Airtel is the 3rd largest mobile operator in the world in terms of subscriber base. However, its revenue per subscriber is significantly lower as compared to American and European counterparts. However, Airtel has been facing pressures due to slowing revenue growth and slimming margins. While a lot of the factors are macroeconomic, this paper attempts to do a microeconomic analysis on Airtel and its environment.
An Analysis of Bharti Airtel Mobile Services Ltd. Using Microeconomic Tools
Bharti Airtel Limited, a part of Bharti Enterprises, is one of the leading providers of telecommunication services with significant presence in India. It has its operations spread over 20 countries across South Asia, Africa and Channel Islands.
Profile
Bharti Airtel has abou0074 194.183 million subscribers in India and South Asia and 55.855 million GSM Mobile customers in Africa as of the end of June 2012. The Proportionate Revenue of Bharti Airtel as on June 30, 2012 is ₹ 193,501 million (Overview). Currently, Airtel is the largest cellular service provider in India in terms of number of subscribers. Bharti Airtel holds the maximum percentage of market share in wireless connections at 20.67%, Vodafone is at 16.96%, Reliance at 14.68%, Idea at 12.88% and BSNL is at 10.81% (News report – Medianama)
The businesses at Bharti Airtel have been structured into three individual strategic business units (SBU’s):
Mobile services,
Telemedia services (ATS) &
Enterprise services (Carriers & Services to Corporates)
Ownership and Organizational Structure:
Bharti Airtel was established on July 7, 1995 as a public listed company headquartered in New Delhi, India.
With effect from Jan 13, 2010, a new integrated organizational structure has emerged with an objective to enhance Airtel focus on expanding operations in international markets beyond India and South Asia and further consolidate its leadership position in India. The transformed organizational structure consists of two distinct Customer Business Units (CBU) with clear focus on B2C (Business to Customer) and B2B (Business to Business) segments. Bharti Airtel’s B2C business unit comprehensively serves the retail consumers, homes and small offices, by combining business units such as Mobile, Telemedia, Digital TV and other emerging businesses (like M-commerce, M-health, M-advertising etc.).
Figure 1: Airtel’s Organization Chart (Overview)
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The B2C organization encompasses Consumer Business and Market Operations. Bharti Airtel has understood the importance of its partners to remain competitive in a dynamic business environment. As a step in that direction, the Supply Chain (SCM) function has been created with a mandate to develop partner relationships to maximize mutual opportunities for growth and profitability. The SCM organization has a central core team of supply chain subject matter experts and execution teams operating under different business divisions across the country.
Business Model
Focus on core competencies and outsource the rest
Airtel is probably one of the best run companies in India. It has advantages of both having a massive size and being in a very high growth industry. The secret of its enormous success owes a lot to its business model. Airtel focuses solely on two things: Customer acquisition & Servicing and business development/Expansion. The main focus of Airtel has been on Data IP solutions, conferencing and Video solutions and wants to grab the potential of market of these business sectors. The other functions such as hardware, network, backend applications (billing etc.), value added services and even telecom infrastructure are all outsourced. Airtel was the first player in India in pioneering such a business model. Airtel has outsourced its Network Management services to players like Nokia Siemens Networks and Ericsson, while its backend application is taken care by IBM. It was also the first to divest its hard assets, i.e. – its telecom towers – to a separate company and lease them back themselves as well as monetize surplus bandwidth by selling to other operators.
Cost Control through Smarter Billing
In this sector, most of its competitor approach towards people is industrial. On the contrary, Airtel were trained in service industry and has successfully adopted DPE model (Dollars per Erlang) thus paying only for traffic that comes out of boxes. This has led Airtel to save 1bn to 1.5 bn USD annually and added advantage of saving depreciation cost. The success of Airtel business is evident from the fact that its existing model has been copied all across the world. Now, Airtel is working on a model that will lead to surge in the consumption of data usage.
Annual Revenue and Profit trends
Figure 2 shows Airtel’s annual revenue, EBITDA and subscriber figures. The diagram shows a clearly increasing revenue rate. This chart is for the consolidated results of Airtel – comprises of India business and other regions like Africa, Sri Lanka, Bangladesh, Channel Islands, etc. Even though Airtel’s India revenues have slowed, we can see a clear upshot in the revenue figures in 2010-11. This is due to the acquisition of Zain Africa and the inclusion of its revenues in Airtel’s books. This also corroborates a clear rise in the subscriber figures. However, this has not translated to proportionately higher EBITDA as its Africa business has not been as profitable. All of these factors can be seen showing their effect in the share price of Airtel which, while increasing, has shown a slowing down trend.
