How global telcos can profit from India’s wireless experience · and Bharti Airtel (Airtel) enjoy EBITDA (earn-ings before interest, taxes, depreciation and ... use of outsourcing

How global telcos can profitfrom India’s wireless experience By Bart Vogel and Sandeep Barasia

Global wireless companiescan reduce costs if they followthree strategies from India’swireless playbook.

Copyright © 2011 Bain & Company, Inc. All rights reserved.Content: Manjari Raman, Elaine Cummings Layout: Global Design

Bart Vogel is a partner with Bain & Company in Sydney and co-leads Bain’s Asia-Pacific Telecommunications, Media & Technology practice. Sandeep Barasia isa partner with Bain & Company in New Delhi and a member of Bain’s GlobalTelecommunications, Media & Technology practice.

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How global telcos can profit from India’s wireless experience

Global wireless com-panies can reduce costsif they follow threestrategies from India’swireless playbook.

As many wireless telecommunications opera-tors around the world reach saturation pointsin consumer penetration, they fear hitting agrowth wall. These companies face mountingcompetition, declining average revenue peruser (ARPU) and steeply rising costs. All thesefactors put tremendous pressure on their mar-gins. Increasingly, wireless companies musthunt for ways to squeeze more from theirbusiness model—but where and how?

To find answers they might consider dialing thecountry code for India. Indian telcos continueto thrive despite serving users at bare minimumrates. Their ARPU is a fraction of comparable

telcos in developed countries (see Figure 1).For example, in 2009, Indian wireless ARPUaveraged just $2.90 a month. Compare thatwith about $50 a month in the US, a little over$22 a month in Germany and nearly $58 inJapan. Even in developing countries like Braziland Mexico, ARPU averages close to $13 and$14 a month, respectively.

Yet, Indian wireless companies excel in ekingsubstantial returns from thin soil. LeadingIndian players like Reliance Communicationsand Bharti Airtel (Airtel) enjoy EBITDA (earn-ings before interest, taxes, depreciation andamortization) margins of more than 30 percent.These compare well with global competitorssuch as AT&T, Verizon, Deutsche Telekom,Vodafone Group and Telefónica, despite havingARPUs of one-tenth or less of these giants(see Figure 2). Only some of this wide variancecan be explained by scale and the relativelylower wages of the Indian labor force. Muchmore hinges on a unique business model.

Note: APRU mentioned is overall APRU (divided by 12 for monthly ARPU)Source: Ovum (mobile regional and country forecast pack: 2010–15, May 2010)

0

20

40

$60 57.8

52.050.2

34.4 33.6

22.3

17.6 16.313.8 12.8

10.0 9.4

3.0 2.9

Japan France USA UK Korea Germany HongKong

Malaysia Mexico Brazil China Russia Pakistan India

Wireless ARPU (2009, monthly)

Figure 1: Indian wireless players have less than one-tenth the ARPU of telecom companiesin developed countries

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How do India’s young telcos generate superiorreturns and make calls so inexpensive forconsumers? The true secret of their successlies in a rock-bottom cost model that aims toachieve the most optimal economics at threelevels: First, Indian providers have learned how to“manufacture” very low-cost minutes. Second,they continually strive for high levels of net-work utilization. All this amounts to a telecombreakthrough in achieving high minutes of use(MOU) rates while radically de-layering tradi-tional telco operations. Third, they have a cus-tomer acquisition and distribution model thatignores the traditional norms created in moremature markets. Let’s consider these factorsin detail.

Manufacturing very low-cost minutes

India’s mammoth population of 1.17 billionpeople creates a unique market, but it canprovide universal lessons. Its telcos’ huge scaleof mobile operations and integrated networks

help them achieve their high MOU totals. Indiahas one of the largest mobile subscriber basesin the world. In 2010, the country had 752million mobile subscribers, second only toChina’s 842 million—and more than doublethe 305 million subscribers in the US, whosetotal population is around 310 million.

India also has some of the highest minutesof use per connection globally (see Figure 3):nearly 4,000 MOU per year per connectioncompared with nearly 2,500 in China and justover 1,600 in Japan. India’s total annual min-utes of usage are also very high at 3,000 billionversus 1,450 billion MOUs for the US and 150billion MOUs for Germany. One key reason forhigh mobile usage: the low penetration and lackof sophistication of fixed-line services in Indiawhen mobile phones first arrived. Consumersshifted their pent-up demand for communi-cations to mobile phones. Culturally, Indianconsumers enjoy communicating frequently,and at length, whether through conversationsor texting. Lower prices further encouraged

Note: FY05 for Indian telecom players implies year ending March 2005Source: CapIQ company reports; analyst reports

EBITDA margins

0

20

25

30

35

40

45

50%

FY03 FY04 FY05 FY06 FY07 FY08 FY09

Bharti AirtelRelianceIdea CellularTelstraTelefónicaDeutsche TelekomVodafoneAT&TVerizon

Figure 2: Leading Indian wireless companies are as profitable as their European and US peers

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greater usage: as prices plummeted from anaverage of 16 cents a minute in 1998 to just0.70 cents a minute 10 years later, more Indiansconsumed more mobile minutes.

