A dream deferred: Airtel’s low calling rate strategy hits a rocky path in Africa

• Sunil Mittal insight against his rivals was based on the simple observation that first, given a choice, Indians would talk endlessly on their mobile phones if airtime was priced really dirt cheap. Second, after a customer makes a call within an operator’s network, it costs almost nothing for every second a caller keeps talking.
• Mr Mittal’s business insight was that if he stripped out all the fat out of his cost base by negotiating with suppliers for huge discounts on bulk purchases, standardising technologies and processes across a large base, outsourcing non-essential services, and keeping labour costs low, he would make profit.
• If this model that worked in a country where poor people are equivalent to half the population of Africa, the formula must work in competitive markets like Nigeria and Kenya where operators were raking in good profits, Mr Mittal concluded.
• This logic was notwithstanding the fact that despite Airtel being the biggest operator in India, Sri Lanka, and Bangladesh — Asian countries that are economically and culturally closer to India — Bharti Airtel staff had no experience running a business in Africa.
• This would come to play a big hand in the woes that the Airtel brand would face on the continent. Three months after buying Zain, Airtel experimented with a small price cut in June 2010 after the Communications Commission of Kenya (CCK) cut the mobile termination rate by half to Sh2.21.
• An internal analysis conducted by Telkom Kenya early this year revealed that while the four operators grossed Sh113.5 billion in sales in 2011, of which Safaricom accounted for 84 per cent, the industry made a loss Sh2.2 billion as measured by earnings before interest, taxes, depreciation, and amortisation (Ebitda).
• This data, when looked at from the point of view of Ebitda meant that the operators were losing cash from operations, which is dangerous because with declining cash reserves the operators would be forced to borrow heavily in a market environment plagued by currency depreciation and interest rates of over 20 per cent to pay for day to day expenses and invest in building mobile networks.
• Overall, Airtel made a net loss of Sh19.5 billion in 2012 on revenues of Sh291 billion, which was an improvement from a net loss of Sh52bn on revenues of Sh197 billion the previous year.

Sunil Mittal had big hopes of up-ending the African telecoms market overnight with the outsourcing model he perfected in India, but with the cultural gap and high cost of doing business — the plan did not work as expected.

Airtel’s market entry strategy into Africa, and in particular Kenya and Nigeria where it was planning to wage a titanic battle against established and highly profitable rivals such as Safaricom and MTN, was based on a weapon it had used as an upstart to upstage big players in India.

As an outsider entering the mobile phone market in India, Bharti Airtel Ltd chairman Sunil Mittal had observed how the heavy capital outlay required to put up a competitive mobile network created a natural barrier against competition from weak players and allowed the big boys to charge fat margins on top of their high operation costs. This kept the price of calls beyond the reach of ordinary people.

His business insight against his rivals was based on the simple observation that first, given a choice, Indians would talk endlessly on their mobile phones if airtime was priced really dirt cheap. Second, after a customer makes a call within an operator’s network, it costs almost nothing for every second a caller keeps talking.

It is also true that in a typical day, an operator has an inventory of airtime worth 86,400 seconds to sell to a customer. Of course, selling that amount in a day means that all a customer will do in a 24-hour period is to talk on the phone and do nothing else at all.

However, any of those seconds that are not bought by a customer is forgone revenue. Mr Mittal’s business insight was that if he stripped out all the fat out of his cost base by negotiating with suppliers for huge discounts on bulk purchases, standardising technologies and processes across a large base, outsourcing non-essential services, and keeping labour costs low, he would make profit.

“We were always in conflict with our suppliers on equipment. I want less tower sites, they wanted to supply us more sites. As far as I was concerned, I wanted a great network, Akhil (Gupta, joint managing director of the group) wants to pay less money, someone wanted more equipment... all this was in inherent conflict,” he told India’s leading business magazine Business Today in January, “So, Akhil, who is not an engineer, broke through this by saying, “I want to buy minutes. I don’t want to buy boxes. That is when we started this process on how to buy telecom traffic, not boxes.”

With these basics in place, Airtel could charge for calls at a price that seemed to be below costs and make money by keeping its millions of customers talking for a very long time. And thus began the minute factory revolution.

Today, Bharti sells over 200 billion minutes to over 150 million customers. Mr Mittal had built an upstart in 1995 to become India’s largest mobile phone company in five years using this approach.

Out of Africa
If this model that worked in a country where poor people are equivalent to half the population of Africa, the formula must work in competitive markets like Nigeria and Kenya where operators were raking in good profits, Mr Mittal concluded.

READ: India turns to Africa for cash and influence

This logic was notwithstanding the fact that despite Airtel being the biggest operator in India, Sri Lanka, and Bangladesh — Asian countries that are economically and culturally closer to India — Bharti Airtel staff had no experience running a business in Africa.

READ: India's Bharti Airtel profits slump on Africa costs

This would come to play a big hand in the woes that the Airtel brand would face on the continent. Three months after buying Zain, Airtel experimented with a small price cut in June 2010 after the Communications Commission of Kenya (CCK) cut the mobile termination rate by half to Sh2.21.

During that month, Kenyans were on average making phone calls equivalent to 86 minutes a month, which works out to roughly 2.87 minutes a day.