Another reason for this slowdown in share price could be the extremely high debts that Airtel has accumulated in order to finance spectrum lease fees. Spectrum for 3G networks was sold at a high premium and thus Airtel – and other operators too, have to face high financing costs. This has also led to downgrading of Airtel’s investment grading by various rating agencies. It is also worrying that TRAI has declared that new spectrum will again be auction at a high reserve price. This will lead to further stress on Airtel’s finances, if it decides to buy more spectrum.
Figure 2: Airtel Annual figures trends
Also, subscriber growth can be seen slowing down which could be another factor in Airtel’s loss of margins. This is compounded by the fact that most new additions to its network are from rural areas which typically have low Average revenue per user (ARPU) figures.
Analysis of Industry Costs
The Indian Telecom has witnessed high subscriber growth over the past decade. This can be particularly attributed to the de-tariffing of the Indian telecom market in year 2000. This has also led to a decrease in prices of all telecom operators. The overall costs have risen for all telecom operators. The rate of growth of variable costs has been proportional to the revenue growth rate, while fixed costs have nearly remained stable. However, what makes things interesting is the cost per subscriber figure. Average cost per subscriber has reduced by nearly 50% over the past five years. In the case of Airtel, this figure is nearly 60%. (Bharti Airtel Ltd., 2006-2012)
From the above trend, we can infer that Indian telecom has diminishing marginal cost of adding more subscribers. Airtel has been an industry leader in this trend as it has managed to reduce its costs by a higher percentage than the industry average. There are two major reasons for this cost trend.
First, telecom experiences a strong network effect. This means that people prefer to join a network that already has wide coverage so that they don’t have to worry about dropped calls and being in ‘no coverage’ zones. There are some economies of scale, however, they are not as significant as might seem obvious. The cost fixed cost component in Airtel’s case was around 33% of revenue in 2006 which has come down to around 17% in 2011. Also, these are purely operational costs and massive one-time costs like spectrum fees are excluded from this.
Figure 3: Airtel’s costs and Revenue Trend
Second, the reduction in cost per subscriber can also be attributed to a sharp fall in network equipment prices. Ever since the Chinese vendors (Huawei, ZTE) entered the market, European vendors have been facing price pressures. This has led to severe problems in the European telecom vendor landscape. Alcatel-Lucent has had to scale down operations; Nokia Siemens Networks has been in red for 4 years now. American vendors like Nortel and Motorola have gone bankrupt and have been taken over by Ericsson and Nokia Siemens Networks respectively.
Major Competitors and New Entrants
Indian telecom market had only four or five players in most circles – BSNL/MTNL, Airtel, Vodafone, Idea Cellular and Aircel. There were many other regional players who ran operations in fewer circles. However, after additional spectrum was distributed in 2009, there were many more entrants in various circles. These new entrants often followed a predatory pricing approach so as to gain market share rapidly. This was done through extremely low call costs. As a result, Airtel and other established market players lost significant market share. This can be seen in the marked fall in the Airtel’s revenue growth since 2009.
Market concentration has also significantly fallen as new players have entered. The chart below shows the decline in HHI for Indian Telecom.
Figure 4: HHI for Indian telecom and Market shares of various operators
HHI is calculated as HHI = 10000 * Σwi2 . A concentration ratio of 1500 – 2500 indicates a moderately concentrated market. In 2012, The HHI is 1955 which still indicates a concentrated market but getting increasingly competitive.
It is only Idea Cellular that shows a marked increase in its market share. This is explained by the fact that it had acquired Spice Telecom to quickly increase its market presence in Punjab and Karnataka.
Evolution of new players in the Indian Telecom Industry
The pricing in the Indian mobile service providers’ industry evolved over three phases, with call charges steadily falling through the phases.
In the initial introduction phase, from 1995 to 2000, the incoming and outgoing calls were priced around Rs 14/minute, which made the use of mobile services a luxury. Eventually the outgoing call prices dropped to Rs 9/ minute and incoming to Re 1/minute (towards the end of this period), bringing more people into the loop.
From 2000-2005, the outgoing call rates dropped to Rs 2/minute while the incoming calls became free of charge. This prompted the entry of many new players, such as Reliance, which set new benchmarks for pricing. Following an aggressive strategy to attract a huge customer base, Reliance forced other operators to change their plans according to its offerings.
After 2005, the entry of new telecom service provider, Tata Docomo, changed the entire game. Docomo used the 1p/second billing to gain entry into the crowded telecom market. The other operators reluctantly followed suit and added per-second billing plans to their existing product portfolio. This is one of the reasons for the crowding seen in Airtel’s postpaid plans, among others, as it continues to offer per-minute billing options also.