To enable this volume, Indian telecommuni-cations companies maintain large, integratednetworks. For instance, the top six wirelesscompanies in India, measured by subscriberbase, all operate across the breadth of thecountry, handling more than 50 million sub-scribers each.

Indian telcos do this very inexpensively by twomeans: sharing passive infrastructure such asthe tower, shelter or generators and the wideuse of outsourcing. That outsourcing reduceswhat in the rest of the world are the high fixedcosts of such backbone items as networks,information technology (IT) maintenance andservices, data transmission and certain areasof general and administrative expenses. Thatapproach of sharing passive infrastructure helpsamortize costs among a larger set of players.

The savings then translate into lower billingrates that still deliver strong profits.

For instance, sharing or leasing towers cansave as much as 25 percent of tower costs astenancy increases from one operator to more.These savings will increase further when thetelcos begin sharing active infrastructure likeantennae, feeder cables, nodes and transmis-sion systems, too. While active infrastructuresharing is still at a nascent stage—most com-panies are still testing possibilities throughintra-circle roaming, whereby calls from oneoperator use the network of another operator—almost every telco in India is aggressivelypursuing passive sharing.

Many have teamed to spin off their passiveassets into separate entities. Tata Teleservicessold its towers to Viom Networks (the erst-while Quippo WTTIL). Bharti Infratel (Airtel),Vodafone Essar and Aditya Birla Telecom Ltd.(Idea) came together to set up a joint venture,Indus Towers, to handle their passive assets.

Source: Ovum (Mobile Connections Forecast Pack, May 2010; mobile regional and country forecast pack: 2010–15, May 2010)

MOUs/connection (2010)

India

USA

Brazil

Mexico

France

Germany

UK

Hungary

Poland

Australia

China

Hong Kong

Japan

Korea

Singapore

UAE

South Africa0

2,000

4,000

6,000

0

1,000

2,000

3,000B

Total MOUs (2010)

MOUs/connection Total MOUs

Figure 3: India ranks high in minutes of use (MOU) compared with other global markets

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And Reliance Infratel and GTL Infrastructurecame close to striking an $11 billion deal tocreate the world’s largest independent telecominfrastructure company. The benefit: suchinitiatives not only free up capital for invest-ments, they help reduce interest costs.

Beyond sharing passive infrastructure, Indiantelcos improve operating efficiencies by exten-sively outsourcing network development, oper-ations and maintenance. Airtel works withmore than half a dozen partners—from IBM toEricsson—for functions such as network plan-ning, IT and call center operations. Reliance’sjoint venture partner, Alcatel-Lucent, managesthe company’s CDMA and GSM mobile phonenetworks. Vodafone partners with IBM andNokia on back-office IT operations and net-work management. Indian telcos may havepioneered such pervasive outsourcing, butmany global players are beginning to adoptthis tactic, too. Recently Maxis, a leading playerin Malaysia, announced a new network out-sourcing deal with China’s Huawei.

Thanks, too, to outsourcing, new products andservices come to market at minimal costs—and roll out faster. Tata Teleservices, for exam-ple, recently signed a deal with Nokia SiemensNetworks to support the launch of its networkin India. In a deal worth $700 million, Airtelsimilarly partnered with Nokia Siemens Networksto roll out its networks in record time, as wellas to manage its radio and core network andservices in eight Indian telecom circles.

Pushing high levels of utilization

The success of Indian telcos hinges on match-ing these very low costs with very high utiliza-tion of networks (see Figure 4). The principle:serve more with less. India’s companies typi-cally operate their networks at full capacitylevels not seen in most other telcos. The goalis to treat most expenses as variable costs andtrack them against a minute of use. Despitehaving limited spectrum compared with manyof their global peers, Indian telcos serve muchhigher levels of subscribers and MOU. Indeed,

Source: TRAI; COAI; TEC; analyst reports

Capacity position by circles(number of circles)

0

20

40

60

80

100%

Airtel

23

Vodafone

23

Idea

Above capacity

Well above capacity

At capacity

Excess capacity

Near capacity

23

Figure 4: Indian telcos achieve very high levels of utilization, often operating well above capacity

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some of the nation’s telcos are running 50percent to 75 percent of their base transceiverstation (BTS) facilities at above, or well above,capacity. While this approach can be ultra-efficient, it can also significantly affect callquality, especially for consumers at the top endof the market who demand superior service.

