On The Hindu Business Line on 29 May 2009
Thomas K. Thomas
The merger talks between Bharti Airtel and South African telecom company, MTN, is a pointer to an emerging trend in the Indian telecom growth story. Saturated urban markets, declining average revenue per user, tighter domestic acquisition laws and the desire to achieve global scale are driving Indian telecom operators to other emerging markets.
That the largest and most profitable mobile operator in the country is looking for markets elsewhere in the world is a clear indication that there is not much juice left in the Indian telecom market. This is similar to what Vodafone went through in the earlier part of this decade, when it decided to move out of its traditional, but saturated, European market to other emerging markets.
A recent report from the Department of Telecommunications leaves no ambiguity on what the policy-makers think about the future growth prospects of the Indian cellular market. The report states that though the mobile subscriber base is increasing at a scorching pace, the growth rate will taper off by the end of next year.
Using the S curve model of growth, the DoT has projected that the telecom sector will reach an inflexion point (the point at which maximum growth rate will occur) when the mobile density reaches 44 per cent. Considering that the current tele-density is close to 35 per cent, it is expected that the inflexion point will be reached by the end of 2010, after which growth rate of mobile subscription is expected to decline.
In addition, Indian operators have been struggling with falling monthly billings because the new additions are coming from semi-urban and rural areas where subscribers are not willing to spend more than Rs 100-Rs 200 a month on mobile usage. Therefore, even though the mobile user base is expected to increase from 400 million at present to 900 million by 2013, operators are not betting on a proportionate increase in revenue generation.
In comparison, other emerging markets such as Africa, Latin America and West Asia offer a mouth-watering proposition. These markets are at the point where India was in 2003. The telephone penetration levels there are low which means huge potential in terms of higher subscriber addition. The African telecommunication market, for example, is estimated to grow at roughly 40 per cent and is expected to continue to show higher growth for much longer period after the Indian market stagnates.
Also, the average revenue per user is much higher at Rs 600 in these emerging markets compared to Rs 250 in India. By foraying into such territories, Indian companies can hope to cash in on higher margins.
The domestic merger and acquisition norms have also made it impossible for existing telecom companies such as Bharti and Reliance Communication to acquire other large operators within India. On the other hand, a deal with South Africa’s MTN will give Bharti access to nearly 100 million subscribers across 21 countries.
However, Indian companies also have to deal with challenges related to higher cost of acquisitions, different regulatory environments and competition from European and Chinese telecom majors which are also eyeing these emerging markets.
So far, Indian players have had mixed success in their attempts to go global. While Bharti Airtel, Tata Communications and Reliance Communications have had a fair share of success in the long-distance segment through acquisition of cable networks, including Tyco Global and FLAG, they have failed to acquire telecom licences in countries such as Qatar, Kenya and Saudi Arabia. The reason for the partial success has primarily been the pricing of the acquisitions. Most of the successes for Indian telecom players have come in cases where the deal came cheap.
For instance, both Tata Group and RCom acquired Tyco Global and FLAG respectively when the global undersea cable market was facing a bandwidth glut. In 2004, Tata paid just $130 million to acquire Tyco Global Network, which had 60,000 km of cable spread across three continents. Similarly, Bharti bagged licences for Seychelles in 1998 when mobile services were just beginning to reach consumers.
However, Indian telcos have lost out whenever competitive bidding has taken place. For example, Bharti and Reliance lost out in the race to acquire a licence in Saudi Arabia after Kuwait Mobile Telecom Company bid a whopping $6 billion. Indian operators also lost out to France Telecom when 51 per cent of Telkom Kenya was up for grabs. France Telecom coughed up nearly $400 million for 2.8 lakh fixed-line telephone subscribers.
Since Indian operators are already working on thin margins, given the low tariffs in the country, they cannot afford an expensive buy to maintain profitability. The other reason is that home-grown operators are still small in scale compared to global giants such as Vodafone, giving them a lesser chance of winning a competitive bid.
One advantage that Indian operators have is that they have mastered the game of working on high volumes, building economies of scale, and cost management through innovative outsourcing deals and infrastructure-sharing agreements.
Bharti’s talks with South African major MTN, if successful, will take the low-cost business strategy to a new level. Markets such as Africa are also similar to that of India — predominantly agriculture-based with a large rural population — which again works to the advantage of Indian operators. The Bharti-MTN deal, therefore, could show the way to other Indian players.
Companies such as Reliance Communications, MTNL and BSNL have been eyeing countries such as Tunisia, Egypt, CIS and the Gulf region to expand their footprint.
For a company such as MTNL, foreign markets offer an opportunity to go beyond Delhi and Mumbai. The PSUs profits have been dipping over the past few years and the company is, therefore, betting big on the foreign telecom forays.
Showing the way
But the window of opportunity is closing fast. Most of the emerging markets in the African continent, for instance, are already controlled by European players such as Vodafone and France Telecom. The Bharti-MTN deal would create a most formidable rival there. Other Indian operators looking for a similar deal still have options such as Kuwaiti-based Zain, which is in 24 markets across Africa and West Asia and may be a bid target. The Egypt-based Orascom, which has operations in 11 countries, could be another possible partner. Then there are regional players such as Telekom SA, which may be open to a possible alliance. Partnering with an Indian company will also give these foreign operators a foothold into the fastest growing market in the world.
Bharti Airtel’s $23-billion deal with MTN, if successful, may spark the consolidation of mobile phone markets across Africa and West Asia. But Indian operators may have to move fast if they want to continue the telecom growth story.