Airtel: The transformers

SUNIL BHARTI MITTAL wants a big piece of our everyday lives. He wants to play banker, entertainer, teacher, doctor, and countless other things to nearly 200 million Airtel users across India, Sri Lanka, Bangladesh, and Africa. If he succeeds, he’ll not only change how they interact with the world around them, but also transform the Rs 43,053 crore Bharti Airtel, India’s largest telecom company (ranked 14 on the Fortune India 500).

Three bets to facilitate this were made last year. In January, Airtel paid $300 million
(Rs 1,352 crore) for 70% in Bangladesh’s Warid Telecom. Two months later, it stitched a $9 billion buyout of Zain Telecom, a Bahrain-based telco operating in 15 African nations. Then, in May, Airtel snagged 3G licences across 13 circles in India for Rs 12,295 crore.

For anyone seeking an insight into the firm’s transformation, a conference last November would have been a good place to be. Each year, its top officials get together for three days to discuss company strategies. Dubbed the Airtel Leadership Conclave, this is Mittal’s show—he sets the agenda.

This time, nearly 160 managers, vice presidents and above, got together at Atlantis, The Palm, one of Dubai’s shiny new hotels on the Jumierah waterfront, from November 25 to November 27. Around 60 in the group were from Airtel’s Africa operations and the rest from India and the
neighbourhood. No surprise then that the conclave’s theme was ‘Winning the World’ and its venue, Dubai—midway between the subcontinent and Africa.

At the meet, Mittal spoke of how Airtel’s business would move from voice to data and how that would change the company. (Data refers to all non-voice activities on a handset.) In an interview to Fortune India a few weeks after returning from Dubai, Mittal said 3G was “data on steroids” and a quarter of sales would come from there in three years. Thereafter, “to my mind, even 50% data revenue isn’t unthinkable, though it’s difficult to do precise crystal ball gazing”.

But, getting there requires a complete change in thinking. As Mittal says: “It’s like starting out all over again.”

Thanks to spotting the potential of telecom early, Mittal almost always set the agenda in the past. In the late 1990s, he revolutionised the industry by introducing prepaid cards (Airtel Magic) which became an industry norm. In 2002, he handed over Airtel’s entire infrastructure and customer care backend to IBM, Ericsson, Nokia-Siemens, and Mphasis, which reduced operating costs, allowed faster roll-outs and improved margins. Today, Vodafone, Idea Cellular, and Uninor, among others, follow this model. Rajeev Gupta, MD, Carlyle, an asset management company, says not too many CEOs would have trusted outsiders to cut costs. Mittal was also the first to build a business around ringtones and callertunes.

But as the industry has matured and gotten crowded, his competitors, which include the likes of the Tatas backed by Japan’s DoCoMo, Vodafone, Idea, and Malaysia’s Maxis-backed Aircel, have begun matching him innovation for innovation. And now they have the same idea—getting people to live their lives on 3G networks. There’s also the 800-pound gorilla, Reliance Industries, eyeing the data space though an alternate route—broadband wireless access (BWA). “Airtel needs to answer this question: How will it respond to the BWA challenge?” says Ashish Sharma, principal, Booz & Co., a consultancy firm.

After nearly a decade of veering off the charts and defining India’s growth story, telecom stocks have also lost momentum. Valuations have plateaued—call it scepticism or a return to sanity. Though Airtel is still the industry pick, for the last eight quarters its stock has stayed flat despite a 1:2 split last July. Analysts question what 3G will ultimately do for companies like Airtel. “There has been a significant outflow of capital on 3G/BWA licences, which will be followed by capex on setting networks. Given that Indian consumers are price-sensitive, markets don’t know at what price points this differentiated content will be lapped up. Equity investors are concerned over the kind of returns these investments will make,” says Salil Pitale, executive director, investment banking, Enam Securities, a Mumbai-based broking house.

