Manu Kaushik December 29, 2016
Life comes full circle. Nearly 40 years after starting his entrepreneurial journey, Sunil Bharti Mittal, Chairman of the $14.3-billion Bharti Airtel, is standing at the crossroads. The business that he has built from the ground up is under attack from Reliance Jio, the $20-billion venture of Reliance Industries. For Airtel, the most unsettling aspect of Jio's launch in September is the free voice calls that the start-up is offering to its customers for a lifetime. Other major telecom companies, such as Airtel, Vodafone India and Idea Cellular, derive nearly 70 per cent of revenues from voice.
Airtel's revenues from non-voice segments - data and value-added services - have grown recently, rising from 27.4 per cent in the September 2015 quarter to 30 per cent in the September 2016 quarter. But the dominance of voice revenues is still overwhelming. Any dent to voice revenues will have a big impact on overall earnings. IDFC Securities, for instance, expects Airtel's net sales to fall by 0.4 per cent and EBITDA (earnings before interest, taxes, depreciation and amortisation) to slide by 5.2 per cent in 2017/18.
Over the past 22 years, Mittal has fought his way through to become market leader with a subscriber base of 262.67 million (as on October 31, 2016). Every few years, he has to chalk out a new strategy to take on aggressive newcomers. For instance, in 2003, Reliance Infocomm, controlled by brothers Mukesh Ambani and Anil Ambani, forged a war against Mittal by offering handsets and services at a discounted price of Rs 500 per month. Mittal patiently allowed the buzz created by Infocomm to die down.
Then, in 2005, a fight broke out between Mittal and Tata Group Chairman Ratan Tata over spectrum auctions. Tata said that spectrum should be sold through auction process but Mittal opposed it saying that it would make business unviable for telcos. Taking a potshot at Tata, Mittal said that anyone who wanted to donate money can do so by contributing to the Prime Ministers Relief Fund.
Mittal has also fought other battles with Birlas, Modis and Goenkas. His sharp business sense, strong political links across party lines, and a thorough understanding of the sector has ensured the top slot for him in the telecom pecking order. Gopal Vittal, Managing Director and CEO (India and South Asia) of Bharti Airtel says that Mittal is a forward thinking entrepreneur who's built a strong team to look after the operations. Vittal recalls that it took him less than five minutes to convince Mittal to invest an additional $1 billion to build the 4G network early last year. Investment decisions of that magnitude typically require more discussion.
Some analysts believe that the situation is likely to be different this time. Tanu Sharma, telecom analyst at India Ratings, says that the nature of competition has changed. "The competitive landscape has changed for the telecom sector with the disruptive launch of Reliance Jio, which has extended free usage period for one more quarter to gain its targeted subscriber base. To retain their customers, other telcos have also launched promotional offers including bundled plans with free calling. However, the actual churn in customers, especially high ARPU postpaid, once the free offering ends remains to be seen," she says.
The entry of Jio and the recent spectrum auction is likely to intensify the 4G war. Airtel has more than doubled its 4G subscribers to 61 million over the past three years. In addition, the amount of data usage on Airtel has jumped 132 per cent in three years to an average of 1 gigabyte (GB) per user. However, its data ARPU (average revenue per user), now at Rs 200 per user, is likely to come down further when competition rises. "The key challenge for Airtel is to protect ARPU in order to keep bottom line intact. With the rise of 4G subscribers, there will be pressure on Airtel's network from quality of services standpoint. This is where Airtel needs to watch out. Growing 4G subscriber base is great but, at the same time, servicing their ever increasing needs will put pressure on ARPU," says Neil Shah, Research Director (Devices & Ecosystems) at Counterpoint Research.
Meanwhile, Jio is posing stiff competition for Airtel. It has already crossed 50 million subscribers within a record 83 days, and is projected to touch 80 million users by March next year. "Even if 70 per cent of these subscribers remain active Jio subscribers by next April, it would mean that the company will have some 60 million high-value 4G users. That will be almost similar to Airtel's current 60 million-odd mobile broadband users». If Jio's coverage and network quality is even on par with Airtel, it can seriously arrest the 4G subscriber growth at Airtel," says Shah.
Some experts believe that Airtel's market share will continue to rise despite heightened competition. In its October report, HSBC Global Research predicts that Airtel's market share will increase from 29 per cent in 2015/16 to 33.1 per cent in 2020/21. "We are not obsessed with competition, we are obsessed with servicing our customers well. We want to strip out every possible failure such as call drops, incorrect billing or issues with our data network," says Vittal.
In the past three years, when analysts were blaming Airtel for falling ARPUs and slow growth of data subscribers, the company's performance has, in fact, improved. Take subscriber base. Between 2014 and 2016, the subscriber base has swelled 20.7 per cent across its operations in 18 countries - in India, South Asia and Africa. Revenues have jumped 12.57 per cent while net income has gone up 119 per cent in three years to 2015/16.
The company is now busy rolling out its 4G footprint, and extending 'open network' campaign to crowdsource feedback and suggestions to identify the coverage gaps. Airtel is sitting on a large chunk of spectrum across different bands - 2G, 3G and 4G - which gives it advantage over newcomer Jio, which has just 4G spectrum. Multiple bands give better coverage for voice and data services.
In 1994, when the government awarded telecom licence for mobile services to Airtel in Delhi NCR, Mittal found his fortune in telecom business. Before that, Mittal had some bit of success in unrelated businesses - push-button phones, portable generators, stainless steel and cycle parts. And no doubt, the battle with Jio will test his business prowess to the hilt.~