SWOT Analysis of India’s largest mobile telecom operator – Bharti Airtel

Bharti Airtel is the world’s third largest mobile service provider by subscribers after China Mobile and Vodafone with over 270 million global customers. It is also India’s biggest wireless telecom operator both by subscribers and revenue. Those numbers came in at 193.5 million and Rs. 113 billion ($1.8 billion) respectively after the end of latest quarter. Again, these figures are just for Airtel’s mobile services in India. The telco also provides mobile telephony services in 20 other Asian and African countries. Given the challenging (but improving) telecom sector sentiment in India, it is worthwhile to discuss a Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis for the company.

Strengths –

• Biggest mobile service provider in world’s second largest telecom market – Mobile phone subscriptions now follow the normal population trends around the world. With about 870 million wireless subscriptions, India ranks second after China in the wireless market. Airtel has a 22.2% share of that market.
• Well-established nationwide infrastructure – Airtel has been in the market for 18+ years and thus has towers and backhaul all over the country. This is a major advantage. Deployment of new technologies or increasing capacity at times requires software and minimal hardware upgrade. Having infrastructure already on the ground makes that process much faster and smoother. Secondly, it is easier to capture new customers if a telco already has a network in place.
• High brand equity – Airtel is among India’s most visible brands omnipresent in most parts of the nation through television, print and various other forms of advertising. Celebrity endorsements and innovative advertising that understand the pulse of market are some of the assets of the Airtel brand.
• Superior overall network quality and reliability – Bharti Airtel (along with Vodafone) runs one of the better mobile networks’ in India. They have nationwide penetration and although there is no dearth of consumer complaints regarding dropped calls and slow data against Airtel, it still offers a higher quality telecom service experience as compared to most other telcos.

Weaknesses –

• High competition in the telecom market – Airtel, like all other service providers in India, has been adversely affected by the extreme price competition. Although the average voice call rates have gone up recently, they were as low as Rs. 0.6/min. (1 cent/min.) a few years ago. The story is similar with data and 3G tariffs. As a result, the company has been reporting declining profits for many years. ARPU had been decreasing too although it is showing signs of bottoming out now.
• Debt and finances – According to their latest quarterly report, Airtel is burdened by $9.7 billion in net debt, which is a lot of money when converted to rupees. How can Airtel repay this debt is the question? Possibilities include stake and equity sale or spike in revenue. Depreciating rupee is also an issue since it results in foreign exchange losses and increases the financing cost.
• Africa acquisitions and operations – Airtel acquired Zain’s Africa business for $9 billion in 2010. Since then, it has struggled to turn around those operations reporting repeated losses from the continent. While the Africa operation has widened the companies’ geography, it continues to be a drag on its balance sheet.
• Late adoption of 3G and advanced wireless technologies – Due to various regulatory uncertainties and delayed spectrum auctions, India and Airtel were late to the 3G party. 3G services were launched by Airtel only in early 2011. The data tariffs were high, speeds were unsatisfactory and customer acceptance of 3G was slow. The company lacks nationwide 3G license with spectrum in 13 out of 22 telecom service areas. Airtel’s LTE network for mobile broadband is still confined to only 4 cities in India.

Opportunities –

• Untapped voice market – Despite many believing that the voice market in India is close to saturation, hundreds of millions remain without a phone. Recently, VLR (Visitor Location Register) numbers released by the regulator TRAI, showed that around 730 million out of the total 870 million are active connections. Given many people in India use multiple SIMs, it is safe to say that mobile phone penetration in the country is less than 50%. The opportunity for Airtel is huge, especially in the rural segment.
• 3G and data revenue – Airtel’s 3G subscribers constitute less than 5% of its total subscriber base. Apart from getting new 3G customers to join Airtel, there is immense room for growth within its existing customers. The operator should be more aggressive in marketing the benefits of high speed data access on phone. Simultaneously, it must ensure faster and consistent data speeds on its network.
• LTE – The whole wireless world is moving towards LTE. LTE for mobile broadband can be a good solution for India where fixed broadband penetration is otherwise low. Airtel has taken the lead with this version of LTE in 4 cities, but deployment needs to catch up pace. Despite a weak LTE ecosystem in India, Airtel should portray itself as the embracer of that technology. It must pursue the device manufacturers to produce LTE capable phones for India and then take the lead in the deployment of LTE for cellular networks too.
• Mergers and Acquisitions – Unfortunately, the M&A rules in India are yet to formally declared although recent media reports have suggested that companies may be allowed to merge as long as their market share in every circle is less than 50%. Airtel with a market share of 22.2% should be good to acquire smaller telcos to reduce competition and add subscribers and spectrum. Such acquisitions will incur huge spectrum costs, but it could be well worth it in the long term.

