While Bharti Airtel has made it clear that the basic game plan at Zain will be to export its low cost business model, experts feel it won?t be enough for success. According to them, as reducing costs will play a key role, long-term profitability will depend on the increasing usage with reduction in tariff. ?Bharti needs to replicate the model separately in all 15 markets and a generalised approach will not work in Africa. Providing a local flavour in each market will be important,? they said.
Bharti?s minute factory model, which it has successfully implemented in India, deals with maximising the consumption of minutes. This can be done by an operator by increasing subscriber per base transceiver station (BTS) or driving usage per subscriber by resorting to tariff cuts.
It will be difficult for Bharti to replicate this model in 15 African markets because the reported subscriber penetration of Africa is 34%, which is overstated as dual sim usage in the country is about 40% of its total subscriber base.
Also, usage levels are low in Africa with total minute of usage at 120, which is only a third of Bharti?s subscriber per month usage which as of December 2009 quarter stood at 446 minutes. A recent report by HSBC Securities points out that markets like Kenya show that increase in usage levels has not been enough to compensate for tariff declines.
For Bharti, cost reduction and increased usage in order to gain market share will come at an incremental capex investment. It will have to bring its network up to the same level as its competitors, which is estimated to involve a capex of about $1.5 billion (Rs 6,800 crore approximately), said Rajiv Sharma, analyst, HSBC Securities. ?If Bharti intends to stimulate elasticity in the African telecom market and move from a high average revenue per user (ARPU), low minutes of usage (MoU) model to low ARPU, high MoU model, then it needs to increase its investments in the network. We expect this to lead to additional capex investments in the medium term and await guidance from management on this,? said a report by Goldman Sachs.
High tax and mobile termination rates in African countries limit Bharti?s ability to cut tariffs and apply the minute factory model.