Airtel altered the economics of industries not by developing state-of-the-art technologies or great product but by creating new business models. Airtel set inexpensive price-performance points and changed the way consumers could access offerings. It is a clear example of innovation that changed the business dynamics. Innovation need not to be a great product all the time!
When Airtel got license to operate the mobile telecommunication in Delhi circle to begin with; the company has to pay huge amount as license fee and in addition to that the investment was made in towers, telecom networks and support systems such as billing systems and customer case support centers. And obviously the subscribers had to pay for all this cost and soon competition started catching up; thus Airtel has to cut operating expenses in order to grow.
Airtel at this point of time started thinking of itself as a factory that produced wireless minutes.
Firstly management starting focusing on three elements; gross revenue and profits; the ratio of operating expenses to gross revenues and ratio of revenue to capital expenditure. This was drastically different from what the telecom industry is measuring across the world; ‘Average Revenue Per User’. The moment company started thinking on gross revenue they stopped thinking about how many new subscribers they have enrolled, but started thinking on how to expand more in to other areas. This number of new customers is very confusing in India as Indian consumers are known to purchase the SIM but just use it for just incoming calls, or keep it as making calls to with-in the network. They don’t use that SIM for multiple purposes like data, games, voice or money.
Bharati Airtel also had to find a way to grow without worrying about financial resources. One way to do that is to have a sense of expenditure on its non-core operations. Only way to do that was to outsource all non-core operations. Airtel outsourced all their IT support to IBM in 2004, promising to pay the provider a percentage of monthly revenue and guaranteeing a minimum monthly payment. By typing IBM revenues to its own growth, Indian company got supplier’s skin in the game.
Similarly Airtel chose to pay its telecom network equipment vendors, Ericson and Nokia; as pay-per-use model. Thus, the company decided when there will be additional capacity required while suppliers ‘installed, operated and maintained’ the network equipments. It measured network quality in terms of calls dropped, blocked calls and voice quality. It thus converted fixed costs and capital expenditures into variable operating expenses, greatly reducing its dependency on expenses.
Although the company recognized that distribution would be critical for future growth, it didn’t have time to create their own channels. It decided to piggyback on distributors for consumer product companies like Godrej and Uniliver. This is when we started seeing the Airtel services being distributed by Kirana shops. To enter the rural market, Airtel started working with fertilizer manufacturer like IFFCO.
Bharati Airtel even collaborated with competition in order to save capital. As it expanded in to Rural India, putting up passive infrastructure such as towers, air-conditioning, and generators became a large expense. In 2007 Airtel, Vodofone and Idea had struck a deal to set up Indus tower, in which Bharati Airtel and Vodofone own each 42% of equity and Idea owns remaining 16%. This structure allows the three companies to share the cost of setting up passive infrastructure and reduces the investments.
This is a very unique business model which all telecom companies of the world are trying to simulate. Where Airtel reduces the cost per call to around 50 paise, which is lowest in the world!
