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Tuesday, April 5, 2011

Indian lessons for global telcos


Having worked in India region very closely with telecommunication mobile service providers for past 1 year, I have noticed stark differences how they operate to survive and make profits when compared to other renowned, older global telcos. This article is business summary of my distilled observations. If you work in telecommunications area or related businesses, this could be interesting read. If you wish to know more ways India can contribute to developed countries and feel proud, read on. For others, this will be not be interesting.

Truth about Indian telcos

India has witnessed unparalleled subscriber growth over 10 years. When writing this article, total mobile subscriber base was ~750M! Indian telcos fight still competition, face declining ARPU (Average revenue per User) and steeply rising costs. ARPU in 2009 was $2.9/month and coming down always. Despite systemic business challenges, leading telcos like Bharti and Reliance enjoy EBITDA margins of 30% and more! On this count, they perform on par with global telcos like AT&T, Deutsche telecom, Vodafone group. Compare APRU of ~$50/month in US, ~$23 in Germany, ~$59 in Japan, ~$15 in Brazil and Mexico – clearly there is something to learn from Indian telcos. Only few aspects can be attributed to scale and relative lower cost of human capital available in India. Truth lies in rock-bottom cost model which extracts most optimal economies at 3 levels. First Indian telcos have art of producing “cheapest talk minutes”. Second they maximize network utilization leading to better MOU (Minutes of Usage) rates which radically de-layers traditional telco operations. Third is distribution model for new SIM cards is unique unparalleled in more mature markets leading to extremely low customer acquisition costs. Let’s examine more in detail.

Producing “cheapest talk minutes”

India has one of highest mobile subscriber base in world. The country had 752M in 2010, second only to China’s 842M. This is from total population of 1.21B (from latest census statistic). India’s Minutes of Usage is highest in world – this largely reflects social pattern in India where people like to talk more with friends and family. This plus lower cost of minutes have resulted in these numbers - MOU in India ~4000 min/subscriber in 2010 when compared to ~2500 min for China and ~1600 min in Japan. To meet this requirement, Indian telcos scaled up network capacity and each handle in excess of 50m subscribers. They do it inexpensively by sharing passive infrastructure and massive outsourcing. Towers, generators and shelters are all shared usually by third companies. In India, if you wish to lease out your terrace, there is most likely a telco taker. E.g. A family near my house makes Rs.45,000/month for leasing out their terrace space to Airtel – little less than an average IT salary in Bangalore. Telcos save ~25% cost by sharing passive infrastructure like towers etc. It’s a win-win which is helping telcos cut OPEX corners and churn out cheaper minutes while it is helping families utilize their space profitably. Bharti Infratel, Vodafone Essar and Idea have jointly setup a company Indus Towers which handles their shared passive infrastructure. Recently Reliance Infratel and GTL came close to signing ~$11b deal which would have been world’s largest independent infrastructure company. These initiatives not only free up capital for other investments but also help reduce interest costs. Few Indian telcos are exploring active infrastructure sharing like antennae, feeder cables and transmission systems. At moment, they are forced to try it out due to fact that no operator has bagged a pan-India 3G license. So when subscriber roams in another circle where they don’t have license, they enter into roaming agreement - by settling roaming costs on net-net basis at end of quarter. This amounts to active sharing in nascent phase. But when this intensifies, telcos can share much more costs which will get passed on to end customer. In addition, Indian telcos outsource network implementation, operations and maintenance. Economies of scale works favorably in country like India. E.g.: Airtel pioneered this business model successfully which is now adopted globally. Recently Maxis announced a massive outsourcing deal with Huawei. Similarly Tata teleservices and Airtel have entered into infrastructure outsourcing deals with Nokia Siemens Networks to get their 3G radio and core equipment rolled out in record time.

Operational efficiency – better network Utilization levels

Indian telcos combine power of generating low cost minutes with record high utilization levels. Goal is to treat most expenses as variable costs and track them against minutes of usage. Despite having access to least spectrum resources when compared to global counterparts, Indian telcos serve more subscribers with higher MOU!  Although it has started to affect call quality adversely, telcos are continuing to hinge on growth story. Better utilization is made possible by cell densification – Airtel operates in 23 circles with more than 75% radio resources utilized. Similar are numbers with Vodafone and Idea. Recently Uninor has launched a special scheme where subscribers are given dynamic discounts based on time of day and cell of origination. They are incentivizing people to call from low call-density areas thereby increasing network utilization. Vodafone is doing similar trials in their key circle. With this comes decrease in call quality – call drops and poor voice reception etc. With rollout of Mobile Number Portability, telcos can’t ignore dissatisfied customers. Quality will be next push element for Indian telcos.

Cheap distribution model for SIM cards

Indian telcos spend thriftily on sales, marketing and customer service strategies. They serve predominantly prepaid market (~90% prepaid market). Prepaid model creates substantial cost reduction in billing and collection expenses. More critical is its inherent ability to sell more phones to low income customers. To get as many phones as possible, Indian telcos rely on local grocery stores (Mom & Pop stores as they call in US) where you can get recharge coupon for any operator and any tariff plan. Buying a phone or recharge coupon in India is akin to buying toothpaste. Many other outlets also sell SIM cards acting as distribution centers to telcos. It’s an income stream for house hold entrepreneurs. Telcos achieve high volumes with less commission to sales partners. Eg: Airtel pays 4% commission to local grocery stores on recharge coupon sales. To drive costs even more, Indian telcos encourage self electronic recharge systems rather than paper based recharging. In 2010, electronic recharges account for ~80% of all recharges across India (most of which happens with help of dealer at his shop). Telcos offer lower talk cost during off-peak hours and for students. They incentivize by offering long-distance minutes or other bonus programs. Recently Tata Teleservices has tied up with Big Bazaar to sell its SIM cards. Big Bazaar is hyper market which owns Pantaloon brand started by Kishore Biyani. It is always buzzing with people all of whom have access to Tata's SIM cards at its billing counters. They incentivize its customers with talk minutes with more purchase. Truly win-win. Tata gets free distribution channel while Big Bazaar adds zing element to its purchases. Plus Indian telcos don’t subsidise phones, you dot find any Indian telco investing in handset manufacturer. This decreases handset subsidies which they would have borne otherwise. Predominant prepaid market aids in making this possible.

Evolving landscape in India – global telcos watch this space

Success of Indian telcos will bring them to inevitable dilemma of service quality especially when growth story hits saturations levels. The EBITDAs which they enjoy today will no longer be sustainable. Telcos are made to pay out heavy cost for 3G licenses for which they will seek to make amends by extracting more from existing subscribers. All this while more OPEX cuts are happening with ever decreasing ARPUs. With MNP threatening churn, Indian telcos need to invest in quality. With ever increasing competition and consolidation in industry, customer experience becomes increasingly important. Its importance will be highlighted as soon as market reaches saturation in growth. For telcos, this presents them with new unique challenges and opportunities. Global telcos need to watch this part of world to see how it performs – after all an industry which has added 220m subscribers in 2010 with low APRUs yet solid returns would make right decisions.

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