past November and is seeking a valuation of $20 billion to $25 billion, despite a Bloomberg report several months ago that valued Snap at $40 billion. Morgan Stanley and Goldman Sachs will head the deal, which could make CEO Evan Spiegel wealthier than many Fortune 500 CEOs. Spiegel and several of his friends from Stanford created Snapchat in 2011 as a private photo-sharing application, but the functionality of the application continues to expand over time. In the three years from 2011 to 2014, the app saw an increase in daily active users from one million to 100 million. While the daily user count continues to expand, the rate of growth has slowed down significantly in recent months. This number increased by only 7 million during the last three months, less than it had in most quarters.
Despite its growing user base, Snap mentioned in its filing that it may never become profitable. This risk factor caused many business journalists to criticize the social media platform in the past few days due to speculation over its potential viability against longer-established companies like Facebook, Instagram, and Twitter. The company brought in $404.5 million in revenue in 2016, while losses increased from $372.9 million in 2015 to $514.6 million in 2016. This increase in losses correlates with the growing daily user base that creates extra costs associated with hosting all the pictures, videos and messages running through the app’s servers. Snap currently makes its money from selling advertising space that companies can buy to promote movies and products on the filters and lenses available for users to implement into their pictures and videos. Short advertisement clips also play after consumers view certain pictures or videos, and the company’s filing shows potential for the growth in mobile advertising around the world, especially as internet infrastructure improves in developing countries.
The company is looking to expand its revenue sources with the introduction of Spectacles, sunglasses with a camera that allows users to save images and videos as “Memories” on the Snapchat app. Introduction of this product beyond the mobile app helps Spiegel reposition Snap Inc as a camera manufacturer and not just a social media platform. The camera glasses were sold in limited quantities during the last few months of 2016, creating new hype for the future of the product and company innovations in the future. Despite this excitement, expansion into new markets will result in more losses and feed the doubters that question the future profitability of the company.