To serve their burgeoning population of cus-tomers, India’s telcos work hard to expandcapacity in high population centers through thebuilding of infrastructure, a process called celldensification. Today, Airtel operates in 23 geo-graphic circles that cover most of India. Ofthese, more than 75 percent are above capacity.Vodafone also operates in 23 circles. More than50 percent are above capacity and another 35percent are at capacity. Lower-frequency GSMspectrum will further allow some leading compa-nies to lower costs by renting out excess capacity.

However, this cell densification is leading to anoticeable decline in call quality. Consumersare now more discerning about issues like call

drops and network quality. Until recently, thelack of mobile number portability protectedcarriers from mass defections of customers tocompetitors offering better service—but thatwill change now. Mobile number portabilityrolled out across India in early 2011.

Building a low-cost customeracquisition and distribution model

Indian telcos bring thriftiness to their sales,marketing and customer service strategies aswell. First, they focus predominantly on servingprepaid customers (see Figure 5). The prepaidbusiness model creates substantial cost benefits.They include the creation of lower billing andcollection expenses, and the critical ability to sellmore phones to more low-income consumers.The last is essential to expanding scale.

To get phones into as many hands as possibleat the lowest cost, telcos rely heavily on India’smany mom-and-pop shops, which offer prepaidrecharge coupons for several operators. Many

Source: Ovum (Mobile Connections Forecast Pack, May 2010; mobile regional and country forecast pack: 2010–15, May 2010)

Postpaid versus prepaid subscribers in India (in millions)

0

500

1,000

1,500M

2008

347

2009

525

2010

741

2011

924

2012

1,049

2013

1,135

2014

1,185

2015

1,217

Prepaid Postpaid Total subscribers

Figure 5: Prepaid subscribers dominate India’s mobile market

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of these outlets also sell SIM cards directly tocustomers and hence act as distributors forthe operators. That approach stresses highvolumes and low commissions to sales part-ners. For instance, Indian telcos typically pay4 percent to 5 percent commissions to partnerson prepaid recharges. Of that, a minuscule1 percent to 1.5 percent goes to the distributorand the remaining 2.5 percent to 3.5 percentis paid to the retail outlet. To drive costs downeven further, Indian telcos also promote self-service electronic recharging, rather than paper-based methods, for prepaid phones. Today,electronic recharges account for more than80 percent of all sales.

The few telco-owned or franchised outlets inexistence are maintained mostly for servicing.Vodafone Essar offers postpaid, prepaid, roamingand value-added services through 1.2 millionretail outlets. But only a fraction of these,1,150, are company owned and 6,500 consistof franchises and exclusive dealer arrangements.Indian telcos also team with unconventionalpartners. For example, Airtel entered into analliance with IndianOil to gain access to 23,000retail outlets at gas stations and cooking gasdistribution outlets. Other major Indian telcos,such as Reliance Communications, also main-tain a low ratio of owned outlets.

Another Indian telco practice is to keep sub-scriber acquisition costs at the barest possibleminimum. Thus, most telcos have little stakein the new handset market. That allows themnot only to maintain a very minimal deviceinventory, but it frees them from making largeinvestments in the handset supply chain.Instead, a thriving open handset market hasdeveloped in India.

That is in direct contrast to those in developedmarkets, where wireless companies often bearthe full burden of handset subsidies. These up-front, fixed expenses can comprise as much asone-third of subscriber acquisition costs. InWestern Europe, for example, handset subsidies

can total as much as 12 percent to 14 percentof sales, on average. For GSM wireless com-panies in India, handset subsidies are zero.For CDMA service providers, they amount toless than 3 percent of revenue.

Finally, to pump up user demand, India’s tel-cos aggressively promote on-net and off-peakcalling, meaning they provide lower pricesfor calls between customers within companynetworks and during evening and overnighthours. Not only do these policies redistributeand increase usage, they bring down inter-connect and termination fees between telcos.Intra-circle roaming agreements also maximizenetwork usage. How India’s telcos managethese call reallocation efforts reveals somemarketing ingenuity.

For instance, Vodafone offers 1,000 local min-utes for a minimal cost to customers betweenthe hours of 10 PM and 8 AM. MTS offers 150on-net calls. Similarly, Airtel bills in-networkcalls at bargain rates compared with out-of-network calls. And Reliance lets customersmake unlimited local and long-distance callsif the consumer takes a prepaid CDMA con-nection for Rs 599, or about $13.

What can a global company learnfrom Indian wireless companies?