Threats –

• Unfriendly regulatory environment – The telecom industry in India has been plagued by a hostile and unstable regulatory scenario. This has adversely affected the industry sentiment and the wireless service providers. While some clarity has begun to emerge, many guidelines are far from certain. Airtel has not remained untouched from this chaos.  And this threat would continue to linger for the next few years.
• Spectrum Auctions and Refarming – Government of India and TRAI kept a high reserve price for 3G, BWA and the recent 1800 MHz auction. Airtel had spent Rs. 123 billion ($2.7 billion per rupee to dollar conversion back then) for 3G airwaves. Since the returns are slow due to low tariffs, buying the spectrum at high price is detrimental for the telcos. Refarming 900 MHz is another terrible idea which would negatively impact Airtel’s finances, given that it will have to repurchase those airwaves to continue 2G operations.
• Mobile Number Portability – MNP gives the customer independence to change the service provider while retaining the number. With similar tariffs across various telcos and satisfaction with the current service provider being low, consumers are willing to jump ship. The larger incumbent operators are losing millions of customers to the newer players who attract these customers with their freebies and innovative offers.

Some of the points mentioned above also apply to big incumbent telcos in India like Vodafone and Idea. But let us not forget that Airtel has been a torchbearer of the Indian wireless industry. If it intends to remain in that position, a SWOT analysis like this one will help. Overall, I am bullish on the company’s future and believe that despite the current difficulties, Bharti Airtel will continue to be a major player in India’s telecommunication sector.

Why USA is the leader of advanced wireless services and Europe has fallen behind?

Europe had been a pioneer of innovation and deployment in wireless communications for a dominant period in the history of this technology. From the first GSM standard to the first LTE network in Scandinavia, Europe led all the way. Till about 6 years ago, the European wireless market was at par or even better than the American market in certain aspects. But the scenario is changing now with the United States taking over as the leader of next-generation wireless services. Here are a couple of quick statistics to support this view. The GSM Association’s recent report estimated that 19% wireless connections in US would be on LTE by year end compared with 2% in the European Union. Wireless capital expenditure (CAPEX) has declined slightly in Europe over the past 6 years but has shot up more than 70% in US over the same period of time. While it is somewhat unfair to compare the whole continent with a single country, most of Europe has moved together when it comes to telecommunications. Many nations have common wireless operators who face similar challenges.