The recent controversy over ex-telecom minister A. Raja has cast the industry as corrupt, sleazy, and manipulative. While Airtel has not been directly drawn into the machinations, such things ultimately impact business. Mittal admits that the public perception of telecom “bothers him”,
simultaneously arguing that regulations need to be made more transparent.

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 with even a year back. He was involved in the minutiae of Airtel’s logo redesign, for example. “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. He reacts instinctively,” says Rohit Ohri, managing director of JWT India, Airtel’s advertising agency.

Adds Carlyle’s Gupta: “The requirements of his business have changed. And he has to take responsibility for its success or failure.”

NOVEMBER 18, 2010. Rose Garden, Chattarpur Farms, New Delhi. Mittal shows up at a party for Airtel employees. Earlier that day, the company’s new logo was unveiled. The brief given to London’s Brand Union, a WPP group company, which designed it: Make it appeal to the youth (see box). “The earlier design did not allow us any fluidity and space to play around. We needed to break the mould to announce our arrival in the international market and also show the youthful energy within the company,” says Mittal.

It’s almost three years since he has informally interacted with his workforce. The last time was in 2007 when the Bharti logo changed. (Bharti is the common identity used across all of Mittal’s businesses, including telecom, insurance, and retail.) At Rose Garden, Mittal speaks about the new logo and what it means, and then goes on to exhort employees never to become complacent just because they are market leaders.

This is a recurring theme among Airtel’s senior managers. Akhil Gupta, Bharti Enterprises deputy group CEO and managing director, says unprompted: “We cannot afford to be complacent because we are the leaders. We have to start thinking from zero base wherever we are present.”

It’s easy to get complacent with 150 million users who talk an incredible 2.3 billion minutes every day on Airtel’s networks. But now the company will need them to do other stuff. Sanjay Kapoor, Airtel’s CEO for India and South Asia, explains: “Data is where voice was in 1995: I would be looking at overall opportunities.”

Selling data will change Airtel fundamentally. Voice was about managing scale, data is about managing complexities. So far, its business was built on the back of postpaid and prepaid services. Sure, there were other things—texting, ringtones, GPRS, and other value added services—but the basic product stayed constant.

Now, Airtel will need to sell thousands of different kinds of products—from something as simple as Internet connectivity to complex machine-to-machine communication like remote monitoring of electricity meters. Moreover, the products will be made by independent technology developers who could just ally with the network that pays them the most.

The complexity is already visible in its application store (and India’s first for mobiles)—Airtel App Central—which was launched in February 2010. The store currently sells 71,000 apps under 25 categories for 550 different handsets. On the existing 2G networks, it registered 2.5 million downloads in the first 30 days of its launch. Now imagine how this will explode once 3G rolls out.

Airtel’s challenge is to establish itself, especially against players such as Aircel and Tata DoCoMo. “In 3G, Aircel is the incumbent and has already created the services ecosystem along with partners,” Gurdeep Singh, chief operating officer, Aircel, told Fortune India while launching mobile healthcare apps in collaboration with Apollo Hospitals. Even on a 2G network, to differentiate itself, Aircel positioned itself more as a data provider than voice. Estimates suggest data contributes almost 14% to Aircel’s total revenue already. Its revenue market share (RMS) has moved up from 3.9% to 5.2% between September 2009 and September 2010. This translates into incremental revenue of Rs 300 crore per quarter, from Rs 800 crore to Rs 1,100 crore.

With falling tariffs leading to melting average revenue per minute (ARPUs), RMS is the industry’s new inviolable metric. Airtel leads the pack with an average share of 33.16% in the last four quarters. Vodafone follows with 20.5%, but neither has grown. “We achieved a pan-India presence in 2005 and have held our position on RMS. The new entrants are now seeking a similar footprint,” says Kapoor. Airtel’s networks cover 85% of the Indian population and there’s limited scope for it to expand.

Kapoor’s way out: With 3G, aim for a piece of the customer’s overall spends across categories such as entertainment, education, and health care rather than focus on his telecom (read voice) wallet. That way, 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. With less than 1% of our population having broadband access and a large youth population, the potential upside is huge.”

