Why Vodafone India Wants YOU Broadband

Vodafone India is believed to be in talks to acquire YOU Broadband, a small Internet service provider, for around 4 billion Indian rupees (US$58.64 million), according to media reports.

YOU Broadband has around 3,000 kilometers of optic fiber and 6,000 kilometers of last-mile cable serving homes across 12 cities. Its significant presence in the financial capital of Mumbai, a key data market for Vodafone Group plc (NYSE: VOD), largely explains the mobile operator's interest in acquiring it.

YOU Broadband is one of a number of relatively small Internet service providers addressing specific regions of India. While YOU Broadband is active in western India, ACT TV serves Bangalore and D-Vois caters to Maharashtra, for example.

Besides last-mile fiber connectivity, most of these players boast a loyal customer base, which would hold strong appeal for service providers such as Vodafone. ACT now claims to serve more than a million customers and offer a range of broadband and TV services under its Fibernet, Digital TV and HD TV brands. Since they use unlicensed spectrum, they are able to offer Internet access at cheaper prices.

"These players often have fiber or copper installed in the last mile and have managed to build a healthy base of customers that exhibit a relatively high degree of stickiness," says Deepak Kumar, the founder analyst of B&M NXT, a market research and advisory firm. "Aggressive per-gigabyte pricing has helped them grow the base steadily over a period of time and, as the market enters into a next phase of consolidation, they're becoming attractive acquisition targets for the bigger service providers like Bharti Airtel Ltd, Vodafone and Reliance Jio. Exits, however, will depend on the attractiveness of a potential deal."

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As the data market picks up and 4G competition intensifies, more Indian service providers are likely to make efforts to acquire or form partnerships with small Internet service providers.

Growing competition also means these players will find the going increasingly tough. With big players including Bharti Airtel, Vodafone India, Idea Cellular Ltd. and Reliance Jio entering their territory, tie-ups may be their best bet for survival.

– Gagandeep Kaur, contributing editor, special to Light Reading