Techniques used by Airtel to stay ahead of the curve
Reverse mentoring process, wherein the new recruit becomes the mentor and the senior executive is the protégée.
This helped the senior executives to adapt new technologies more effectively and also the new recruits gained from the wisdom of older executives.
Airtel introduced the concept of Airtel money, an innovation for which it received the ‘Best Innovation’ awards at the Telecom Operator Awards 2012.
Elasticity of Demand
The curve below shows the change in demand since the beginning of mobile telephony in India.
Figure 5: Indian Telecom Demand Curve
Indian telecom market has a highly elastic demand curve and this curve has been flattening over time. The elasticity is increasing over time. A reason for this could be that most new subscribers being added are those from rural areas (low income households) and are extremely sensitive to price changes. This is especially true for new services such as 3G and Data packs.
Main factors influencing demand
The primary factor influencing the demand of the telecom sector as a whole is the penetration level of mobile operators in the rural and semi-urban places of India. Since supply rather than demand is the main constraint, it would be useful to focus on increasing the supply of the network. The change in price is unlikely to affect overall demand, except in areas where the supply constraint does not apply. As the government has also declared to provide cell for everyone as its next poll slogan, it would definitely increase the demand for the network operators also. But it is, as of now, only a plan of the government.
As per a Gartner study, the penetration level is expected to grow to 72% by 2016. Mobile data revenue has tremendous growth opportunities in India because of low Internet penetration. India’s fixed broadband household penetration was 6% in 2011, which is lower than the overall penetration in emerging markets (estimated at 16% in 2011).With consumers perceiving mobile broadband as a basic necessity, mobile operators globally are reaping their investments in infrastructure through an increase in mobile data revenue.
The dissolution of the previous 2G spectrum allotment because of “first come first serve” basis and the high base price of the new auction has brought very high repercussions along with it. Many of the foreign telecom firms which had gained spectrum during last time have not attended the pre-bid meetings for the fresh auction of 2G spectrum. Etisalat was the first one to announce its absence from the auctioning of the fresh 2G spectrum. It was first thought that telecom tariffs would rise 37p to 49p per minute led by the cabinet’s decision to fix the reserve price for the 2G spectrum auction at ₹ 14,000 crore per 5 MHz in the 1,800 MHz band, according to the Cellular Operators Association of India (COAI). COAI also said this decision would lead to a rise in the industry debt to anywhere between ₹3.7 lakh crore and ₹5.4 lakh crore. The reserve price per MHz per population in India (on purchasing power parity basis) of ₹19.68 is enormously high as compared to ₹1.06 that Ofcom (Britain’s telecom regulator). But many of the operators have assured their customers will not be made to bear this burden through increase in call prices.
Bharti Airtel post depressed performance in the June 2012 quarter with 23% fall in net profit from the previous quarter, the sharpest in any of the quarters so far. The company has not been able to report any meaningful growth in its bottom-line despite its efforts to take its business to new shores and to rationalise operating costs through total outsourcing of core operations. In the trailing 12 months to June 2012, its revenue rose by 15% from the corresponding period a year ago. Net profit on the other hand fell sharply by 29%.
The main factors for Airtel’s net profit to fall may be:
Competition – The competition in the 2G segment is cut-throat, despite the decision of new players such as Etisalat and S Tel to wind up their operations in India after the Supreme Court decision of quashing of licenses issued after January 2008. As a result, overall tariffs have been stable in the last few years and operators have been unable to increase prices. Consequently, Bharti’s average revenue per user (ARPU) has fallen by 16% since March 2010 to Rs 185 in the June 2012 quarter even though mobile subscriber base rose by 47% to 18.7 crore. This shows that falling per-user potential to generate revenue has offset the benefits of increasing customer base.
Slower Adoption of 3G – Two years ago in the hope of boosting their revenue and profitability, telecom operators had bid aggressively to obtain licenses for 3G services. Private operators had paid nearly Rs 51,000 crore through borrowing to acquire licenses of 3G services.
Though most operators have launched 3G services, these are yet to acquire necessary traction. While the expected revenue growth has not been as per expectations, interest costs to service debt are mounting. For Bharti, interest outgo as a percentage of revenue shot up to 4.2% in the June 2012 quarter from 2% two years ago. This has adversely affected profitability of the company.
The way ahead for Bharti Airtel from here now should be:
The period FY2013 will be a year of consolidation. Investments in 3G, 4G and Africa operations will in time propel Airtel into profitability as a low cost leader with a factory approach to call volumes.