To support the data business, Airtel is setting up a series of verticals. These are independent businesses, headed by professionals from a particular industry. For instance, the financial services vertical is headed by Sriram Jagannathan, a former Citibanker. His team is working on a semi mobile wallet, which will offer conditional financial transactions over the mobile. For example, a prepaid customer can use credit to buy goods at a shop and use his phone to pay.

In entertainment, Airtel wants to extend its lead of being the largest music store in the country 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 circles on Diwali, 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’s response: They would rather go for one big rollout than do it piecemeal.

“Airtel need not be first movers in everything,” says 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.

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 Rs 90 for 200MB of data download. 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 thing to do. “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 licences, cut back to 13 key circles. Gupta hopes that the industry’s spends on 3G (Rs 67,719 crore overall) 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.”

It may not be about pricing 3G services only. “They have to find a new way; operators haven’t cracked the code of profiting from the increase in mobile data usage, as best exemplified by AT&T,” says Booz’s Sharma. Despite an upsurge in usage when the iPhone was launched in the U.S., AT&T’s revenues didn’t rise significantly.

But how much can Airtel do with the 5 MHz of 3G spectrum? Especially when there’s still no clarity on how much new spectrum will be available in the future. Analysts believe that if they were looking at data, they should have gone with BWA (which was auctioned separately) across many more circles than restrict themselves to just four.

Mittal argues that this is a waiting game and he’s willing to see his competitors’ plans unfold before he makes his next move on spectrum. “We always come out stronger in the face of competition,” he adds with a smile.

It’s a trait he’s been known for since 1995. In those giddy days, soon after mobile telephony was introduced, many business houses got greedy and overbid for circles. Many thought the conservative and steadfast Mittal would be an early casualty. In four years, he would be buying out his rivals. “He seeks substance, not hype. He focusses on input and believes if that is right, results will follow. Airtel’s been built on this,” says an ex-employee who has known Mittal for long.

ON THE EVENING OF NOVEMBER 25, the conclave’s participants gather on the Dubai beach for unabashed partying. They all show up wearing their national costumes or variations thereof. Drew Kelton, Airtel’s Scottish enterprise president, wears a blazing kilt while Amali Nanayakkara, CEO Sri Lanka comes in a silk sari, tied Sri Lankan style. But most visible was the African contingent. The Nigerians show up in agbadas, the Kenyans in dashikis, Ugandans in kanzus and kofias (caps) and so on. The Indians are comparatively sedate. Mittal wears a cream bandhgala, while Kapoor appears in a black pathani suit. Getting everyone to dress in their national wear is his idea: He wants the folks from Airtel present to experience its transformation.

A good way to understand the scale of what Airtel is attempting is to travel across the countries it now operates in. Airtel’s markets spread from Sierra Leone on Africa’s west coast to Madagascar, off the eastern coast of the continent. A flight from Sierra Leone to Airtel’s Africa headquarters in Nairobi takes 10 hours.

The seven English-speaking countries come under the Anglophone region and French under the Francophone region. Nigeria is a standalone market. Each hub has a group head with managing directors of each country reporting in. “One thing is clear. We cannot paint Africa with the same brush. The local dynamics in each country warrant a separate business strategy and a local team to execute operations there,” says Manoj Kohli, Airtel’s CEO (international) and joint MD, who spent his first few weeks in Africa meeting employees, distributors and retailers, and customers, trying to introduce Airtel to them.

While the data opportunity in Africa is huge (“We are bringing Internet to a young population, and they are
delighted,” says Kohli) and Airtel may have inherited a $6 billion business with 41 million users, it’s across nations: that’s a multitude of different customers, market practices, and regulations in an industry where governments set the rules.

Kohli is engaging government officials to share a common agenda of economic development and creating jobs. On offer: adopting primary schools, refurbishing their infrastructure, 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 interconnect charge. In Kenya, Airtel’s efforts have prevailed with interconnect charges, and subsequently tariffs, halved.

