Indian telecom giant Bharti Airtel is aggressively expanding at home and abroad to maintain momentum in an increasingly competitive market.
By Anurag Prasad, contributor
Sunil Bharti Mittal wants to be a big influence in the everyday lives of the nearly 200 million users of his Airtel phones across South Asia and Africa. He wants to play banker, entertainer, teacher, doctor, and countless other roles. If he succeeds, he’ll not only change how they interact with the world around them, he’ll also transform India’s largest telecom company, Bharti Airtel.
To try to make these goals a reality, the telecom company made three big bets over the past year. In early 2010, Airtel paid $300 million for 70% of Bangladesh’s Warid Telecom. Next, it clinched a $9.1 billion buyout of Zain Telecom, a Bahrain-based company operating in 16 African nations. Then, Airtel snagged a series of 3G licenses back home.
For anyone seeking insight into the firm’s transformation, a conference last November would have been a good place to start. Each year, Bharti Airtel’s top officials get together for three days to discuss company strategies. Dubbed the Airtel Leadership Conclave, it is Mittal’s show.
This time, nearly 160 managers, vice presidents and above, met at Atlantis, The Palm, one of Dubai’s shiny new hotels on the Jumierah waterfront. Around 60 were from Airtel’s Africa operations, and the rest came from India, Sri Lanka, and Bangladesh. No surprise then that the conclave’s theme was ‘Winning the World,’ and its venue was midway between Africa and the Indian Subcontinent.
When the conclave’s participants gathered on the beach for some unabashed partying, they showed up in their national costumes. Drew Kelton, Airtel’s Scottish enterprise president, wore a kilt, while Amali Nanayakkara, CEO in Sri Lanka, wore a silk sari, tied Sri Lankan style. Most visible were the Africans. The Nigerians showed up in agbadas, the Kenyans in dashikis, the Ugandans in kanzus and kofias (caps). The Indians were comparatively sedate: Mittal wore a cream-colored formal jacket known as a bandhgala. Getting everyone to dress in their national wear was his idea. He wanted his employees to experience its transformation.
At the meeting, Mittal spoke of shifting Airtel’s business from voice to data—including email and Internet connections—and how it would change the company. In an interview with Fortune India after returning from Dubai, Mittal called 3G “data on steroids” and predicted that a quarter of sales would come from it in three years. Thereafter, “to my mind, even 50% data revenue isn’t unthinkable, though it’s difficult to do precise crystal ball gazing,” he said. It would require a complete change of mindset, “like starting out all over again.”
A long history of firsts
In the past, Mittal almost invariably set the agenda. In the late 1990s, he revolutionized telecom in India by introducing prepaid cards, which became an industry norm. By 2002, he outsourced Airtel’s entire infrastructure and customer care back-end to IBM (IBM), Ericsson (ERIC), Nokia-Siemens and Mphasis. This reduced operating costs and allowed faster roll-outs and improved margins. Today, Vodafone (VOD), Idea Cellular, and Uninor, among others, follow this model. He was also the first to build a business around ringtones and caller tunes.
But as the industry matures and gets crowded, his competitors are coming on strong, matching him innovation for innovation. And they have the same idea—getting people to live their lives on 3G networks. They include Tata, backed by Japan’s DoCoMo (DCM), Vodafone, Idea, and Malaysia’s Maxis-backed Aircel. Then there’s the 800-pound gorilla, Reliance Industries, which is making a bid for the data space through an alternate route—broadband wireless access.
After nearly a decade of defining India’s growth story, telecom stocks have lost momentum. Call it skepticism or a return to sanity, but valuations have plateaued. For the last eight quarters, Airtel’s stock has stayed flat despite a split last July. Analysts are questioning what 3G will ultimately do for telecom companies. “There’s been a huge outflow of capital on 3G licenses and subsequent expenditure on [setting up] networks,” says Salil Pitale, executive director of Enam, a Mumbai-based brokerage. “Doubts are cropping up because the probability of Indians paying for differentiated content remains uncertain.”