The near term positive triggers include listing (IPO) of BhartiInfratel, exits by 4-5 competitors, auction of 2Glicenses and reforming/ sale of spectrum. Airtel will see a return of pricing power.
Share price fall to current levels is a market excess, and offers investors an attractive entry point.
Pricing competition: practices of the company vis-à-vis competitors in the industry
The biggest driver of growth in telecom industry is the development of pricing plans catering to individual needs and requirements of people at the prices they are willing to pay. A plethora of price plans are available today such as prepaid, postpaid, lifetime validity, Closed User Groups, corporate plans or some combination of these.
Price planning takes into view factors such as firm’s overall marketing objectives, consumer demand, competitor’s pricing, products attributes, market and economic trends. Pricing strategy is one of the important issues in telecom industry to each player. Being a conjunctive focus between users and service providers, carriers pricing strategies takes an outstanding role in telecom chain.
Bharti Airtel employs various pricing strategies like very call and SMS rates (penetration pricing), numbers given to corporates (value based pricing), different offers for local calls and local SMS for different states (geographical pricing).
Components of fixed and variable costs/inputs
Airtel has both fixed and variable cost components. They are described below:
Variable Costs
Access Charges – The amount charged by a network operator for the use of their network by other network operators.
Network Operating – Network maintenance costs, typically contain the costs required to operate and maintain a telecommunication services network.
Cost of Sales of Goods – as this depends on the customers
Sales and Marketing – Expenditure towards various marketing and sales operations.
Fixed Costs
Personnel – Wages and Salaries.
Figure 6: Comaprison of Personnel cost to Total cost
Wage cost for Airtel is a stable cost and does not show much variation over time.
Administrative and Others – Expenditure towards internal administration and running of offices.
As seen in Figure 3, Airtel’s fixed and variable cost to revenue ratios can be computed. The chart below provides a glimpse at the Revenue to Opex ratio and capital productivity ratio for Airtel’s consolidated results. This data shows a brief growth in Airtel’s revenues around December 2010 – January 2011, while Opex has stagnated. So, overall, even though, revenue growth rate has slowed, overall, Airtel seems healthy. This data does not acknowledge developments in the 3 months preceding September 2012.
Figure 7: Airtel’s Revenue to Opex and capital productivity ratios
It also indicates that capital productivity has remained fairly consistent around the 70% mark.
Marketing strategies (promotional policies) adopted by Airtel
The marketing strategies followed by Airtel are as follows:
For a country that wants to reach 100% rural teledensity by 2020 – this ambitious target includes extremely remote areas and hence most of the telecom companies are targeting the rural sector of which Airtel is not and exception.
The main challenges faced by Airtel in rural areas include:
The income level of Indian rural residents is significantly lower than urban residents.
A widely dispersed population is present in rural region.
Lack of proper infrastructure (i.e., roads, electricity, etc.)
Besides Airtel deploying a scalable network, it also needs to establish a cost-effective marketing, sales, and distribution channel to provide service promotion and customer support.
The opportunities available with the rural population are as follows:
The future growth of the Indian mobile market is expected to be driven by rural customers, which account for about 70 % of the country’s total population.
Rural dwellers now place a high value on communications.
Various studies have shown that increased mobile service penetration in rural areas could have tremendous socio-economic benefit for the rural population in the country.
With its strong presence in the relatively untapped rural market Bharti Airtel will be well-placed to continue growth with its focus on under-penetrated Indian regions with new revenue streams such 3G-enabled data services and pay-TV.
The marketing strategies it is following in rural India are:
Bharti Airtel has launched micro financing agreements in collaboration with Nokia and SKS Micro-finance company. Under these partnerships, Bharti Airtel provides subsidized tariffs and subscriber identity module (SIM) cards to rural users, Nokia provides subsidized handsets, and SKS offers microfinancing to the people.
Bharti Airtel has also formed a joint venture with the Indian Farmers Fertilizer Cooperative Limited (IFFCO). The joint venture, IFFCO Kisan Sanchar, uses IFFCO’s wide rural presence (it is present in 80 % of Indian villages) and appeal among the rural agricultural community so as to market and distribute Bharti’s products.
IFFCO Kisan Sanchar provides subsidized handsets and connections at competitive rates in rural areas of the country. It also helps Bharti Airtel to identify and acquire suitable locations for deploying its cell sites. Additionally, it also offers tailored services that include voice-based updates on crop prices, farming techniques, rural health initiatives, and “help line” services.
Bharti Airtel has adopted the strategy of direct communications to market its value customers. For making its services accessible, the company provides all of its marketing content in local languages. Vans are also used to cover rural areas with staff who educate locals about mobile services and usage.