In 2009, Zain reported annualised revenues of $3.6 billion, 12% lower than in fiscal 2008, and a post-tax loss of $149 million. The overall Ebitda margin at 32% was 176 basis points lower than FY08 and in seven countries it was below 30%. Its largest market, Nigeria with 36% revenue share, has reported a 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 the lack of interest by the Zain management. A report by the Royal Bank of Scotland last year said the cost of acquisition would go up as Airtel “may need to make additional investments to upgrade/expand networks, and licence renewals due in five countries by 2013”.

Airtel Africa, as the local operations are now called, is targeting 100 million users, $5 billion revenue, and $2 billion Ebitda before March 2013. In the quarter ending September, it reported $866 million in revenue and $207.2 million Ebitda with 40.1 million subscribers, up from 36.3 million in the first three months of operations.

What will Airtel do that Zain could not? To begin with, by March 31, 2011, Airtel will spend $800 million to strengthen its Africa position. It has drawn its strategy around three things. First, affordability. Second, network expansion into rural areas unexplored by Zain. Third, data and Internet services. Africa has negligible landline-based broadband connectivity and the spread of the market makes it unviable to lay fresh copper lines. Airtel will use its 3G licences 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, Airtel Africa.

Affordability, though, will depend heavily on how the company manages to cut operating costs and leverages economies of scale to create a global delivery model. At the core is replicating its outsourced model in Africa. The first move has been made, with IBM managing the entire IT network of the company through three hubs. Customer care has been outsourced to IBM, TechMahindra, and Spanco. They are setting up call centres in each country to serve customers in local languages. This is a first by any telecom operator in Africa. Finally, the mobile network will be managed by Ericsson, Nokia, and Huawei. While the model is similar to what Airtel pioneered in India, Kohli insists that given the complexity of the market, it will be an India plus model with learning and experiences taken to new shores. Another piece of strategy to optimise capex will unfold when Airtel hives off its 11,000 towers as part of its infrastructure sharing plan as it did here.

“Logistics and warehousing are two big challenges in Africa. Unlike India, our vendor partners are required to take responsibility for these here and we will rely on extreme automation to make things easier and smoother. This reflects the change to meet the local market needs,” elaborates Kohli. His African colleagues agree; more than building the infrastructure, they say that maintenance and supplying fuel to keep the network up and running is a bigger challenge. “It’s tough but we also have a winning team handling this,” says Tiemoko Coulibaly, head of the Francophone hub.

Airtel cut the premium being charged on tariffs by Zain from as high as 40% to less than 10%. It has also eased pressure on recharge denominations, which are now as low as
Rs 10 in the local currency. All these initiatives are backed by an expanding dealer-retailer network.

In India, Airtel followed the matchbox model to make connections available in any shop where a matchbox was sold. It plans to take it to Africa, where it will become the salt-sugar-oil strategy. The company is working with Nokia to offer a low-cost handset as a bundled offer in a market which is over 90% prepaid. “There were commitments made by us and we are delivering on those. We are taking mobile telephony to the masses,” says Coulibaly.

TO MAKE ALL THIS A REALITY, Mittal says his “PE” model (professional backed by an entrepreneur) works best. He is clear that Airtel will never become a “PP” or “professional-professional”. “I think the entrepreneurship element always needs to be there.” Mittal knows that as Airtel becomes bigger, it is important to retain the soul of a small company where decisions are made quickly.

“In a company like Airtel there can be strong personalities and ego clashes, but there are none. This is purely because of the entrepreneurial spirit within the company that combines employees as a team and force multiplier for the company,” says Mohit Bhatnagar, managing director of venture capital firm Sequoia Capital. Bhatnagar left Airtel in 2006 but says that he found Airtel more entrepreneurial than his own company. It’s this spirit that Mittal is betting on to make the decade Airtel’s most momentous so far.