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Current Issue: December 2007
Cover Story
India takes outsourcing to new heights
Mobile operators divest their towers as they prepare to serve the country’s poorest communities
by Iain Morris
Modern life has arrived noisily in India’s most tradition-bound communities, but for many of its poorest inhabitants the shrill ring of a mobile phone is still an alien sound.
It might not be for much longer. Having built their businesses serving wealthier city dwellers, India’s operators are now sizing up the rest of the country. The opportunity looks boundless. Despite signing up mobile subscribers at a current rate of about 8 million a month, operators today count fewer than one in five Indians as customers. Vast swathes of the countryside remain unserved.
Getting there profitably, however, poses a challenge of Alexandrian proportions. Spending power in India’s hinterland is comparatively weak, and calling rates are already among the lowest in the world at less than US$0.02 a minute. To make matters worse, network build could be a costly, resource-sapping task if operators try to maintain the rate of subscriber additions. They probably will. In a market where profits stem solely from new sign-ups, investors are likely to squirm if they see any slippage. Nor will any operator want to lag its peers.
These considerations are leading Indian operators to take some fairly dramatic steps. When Telecommunications went to press, Bharti Airtel, the country’s biggest operator, was awaiting high-court approval for the demerger of its towers business: that part of the company responsible for its physical infrastructure. If it gets the go-ahead, as expected, the newly formed Bharti Infratel will be run as a separate organization with its own management team.
Reliance Communications, Bharti’s main rival, is already several months into an identical scheme. In April, the operator spun off a business called Reliance Telecommunications Infrastructure Limited (RTIL), now entirely responsible for management of the operator’s main physical assets. In July, Reliance sold a 5 percent stake in RTIL to a group of private investors, raising approximately US$337.5m in the process.
Manoj Kohli, Bharti’s CEO, sees the forthcoming spin-off as a continuation of an outsourcing strategy that has already paid off handsomely. While divorcing the management of its network from the business of selling mobile communications services, Bharti has risen to be one of the world’s biggest operators by subscribers–with around 50 million at presstime — in a little under 12 years. What’s more, it has done so while continuing to grow its profits.
Just as outsourcing helped Bharti flourish in the first chapter of India’s telecom story, Kohli hopes it will propel the operator to even greater success in the next. Simply to remain competitive, others are being forced to follow suit.
Scaling up at speed
So far Bharti’s outsourcing strategy has involved mega deals with Ericsson and Nokia Siemens Networks (NSN), two of the world’s largest providers of so-called "managed network services." In July, for example, it signed a "network expansion" deal worth US$900m with NSN, giving the supplier full responsibility for the planning, rollout and management of GSM networks in eight of India’s 23 telecom circles (the administrative regions into which India is divided). Ericsson has been the beneficiary of similar agreements in other parts of India.
Suppliers, of course, are only too eager to take on more of the work operators might once have done themselves, especially as their core manufacturing units start to flag. What is striking in the case of Indian operators is their willingness to cede responsibility for their networks to those suppliers at a much earlier stage of their development. In other markets, managed-services deals have been struck after an operator has finished rolling out its network, at the precise moment its focus shifts from scaling up to launching new services. In India, conversely, the main incentive for outsourcing has been the need to scale up rapidly. "That is something specific to India," says Eric Pradier, vice president of managed network services for Motorola.
In that respect, it also issues a challenge to suppliers. Ashish Chowdhary, the global head of managed services for NSN, says his own business has had to evolve in response to the demands placed on it by India’s operators. As an example, it has invested in a network operation center in Chennai that allows it "to share concepts and experiences across multiple operators." The Chennai NOC has helped NSN more efficiently manage outsourcing work for Vodafone Essar and Aircell, two of Bharti’s competitors.
But the benefits for operators are evident. In the last year alone Bharti’s coverage of the Indian population has risen from 50 percent to 65 percent. Its mobile network services are now available in more than 290,000 towns and villages across India, up from around 160,000 in September 2006, while it gained a record 6 million new customers in 2Q07.
Perhaps more importantly, it has been able to scale up at this speed while simultaneously improving its operational performance. Over the past year, the company’s mobile EBITDA margin has risen from 36.9 percent to 41 percent. Undoubtedly, other factors are at play. Bharti does not subsidize its handsets, unlike operators in some developed markets, and 85 percent of its customers are prepaid users, who typically generate higher margins due to lower subscriber acquisition costs. But outsourcing has also had an impact by giving Bharti some predictability over operational spending, says Kaushal Vaidya, an analyst for Capgemini based in Mumbai.
"Outsourcing is a multi-year commitment to a certain level of performance for a certain fee," Motorola’s Pradier adds.
The heights of outsourcing
How game changing, then, is the pending creation of Bharti Infratel? Kohli, the company’s CEO, describes it as a continuation of the outsourcing strategy, but it would seem to mark a change of tack. An extension of deals with Ericsson or NSN, for example, is not implicit in the announcement.
With related legal proceedings underway, details of the spin-off are scanty. What is certain is that Bharti wants to realize even greater operational efficiencies than it has done so far as it moves to capture lower-income subscribers. Chairman Sunil Mittal thinks Bharti will be able to cut costs and "focus more energy on customer-facing areas of the business" by running its infrastructure as a discrete entity.
This is critical. During Bharti’s 2Q earnings call, analysts were unnerved by an emerging trend that is likely to accelerate as the operator marches into rural India: a sequential decline in monthly ARPU that has dragged it down to INR366 (US$9.31) from INR438 (US$11.14) in September 2006. The fact that minutes of use also dropped for the first time in more than a year — down to 469 from 478 in 1Q07 — must have caused brows to furrow further.
Bharti’s response has been to pump more energy into marketing and tariffing. "Over the next few weeks we’ll take steps to stimulate usage to get a recovery in 3Q and 4Q. We [also] need to do away with absolutely low-priced tariffs," says Sanjay Kapoor, president of mobile for Bharti. If splitting off the towers business would allow Bharti to throw even more resources at such "customer-facing" activities, so much the better, it would seem.
It could have a greater impact. Sunil Mittal, Bharti’s chairman, has raised the prospect of "sharing the towers," perhaps inviting strategic partners to take a stake in the new business. Such a joint venture would allow operators to pool resources to save costs more easily, which could be seen as an alternative to more conventional outsourcing deals, says Amit Nagpal, head of mobile for telecom consultancy Analysys (see Indian regulator calls for "active’" network sharing).
NSN’s Chowdhary is sanguine on the future of outsourcing. Certainly he does not believe Bharti-like demergers pose any short-term threat to his arrangements. "Our contract would simply be with another part of the operator’s business," he says. "I don’t think it will change things very much."
He could have good reason to be optimistic. Rampant growth in India’s telecom market has not gone unnoticed, and the Indian regulator’s recent invitation to bid for new telecom licenses has met with an enthusiastic wave of responses from investors both inside and outside the country (see U.S. wireless giants eye Indian mobile opportunity, at right). It is not unfeasible that some new entrants choose to partner on network build, hiring an Ericsson or NSN to manage the project.
"In some circumstances network sharing could actually be an opportunity for suppliers," Nagpal says. "Two operators might decide to contract a supplier to manage a single network on their behalf."
The threat to outsourcing suppliers may happen when two large, existing network operators pursue this model. As they drive service into the remoter regions of India, Bharti and Vodafone are already sharing some equipment to reduce their costs. If Bharti Infratel became a joint venture between the two, as some have suggested it might, the likes of Ericsson and NSN could find they have one less contract to manage.
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