Airtel has developed a shared phone service called Public Call Offices (PCOs) in rural regions to increase awareness about its brand and services. Its Service Centers have been set up in villages to address customer queries and complaints as well as act as sales and distribution points. These centers employ local people and also offer sales and customer services using local dialects.
Airtel has already established over 18,000 service centres in rural India, covering over 400 languages and local dialects. The company plans to expand this network.
Urban strategies
The company had put up a large number of hoardings and kiosks in and around Delhi. The main objective behind designing a promotion campaign for the’Airtel’ services is to promote the brand awareness and to build brand preferences for the urban population. Brand awareness is spread through the’ campaigns and brand preferences through brand stature.
The launching of 4G services
The Indian telecom industry witnessed the maiden launch of 4G services in Kolkata in April 2012 by Airtel. Airtel is just sitting alone on 4G space with their costly devices and not-so-bad tariff plans too. Airtel got the pie of 4G spectrum in Delhi and Mumbai and 2 other circles as they bought 49% of Qualcomm India’s 4G venture .Airtel will leap long term benefit from this deal.
The first mover advantages that Airtel can have are as follows:
Expand its services to Delhi, Mumbai as it has already done in Kolkata and Bangalore.
Cut down the device price to lower down ‘Entry Point’-this might certainly reduce the entry point which may leverage into better 4G device and plan sale.
Free Device Concept fails. Rather add data benefits at no extra cost. Currently Airtel offers 4G in this way:- Buy the device at full payment and get some discounts over 6 or 12 months to recover the cost. There is no problem with this strategy, but Indian consumers don’t like this way. Rather Airtel should try this way: – 5GB data free for next 3 months and forth month onwards one can opt for any prepaid or post-paid plans.
Unlimited 4G plans at night.
Add 3G data and pan India data roaming at no extra cost on existing 4G tariff plans.
Thus the launch of 4G services gives Airtel a first mover advantage. Hence like a true oligopoly it follows the Stackelberg model.It has set its output before other fellow competitors have done.
Advertisement-revenue ratio
Below is table showing the advertisement-revenue ratio for 4 years:
2012
2011
2010
2009
Advertising expense(in million)
5586
7215
5508
6228
Revenue(service revenue in million)
416038
380158
356095
340142
Adv/Reveneue ratio
0.013427
0.018979
0.01546778
0.01831
Table 1: Advertising to Revenue Ratio
From the table we can infer that Airtel spends more or less same amount for its advertisement for the past consecutive 4 years.
Airtel’s other promotion strategy
Airtel believes in new innovative promotion strategies. Below are some examples of Airtel’s promotional strategy
This is the first time in India, where Airtel customers can access their Twitter/Facebook accounts for nominal charges per day even without activating data services.
The year 2011-12 was marked by significant achievements on the brand front as Airtel strengthened its position as a youth brand. The Company again captured the imagination of the nation with the high impact “Har Friend Zaroori Hai (HFZ)” brand campaign that was launched in August 2011.This has been improved with the latest add of “Jo tera hai wo mera bhi hai”. Hence its objective to target the youth has been successful to a large extent.
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Government Regulations:
Spectrum Issues:
In the recent supreme court ruling in the cancellation of 2G licenses in 122 telecom sectors in India, Bharti Airtel market share has increased from 19.58 percent in January 2012 to 19.62 percent in Feb,2012. This is mainly due to Supreme Court order to Uninor, MTS and Videocon telecommunication stop services in the sector were their licenses stand cancelled. With the reduced supply, the prices may shoot up in near future of all the services provided by telecom operator and the demand will be more elastic.
National Telecom Policy (NTP):
The National telecom Policy which was designed in 1999 with an aim of providing affordable and quality telecommunication services in rural and remote areas has undergone recent changes. These changes had been introduced by Department of Telecommunications (DoT) in October 2011. This policy will replace the existing telecom policy formulated in 1999 and define the general direction that telecom policy in the country is expected to take. Some of the major amendments include availability of affordable and effective communication for the citizen, broadband for all at minimum download speed of 2 mbps.
Implication of Change in National Telecom policy over Airtel:
With the implementation of new NTP that seeks to curb the roaming charges and easing of licensing policy, Bharti has been net beneficiary of MNP (mobile number portability) with net addition of 0.15 mn subscriber in Feb,11 (Sources: COAI,TRAI). Airtel was largely benefitted because of “one nation, one license” policy which lead to reduction of high input fixed cost. The draft policy also recommended delinking future licences from spectrum and selling them at market-based prices which brought further flexibility into the system.
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