Bharti's Minutes Factory Moves to Africa
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Image: Finbarr O' Reilly/ Reuters
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THERE'S Enough Juice Bharti is stepping into a continent where even mobile charging is a business
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The $10.7-billion (the price paid for Zain Africa) question is, can the Minutes Factory be transported to Africa? The short answer is, not very easily. Bharti’s top brass will have to think out of the box to transplant this model to Africa.
The physical act of setting up the network will perhaps be the easiest bit. It is a general belief that Africa is an inhospitable place and in many cases road infrastructure is poor or non-existent. Bharti’s detractors say that a factory model is fine but what if you can’t reach a physical location to set up the towers? Actually, sources inside Bharti say that the company’s network planning staff and its partners have had a good workout on this front in North-East India and even Bihar. “We have used elephants to transport mobile network equipment in Assam. In Bihar, we have used boats to move men and material. The logistics should not be a worry for the company,” says a source.
The most important challenge for the Minutes Factory will come from low level of urbanisation in Africa. Data shows that even in a populous country like Nigeria, the population density is just 162 people in every square kilometre. In India, the figure is 339. This has some serious implications for network planning. Combined with a low level of urbanisation — 20-60 percent — this means that subscriber populations are spread out. Therefore, to provide telecom services, more towers and radios are required. The capital requirements naturally go up. Also, due to lack of power many of those towers need diesel gensets running 24 hours a day, 365 days a year. It also requires more security than India to prevent vandalism. “This pushes up the cost of base stations almost three times compared with Europe. In Africa, the cost of a single base station (tower, radios, power backup) can go as high as $180,000 to $200,000. In Europe the same thing would cost $50,000 to $60,000,” says Dobek Pater of Africa Analysis. This is why African call rates are still comparatively high.
Yet it would be foolish to cut rates before the business model can support that. So can Bharti convince its partners — Ericsson, NSN, IBM — to do for it what they did in India? “The key question is whether Bharti can assure them of the sort of volumes that they did in India,” says Mahajan of KPMG. Ericsson, NSN and IBM would want to be big in Africa. Huawei, the Chinese company, is already getting entrenched there. “Currently, Ericsson and NSN are No. 1 and No. 2 in Africa, but over the next five years, Huawei claims it will be the biggest,” says Pater.
So these companies would want to replicate the Minutes Factory but the challenge will be the lack of scale for all players in each of the markets in Africa. “What makes the outsourcing model economically sound in India is that two or three large operators, who might be competitors, outsource to one vendor and that generates synergies of scale for the vendor. In most African markets, there is one large player followed by three or four smaller ones. So outsourced costs of operations might not be that different from doing it in-house,” says Pater.
But what if Bharti were to stimulate demand by first cutting prices? This would be one way of kick-starting the Minutes Factory. Since the costs cant drop quickly, cut prices, generate high traffic and then use that as a bargaining chip to get lower prices from vendors. In 2008, Zain dropped prices drastically in Kenya to dislodge Safaricom. Its traffic went up but not as much as it had expected. The reason is, the African market’s inherent inability to spend on mobile services. “The thing with Africa is that most of the 15 countries score low on the UN’s poverty index, with only two ahead of India on this count. Increasing the addressable market in some of these countries would mean lowering tariffs, which could pressure margins,” says Kawaljeet Saluja of Kotak Securities, in a research report. The other thing is whether Africans will want to gab the way Indians do even when given low call rates. “If you drop prices in Africa, people will spend a bit more time talking but instead of using their full budget from the past, they will try to save some of it,” says Pater.
Dispersed population, lack of purchasing power and outsourcing partners’ ability to measure up to the challenge are issues that Bharti will need to address quickly. If it does then maybe it will be the one genuine case of an Indian business model that can conquer the world, and Sunil Mittal’s detractors being proved wrong yet again.
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