A recent corruption controversy involving an ex-telecom minister has given the industry a black eye. And while Airtel has not been directly drawn in, perceptions ultimately impact business. Mittal admits that the public opinion “bothers him,” while he simultaneously argues for more transparent regulations.
New logo, new beginnings
The new realities are showing up in the way Mittal operates. Though he denies having become more hands-on, insiders say he is far more involved in day-to-day activities compared to a year ago. When the Airtel logo underwent a redesign, for example, he was involved in the minutiae. “Airtel is Sunil Mittal and Sunil Mittal is Airtel. He has an amazing gut for the company, what will work and what will not work with users,” says Rohit Ohri, managing director of JWT India, Airtel’s advertising agency.
Indeed, the new logo has set the tone for Airtel’s transformation. It was unveiled on November 18, 2010, at a party in New Delhi for Airtel employees. Designed by London’s Brand Union, a WPP group company, the new logo—akin to a Nike-like swoosh—was to bring a more fluid, youth-oriented, and futuristic brand identity. “The earlier design did not allow us any fluidity and space to play around,” says Mittal. “We needed to break the mould to announce our arrival in the international market and also show the youthful energy within the company.”
Until that evening, it had been almost three years since Mittal had informally interacted with his workforce. At the party, he spoke about the new logo, and then went on to exhort employees never to become complacent just because they are market leaders. After all, would be easy to get complacent with 150 million users who talk an incredible 2.3 billion minutes every day on Airtel’s networks.
This is a recurring theme among Airtel managers. Says Bharti Enterprises deputy group CEO and managing director, Akhil Gupta: “We cannot afford to be complacent because we are the leaders. We have to start thinking from zero wherever we are present.”
After building a business on postpaid and prepaid services, they say, Airtel needs to think bigger: not just simple Internet connectivity, but complex machine-to-machine communication like remote monitoring of electricity meters. Moreover, new products and apps are being made by independent technology developers who could just ally with the network that pays the most.
With falling tariffs and melting average revenue per minute, revenue market share is the industry’s new inviolable metric. Airtel leads the pack with an average of 33.16% in the last four quarters. Vodafone follows with 20.5%, but neither has been able to grow. “We have held our positions since we cannot grow geographically unlike many new entrants who are now acquiring a pan-India footprint,” says Sanjay Kapoor, Airtel’s CEO for India and South Asia. Airtel’s networks cover 85% of the Indian population and there’s limited scope for it to expand. So the newer players—Aircel, Tata DoCoMo, etc.—fight over incremental market share.
Banking on a data deluge
According to Kapoor, there’s a way out: With 3G, aim for a piece of the customer’s overall spending across categories such as entertainment and education, rather than focus on his telecom (read voice) wallet. So, even if voice revenues dip further, it’ll be more than compensated by new growth from data services. “Operators in Japan and Korea have 50% of revenue coming from non-voice services,” says Kapoor. “With less than 16% of our population having Internet access and a large youth population, the potential upside is huge.”
To support the data business, Airtel is setting up a series of in-house business headed by industry professionals. For example, financial services is headed by Sriram Jagannathan, a former Citibanker. His team is working on a semi mobile wallet, which will offer conditional mobile financial transactions—such as prepaid customer using credit to buy goods at a shop and then using his phone to pay.
Entertainment is where Airtel wants to extend its lead of being the largest music store in India to video-based offerings. The company is wary of revealing details, but officials say they are evaluating video-based, exclusive content. One possibility: Manchester United soccer matches beamed only on Airtel’s 3G network.
But compared to Tata DoCoMo, which launched its 3G services across nine of its 22 license areas last fall, Airtel’s 3G push is behind schedule—the company had announced that the services would be out by December, and so far nothing is available. Kapoor says Airtel would rather go for one big rollout than do it piecemeal. “Airtel need not be first movers in everything,” adds Jigar Shah, head of research at Kim Eng Securities, a Mumbai broking firm. He argues that given Airtel’s size, it doesn’t always need to immediately react to competitor activity.
However, pricing will be the big issue. Early indicators from the two players who have already launched 3G, Tata/DoCoMo and Reliance Communications, reveal that prices are optimal—starting at $2 for 200MB download speed.