Let us first look at how USA became the frontrunner of the global mobile telecom industry. Avid telecom followers would remember that US was considered late to the 3G party. Till about 2007, 3G adoption in US was slow and only a few business users were tempted by the need to access data on their phones. Blackberry was considered the best in the industry. Mass market tablets were non-existent. All that started to change with the launch of the first Apple iPhone in mid-2007. Data usage exploded. With AT&T being the sole carrier of the device till early 2011, its data uptake shot up 8000% in 4 years. Accessing Facebook, GPS, sports scores, news, travel websites, restaurant reviews etc. while on the move became the cool thing. Google followed Apple with its open source Android operating system. By 2009, the market was flooded with Android powered phones from Samsung, HTC and Motorola. Apart from AT&T, Verizon, Sprint and T-Mobile jumped aboard the Android bandwagon and also started noticing a sharp rise in data hungry customers. To attract more subscribers initially, all of them offered unlimited data plans. Although data brought in additional revenue, the cost of offering data per bit was going up because of the additional capital and operational expenditure. The initial reaction was to boost network speeds in existing 3G networks. Thus, HSPA and HSPA+ (also referred to as 3.5G) technologies were deployed by AT&T and T-Mobile. Verizon Wireless had a different predicament. Their 3G version, EVDO Rev. A, topped out between download speeds of 3 and 4 Mbps in normal traffic conditions. This was slower than the WCDMA and HSPA data speeds provided by other operators. Given this constraint and the exploding smartphone market, Verizon’s best option was to embrace the next generation LTE technology. Timely auction of the 700 MHz spectrum in 2008 acted as a booster. After launching their first LTE network in December 2010, the operator rapidly deployed the technology all over US and now covers most areas of the country. Sprint put its money on WiMAX initially, but realized in a few years that LTE is the future and finally launched LTE last year. Despite being hammered by data demand from millions of iPhones, AT&T Wireless took its time to jump on to LTE. Their first LTE network came into operation 2 years ago. T-Mobile decided to squeeze the most juice out of its HSPA+ networks and launched LTE in March this year. All 4 carriers have LTE-Advanced on their roadmap in 2-3 years. Telcos have essentially learned the importance of both ‘first to market’ and ‘best to market.’ Subsidized handset availability served as another catalyst for the smartphone revolution in US. Personally, I am not a fan of 2 year service agreement with the provider, but it does make that latest phone more affordable. Increasing smartphone usage pushed the service providers towards LTE. The traditionally expensive cellphone service in US (with ARPUs among the highest in the world) played a major role in keeping the industry booming. And while customers want lower bills, they want faster speeds and increased capacity too. A direct implication of this approach is the quality of service in US that is widely considered to be among the best in the world.

A healthy, stable and encouraging regulatory environment goes a long way in deciding the quality of telecommunication services. The US regulator FCC and the government prioritized opening of more spectrum in order to promote advanced wireless services deployment all over the country. Mergers and acquisitions have also acted as shot in the arm for the industry. Japanese operator, Softbank acquired 80% of Sprint and Sprint completely acquired Clearwire. T-Mobile merged with MetroPCS and AT&T bought Leap Wireless. While smaller and local service providers still remain in operation, the recent M&A activity has made sure that 4 well-financed, stable and competitive service providers remain in the US industry.

Europe’s lackluster performance in the field of cutting-edge wireless technologies can be attributed to various factors. The recent financial meltdown across the continent gets part of the blame. While the American economy has substantially recovered, Europe has seen a prolonged economic struggle. Sovereign debt crisis and lack of faith in Euro have affected the growth and competitiveness across the continent in the past few years. Needless to say, the telecom sector has been adversely affected. Telcos have become risk averse and CAPEX in fresh wireless infrastructure like LTE has been sluggish. Bitter experiences of the past have also prevented large scale investments from the European telecom firms. Around the turn of the century at the height of tech bubble, many of them spent billions of dollars in buying 3G spectrum and in developing infrastructure for the technology. It left them with huge debts and telcos are still milking their 3G assets to recover that investment. Vodafone CEO Vittorio Colao called the 3G auctions in UK (in the year 2000) an aberration, that was not going to repeat itself. That auction raised about $35 billion for the government, while the 4G auction earlier this year in UK fetched only 10% of that, an amount much more reasonable and affordable for the bidders. Similarly, Germany raised a staggering $67 billion from their 3G auction, but the 4G airwaves fetched only $5.5 billion in 2010. The lesson had been learned and repeating the same mistake with LTE and 4G would have been suicidal. In fact, the Czech regulator canceled fourth generation spectrum auction earlier this year, since the high bids would have hampered the operator’s finances with the costs being passed on to the customer. The auction will be held again later this year and the idea is to encourage new players to enter the market.