The business practices of Indian telcos are notnecessarily directly translatable to companieselsewhere. But the principle of rigorouslyidentifying and justifying costs is. The starkdifference between the average annual costper connection of Indian wireless companies($43) and that of global peers ($406) is mostlyexplained by higher subscriber acquisition andretention costs, network-related costs andpersonnel costs (see Figure 6). Put anotherway, a telco must go deep enough within itsoperating model to understand what increasescost in its business model—and then figureout how to reduce them. As part of such ananalysis, a company also needs to understand

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which costs must be controlled—and deliveredin-house—as well as determine those coststhat are variable with customers or with usage.

There are a lot of innovative ways to addressthis task and finding the right ones may takesome trial and error. But Indian telcos’ costmanagement expertise already provides mostwireless companies with at least five focusareas to start controlling costs. Telcos every-where can explore ways to:

• Maximize the opportunity to share passiveinfrastructure in the short term and startlooking for opportunities to share activeinfrastructure over time. As the Indiaexperience shows, sharing infrastructurecan lead to huge savings on capital andoperating expenses, and also speed rolloutsof new products and features to customers.In contrast, in many global markets, wire-less companies pursued a more traditionalmodel of asset ownership, and competitive

pressures acted as cultural “deterrents” tosharing infrastructure assets.

• Outsource network operations and main-tenance services. Obviously, providersmust forge network outsourcing and infra-structure-sharing agreements with care.But the Indian experience shows that telcosdon’t have to own everything. Indeed,outsourcing can take advantage of a spe-cialized partner’s unique expertise andlower costs as that partner achieves greatereconomies of scale. That also allows telcosto focus on what will truly differentiatetheir service.

• Outsource or offshore select customer carecapabilities to global providers. A wirelesscompany can tap into the already developedworld-class expertise in efficient, scale-delivery centers used by many of the world’sleading telcos.

Note: Other telcos’ data is average of Vodafone (UK and Germany), Telstra, AT&T and VerizonSource: Analyst reports; Bain analysis

Average annual cost per connection (US$)

Network related costs G&A costs Selling and advertisement charges

Subscriber acquisition and retention costs Personnel costs Others

0

100

200

300

400

$500

Indian telcos

43

SARC

118

Personnelcosts

81

Networkrelated costs

77

G&A

44

Selling/advertisement

1826

Othertelcos

406

Othercosts

Figure 6: Global players stack up higher costs—especially for subscriber acquisition and retention

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• Lower customer acquisition costs. Telcoscan lower costs through sales strategiesthat target prepaid subscribers and byintroducing self-service methods. The morecustomers can do for themselves, the lessit costs a telco in staff services.

• Explore lower-cost distribution channels.Indian telcos’ practices demonstrate thatlow-cost channels such as conveniencestores can be just as good as company-owned outlets for the sales of low-cost,prepaid products. As part of this winnow-ing of fixed costs, telcos should also zeroin on ways to simplify call plans andstandardize on fewer handsets to reduceinventory costs.

Controlling costs is a critical element of busi-ness strategy. But the essential strategic taskof any telco is to understand deeply the coreof what truly differentiates its products andservices—and then create ways to strengthenthat offering. It takes a different infrastructureentirely to support a sophisticated smartphoneor tablet than it does to sell prepaid devices. Mosttelcos are somewhere along a curve betweenthe need for high-end support and self-service.Calibrating that point carefully, in order bestto serve the changing needs of its customers,will remain an ongoing task for telcos on thepath of greater profitability.

The evolving landscape

The success of Indian telcos will inevitablyconfront them with growth challenges. Severallooming trends make this inevitable: today’scost-conscious Indian telcos are being forcedto make significant payments for 3G licenses,and they will need to develop resources forthe deployment of the technology’s inherentvalue-added features. What’s more, with mobilenumber portability now available in the marketIndian companies will need to invest more inquality. In order to compete, they will find thatdifferentiation on customer experience will

increasingly become more important. Just asinexorably, the subscriber growth rate will beginto slow down as market saturation increases.Already, the massive growth of dual SIM phonesand multiple SIM card ownership suggeststhat discrete subscriber growth is much lowerthan SIM card growth, and that subscriberARPU may get fragmented.

For companies in the Indian telco market,these developments will represent wholly newopportunities. We can expect that, as leadersin cost-cutting innovations to serve a vastpopulation of very modest means, they willcontinue what they do best: develop new meth-ods for generating ever greater efficienciesand effectiveness, all on a tight budget. But inthe interim, global players would do well toread up on the early chapters of India’s wire-less playbook. After all, any national telecomindustry that can add more than 220 millionphone connections, at such low ARPUs andwith such solid returns, in one year (2010),must have made many right calls.

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How global telcos can profit from India’s wireless experience · and Bharti Airtel (Airtel) enjoy EBITDA (earn-ings before interest, taxes, depreciation and ... use of outsourcing