Will the “minute factory” that has served Bharti Airtel so well in India, also work in Africa? As you would expect, India’s leading mobile operator looks to be replicating its successful business model as closely as possible as it seeks to boost the performance of the 15 sub-Saharan African operations it acquired from Zain earlier this year.
The financial benefits of the in-country scale that Bharti enjoys in India are well understood and well-recognised in the mobile industry, but the jury is still out on whether cross-border scale also provides a significant performance boost. Bharti is out to prove the cross-border sceptics wrong. In any case, it won’t be able to generate the economies of scale it needs in Africa to replicate its famously-low Indian cost base without rapid growth. Across 16 African countries, Bharti “only” has 36 million active customers using 10,800 base stations compared with 141 million customers in three countries in South Asia using approximately 108,000 base stations.
In June, Bharti’s newly-acquired African operations were only generating about US$10,000 in gross revenue per month compared with more than US$35,000 in its so-called minute factory in India. To be sure, that differential is not only indicative of the major efficiency and scale gap, but also Bharti’s modus operandi of outsourcing as much as possible to specialist third-parties.
So what is Bharti’s African action plan? Aiming to fully integrate the African assets by the end of 2010, Bharti wasted no time in establishing its Africa Group Office in Nairobi led by Manoj Kohli, CEO (International), and 20 other senior executives from India. It has also moved quickly to award IBM a ten year contract, reported to be worth US$1.5 billion, to run and expand its IT systems across Africa to support 100 million customers by 2012.
The deal with IBM mirrors a similar IT outsourcing arrangement in India, where IBM manages 90 suppliers on Bharti’s behalf, while also transferring the headache of generating economies of scale in IT across 16 African countries to IBM. Bharti will no doubt do the same with its mobile networks, enabling Kohli and his team to focus on the marketing and customer-facing activities that they have excelled at in India. Kohli has already said that Bharti’s goal is to make Airtel Africa “the most loved brand in the daily lives of African people” by 2015.
Seven times as expensive
To do that, Bharti is going to have to dramatically lower the cost of calls and text messages for Africans. Reporting its financial results in August, Bharti said that the average minutes of use in its African operations are 103 per month, or less than 4 minutes per day, compared with 480 minutes per month in India, where the cost of calling is about 1 US cent per minute, compared with 7.2 cents per minute in Bharti’s African operations. “We truly believe that there is a huge elasticity in each of the markets and in some pilots, which we have done in last few weeks, we have already seen early signs of elasticity in Africa,” Kohli said. “The market faces a huge challenge with multi-SIM environment and hence the churn levels are high…..But one thing is proven by the multi-SIM situation that the real customer penetration in Africa is around 20 percent rather than 30 percent as reported by many other journals.”
In other words, if Bharti can reduce the cost of calling down towards Indian levels, then there are plenty more new customers to be connected. Bharti also believes that there is a “huge opportunity” for 3G-based applications and mobile commerce in Africa. IBM plans to deploy a content management system to offer music and video over mobile devices, while simultaneously facilitating the growth of the application developer community in Africa.
Bharti has 3G licenses in five African countries and has earmarked US$800 million in capex to improve both the coverage and the quality of its African networks. It is also looking to share infrastructure with other operators, just as it does in India. Infrastructure-sharing is going to be crucial if Bharti is going to slash calling prices and still achieve the expansion in network capacity and coverage that will be needed to cater for a potential fourfold increase in usage.
While Bharti probably has the right formula and the expertise to spark a dramatic expansion in the African mobile market, I suspect that it won’t be able to get its retail prices down anywhere near as low as they are in densely-populated India without causing too much damage to its margins. In what looks like an inevitable pan-Africa price war with multinational rivals, such as MTN, Vodacom and Orange, Bharti’s biggest problem is that it trails the market leader in many of the 16 African markets where it operates. That means it will lack the in-country scale of the biggest operator, which can spread the cost of retail stores, call centres, advertising and marketing across much larger customer bases.
Even so, Bharti is clearly going to be a major player in the next phase of African mobile growth. And even if it only cuts calling costs in half, Airtel could yet become the most-loved brand in Africa.
This article was first published on the GSMA’s Mobile World Live portal. David moderates discussion forums on the site and is a freelance media and investor relations consultant.
The editorial views expressed in this article are solely those of the author(s) and will not necessarily reflect the views of the GSMA, its Members or Associate Members