Higher competition and lack of consolidation is another impediment. Europe has more than 100 mobile service providers spread across various regions but the European Commission’s antitrust policies have kept the market fragmented. Direct consequence of high competition is the lower ARPU. The GSMA report estimated the 2012 ARPU in Europe to be $38 as compared to $69 in US. The more money a service provider makes, the more it will invest in the latest technology. Consolidation brings in economies of scale. It must also be noted that many European governments have awarded airwaves for LTE services, but the telcos are taking their own time in bringing up LTE since the data market is still developing. This brings us to the discussion on consumer appetite. In my personal experience and I am sure many would agree, the mobile subscribers in US are hooked to their smartphones more than people from any other country. According to various estimates, they use five times more voice minutes and twice as much data compared to their European counterparts. This ties into the ARPU numbers mentioned earlier in this post. The telecom crash of early-2000s has surely taught the industry that if the demand is rising only slowly, where is the need to hurry on the infrastructure? Fragmented spectrum across various nations has exacerbated the operator’s troubles too. Telecom companies like Vodafone, Orange, T-Mobile and Telefonica provide mobile services in many areas and they would very much like a harmonized spectrum approach. The European Commission’s attempt to make 800 MHz the digital dividend spectrum across all EU member nations by this year is good in theory but difficult in implementation. It has been met with only limited success with many countries expressing inability to meet that policy requirement.

According to a Cisco report, wireless data speeds in US are on an average 75% faster than the corresponding speeds in the EU. In my recent travels across Europe, speed tests showed download speeds ranging anywhere from 1 to 5 Mbps depending on the country. These were essentially 3G and HSPA network speeds. Due to lack of LTE roaming, I could not experience the LTE speeds in Europe. Interacting with fellow telecom professionals in the continent, I was convinced that Europe has been slow to embrace LTE, although LTE deployment is now picking up pace in some European countries. One could argue that why compare a single country, US with the whole continent? And does it really matter, if consumers are not complaining? There is some logic to these arguments. But Europe can learn from America’s telecom industry. The European Commission has been sending encouraging signals towards introducing industry friendly reforms. If the merger of Telefonica’s O2 with the Dutch company KPN’s E-Plus in Germany is approved, it could set the tone for further M&As across Europe. Earlier this year, the continent’s telecom commission expressed willingness to create a unified telecoms market across Europe in order to foster cross border harmonization of the industry’s policies and spectrum. Any such move could face stiff resistance from different quarters with operators having diverse viewpoints especially on issues like free roaming. But where they do agree is that investing in LTE will keep the European economy globally competitive. Only time will tell how fast they can catch up with not just US, but also with other LTE leaders like South Korea and Japan. Maybe they will lead again once 5G comes along?

Better times on the horizon for India’s mobile wireless industry?

Anyone who has followed India’s telecommunications sector in last few years knows that times have been tough for this industry. Excessive competition, stagnant revenues and unhealthy regulatory environment conspired to make sure that smaller players exit the market, foreign companies say goodbye, established operators see declining profits and telecom professionals lose jobs. The general sentiment was downbeat in the industry until last year. But it now looks that the worst is over although there is still a long way to go before the highs of 5 years ago are achieved again. The telcos are steadily regaining that long lost pricing power. Here are a few encouraging signals which have come from the industry in the recent past –