But the head of a leading handset maker in India believes that sooner or later someone will blink and trigger a price war. A flat rate for unlimited usage is the most obvious course. “Then there will be a race for market share and more investments will be piled up. This will ultimately lead to consolidation,” he says. “The sector does not seem to have a plan on how to recover its return on investments.”
When the 3G auctions took place, spectrum costs went completely out of control. Given how high the bids went, Airtel, which was seeking pan-India licenses, cut back to 13. Gupta hopes that the industry’s billions in overall spending on 3G will check an unnecessary price war. “I don’t see irrational pricing happening in 3G. They are all very responsible operators and looking at constraints, I expect the overall pricing to be rational.”
But how much can Airtel do with 5 MHz of 3G spectrum? Especially when there’s still no clarity on how much new spectrum will be available in the future. Mittal argues that this is a waiting game and he’s willing to see his competitors’ plans unfold before he makes his next move. “I always come out stronger in the face of competition,” he says with a smile.
A good way to understand the scale of what Airtel is attempting is to travel across the countries where it now operates. Airtel’s markets now spread from Sierra Leone on Africa’s west coast to Madagascar, off the eastern coast of the African continent. A flight from Sierra Leone to Bharti’s Africa headquarters in Nairobi takes 10 hours. It is a $6 billion business with 41 million users. “One thing is clear. We cannot paint Africa with the same brush,” says Manoj Kohli, head of African operations, who spent his first few weeks in Africa meeting employees, distributors, retailers, and customers. “The local dynamics in each country warrant a separate business strategy and a local team to execute operations there.”
The data opportunity in Africa is huge. “We are bringing Internet to a young population, and they are delighted,” says Kohli. He is working with government officials to share a common agenda of economic development and creating jobs. On offer: adopting primary schools, refurbishing their infrastructure, and providing uniforms, teaching aids and broadband connectivity. In the next 18 months, Airtel plans one fully adopted school in each country. Airtel’s betting these moves will make the governments more sympathetic to its needs. One area that needs immediate intervention is interconnection charge.
In Kenya, Airtel’s efforts have prevailed, with interconnection charges and tariffs halved. In 2009, the company that Airtel acquired, Zain, reported annualized revenues of $3.6 billion, 12% lower than in fiscal 2008, and a loss of $149 million. Its largest market, Nigeria with 36% revenue share, reported zero growth in the four preceding quarters; its nearest competitor, MTN, had clocked a compounded growth rate of 9.3% in the same period. Analysts say this slide was due to Zain management. A report by Royal Bank of Scotland said the cost of acquisition would go up, as Bharti “may need to make additional investments to upgrade/expand networks, and license renewals due in five countries by 2013.” Indeed, Bharti will spend $800 million to strengthen its Africa position this year.
Bharti now targets 100 million users and $5 billion in revenue by 2013. In the quarter ending last September, it reported $3.5 billion in revenue with 40.1 million subscribers, up from 36.3 million in the first three months of operations.
It has drawn its strategy around three things: affordability; expanding its network into rural areas; and data and Internet services. Africa has negligible landline-based broadband connectivity, and the market makes it unviable to lay fresh copper lines. Bharti will use its 3G licenses in nine markets and focus on wireless broadband to increase the 7% non-voice contribution to its revenues. The company is planning to offer music, sports (especially soccer), and social networking to attract data users. “We are evaluating the price points for data services and we expect the youth to access it on their handsets. However, we will also set up cyber cafés to cover every section of society,” says Andre Beyers, chief marketing officer for Airtel Africa.
To make all this a reality, Mittal says the spirit of entrepreneurship must always be present within the company’s ranks. Mittal knows that as Airtel grows, it is important to retain the soul of a small company where decisions are made quickly. Rajeev Gupta, a managing director at asset management company Carlyle who has known Mittal for years, says not too many CEOs would have made the bold moves that Mittal has made. “But equally, the requirements of his business have changed,” says Gupta. “And he has to take responsibility for its success or failure.” This is exactly the kind of challenge that the telecom executive loves to answer.
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