• Increasing revenue and profits – Bharti Airtel’s recent quarterly results exceeded expectations. Revenue rose 9% on a yearly basis although profits declined. Revenue per minute, average revenue per user (ARPU) and data revenue ticked upwards. Airtel’s domestic operations are turning around, but their Africa business continues to bleed. Last month, Vodafone India reported about 14% annual rise in revenue as part of their quarterly results. Data customers and data usage have increased impressively. Idea Cellular reported recently that profits almost doubled as compared to the year ago quarter, while revenue rose 19%. Like other bigger operators, Idea’s data uptake and ARPU have gone up.
• Decreasing competition – Telecom sector in India had 12-14 players per circle about a year ago. While competition to a certain extent is necessary to sustain consumers’ interest, excessive competition is detrimental in the long term. A direct consequence is decrease in tariffs and introduction of freebies to attract new customers and retain the existing ones. But call rates as low as 0.5 Rs./min. (1 cent/min.) are not sustainable. On the other hand, cancellation of licenses not allocated through proper auction and realization among newer operators that low tariff based operations are only good in short term led to termination of services by these smaller telcos in various circles. This is an inconvenience to their subscribers, but with number portability they can switch to more reliable bigger operators. However there are still at least 12 different service providers present in multiple circles although the number per circle is around 8-9. Remember the market can only support 6-7 profitable players.
• Reduction in freebies and increase in tariffs – Once the industry realized that there was no business case for ultra-low call rates and competition started rationalizing, telcos quietly started withdrawing offers and free minutes. The voice call charges were revised upwards. This had net positive effect on the service provider’s financial health.
• Burgeoning data usage – The success of 3G in India is still debatable, but beyond doubt the adoption rates have been slow. However with the need to be always connected, the inevitable trend is towards more data use. The telcos have responded by decreasing data tariffs. Any such decrease in prices is well compensated by an increase in data usage per customer as well as an increase in the number of data subscribers. Hence, the data ARPU is on the rise too.
• Foreign Direct Investment (FDI) in Telecom – While foreign investors were always welcome to partner with Indian firms to form a telecom company, recently government has permitted 100% FDI in telecom sector. Now non-Indian companies will have complete ownership of the business without the requirement of a partner in India. This lessens the probability of legal disputes and regulatory hurdles. The fund starved industry has got a boost from this decision because this can potentially bring in billions of dollars into the sector.

Now as I said earlier, there is a long way to go before investor and business sentiment shows substantial upsurge. The glory days of early to mid-2000s will probably not come back. But there is much room for improvement. The following measures can make the wireless telecom sector more stable and attractive in India –

• M&A guidelines – The whole industry is waiting eagerly for the finalization of consolidation rules. Last year’s National Telecom Policy (NTP) included broad guidelines under which two operators with combined market share of less than 35% would be able to merge without any hurdles. If the combined market share is between 35 and 60%, the regulator would have to review the proposal. The spectrum holdings of the merged company cannot exceed 25% of the total spectrum in a particular circle. But detailed regulations with all the fine print are yet to be released. That could happen as soon as next month. Industry insiders believe that a few operators are already talking about stake sale and merger. But none of them want to risk an action before full clarity comes from the regulator.
• Friendly regulatory environment – Much has been written about the unpredictable telecom regulatory scenario in India. If the stakeholders are really interested in restoring the transparency in this industry then rules and regulations have to be nailed down and followed. Random fines on service providers, legal battles with the government, corruption and misinterpretation of guidelines have already inflicted a lot of damage. There has to be an end to all this chaos. The interests of incumbent service providers like Airtel, Vodafone, Idea and Reliance must be protected and not ignored. Simultaneously, the market should be kept open for newer companies and competitors.
• Justifiable spectrum fees – Wireless spectrum forms an important source of revenue for the government. But it cannot be milked according to the whims and desires of a few powerful politicians and bureaucrats. Higher reserve price for any spectrum auction is a barrier for smaller telcos to enter the market. The idea of taking back the 900 MHz spectrum (considered beachfront property among the mobile companies) from GSM service providers when their licenses come up for renewal and redistributing it at higher price could burden the industry in an unprecedented manner. The government and regulator are currently seeking consultations from stakeholders on the valuation of reserve price of this spectrum. Given the government’s inability to raise revenue from recently concluded auctions, keeping the reserve price high does not make sense. In fact, the whole idea of refarming should be scrapped and licensees should be able to retain their spectrum by paying fixed fees.
• Customer’s happiness – A vital cornerstone of any service is the customer. His satisfaction is a direct indicator of running a good business. And this is primarily the service providers’ responsibility. Effective customer care, low network congestion, good data speeds and affordable tariffs go a long way in gratifying the customer. These parameters have improved over the last few years, but again there is lot of scope for progress.

India’s wireless telecom industry has faced a lot of headwinds in the past 3-4 years. The road is fraught with challenges. Debt ridden operators obviously need cash. Early turnaround signs are visible but much more needs to be done. The government’s task is not easy either because certain regulations which may favor a group of telcos could be bad news for the other telcos. A balancing act is need of the hour. With clear consumer and business friendly policies, it is possible to reinstate telecommunications as one of India’s top performing sectors.