Airtel - Targeting High Paying Customers

and Foreign Partners to Offset Declining

Revenues and Market Share

Prepared by:
VJIM Faculty
Dr. N.Padmaja
Dr. Sushma Kaza

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This report contains the following sections:

1. Executive Summary
2. Introduction
3. Client Profile
4. The business and market environment
5. Problem/Opportunity to be studied
6. Background of the problem
7. Defining the company’s objectives
8. Main results
9. Responsibilities held during internship
10. Learnings and skills required
11. Conclusion
12. Bibliography
13. Appendices

Introduction
This report analyses the reasons for the deteriorating financial performance and market
share of Airtel. It identifies the primary reasons as predatory pricing strategy of Jio coupled
with an unfavourable and partial TRAI policy. The report recommends that the solutions to
counter this challenge lies in pursuing twin objectives of customer retention and customer
acquisition. This includes focusing on upgradation of technology, cheap plans – both voice
and data, FDI – continue exploring partnership opportunities with foreign companies such as
Singtel, adopt new telecom technology such as OTT, 5G, value added services, IoT and offer
more cloud-based services. Also, it has to continue to tap high paying customers, rural
subscriber base and postpaid customers.

Executive Summary
1. Airtel is one leading telecom service provider in India. It was founded in 1995 and
operates in 18 countries.
2. The Indian telecommunication services market will likely grow by 10.3 per cent year-
on-year to reach US$ 103.9 billion by 2020.
3. The telecom industry has witnessed intense disruption, shrinking revenue streams,
bankruptcy and, finally, consolidation. The last three years have been monumental
as 4G coverage soared and became a catalyst for the growth of mobile data and new
applications and services, especially in the content ecosystem.
4. The three major challenges of the industry are intense competition, high cost
structure and exorbitant spectrum prices coupled with govt. charges and lowest
ARPU (average revenue per user)
5. Airtel’s financial performance is deteriorating and its market share is declining owing
to new entrant Jio’s aggressive tariff war. This is reflected in its falling revenues,
declining profitability and high debt.
6. Airtel’s revenues declined from Rs. 82,887.6 crores in FY 2018 to Rs. 81,071 crores
in FY 2019. Over the same period, net profit declined substantially from Rs. 1,099
crore in 2018 to Rs. 409.5 crores in 2019.
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 7. Jio initiated a price war by offering free voice calls and roaming charges and data
charges at 1/10th of the prevailing rates. As a result of the price war, smaller
companies were either shut down or acquired, leaving just Airtel, Jio and the merged
entity of Vodafone and Idea to compete in the Indian market.
8. High fees, frequent flip-flops, endless tax demands from an unsympathetic
bureaucracy and greedy govt. that treated MNOs as cash cows have driven many
operators aground.
9. Airtel posted its first quarterly loss in 14 years amid a brutal price war unleashed by
Reliance Jio that has destroyed competition and reshaped India’s telecom market.
10. Airtel’s losses owe to cost of managing multiple networks given its users are also on
2G and 3G. This hurts Airtel’s economics in the short run. Unfavorable Supreme
Court verdict and partial govt. policy further worsened the situation for Airtel.
11. The best way forward for Airtel is to focus on Upgradation of technology, customer
acquisition and customer retention strategies that include cheap plans – both voice and
data, FDI – at present Singtel holds 48% equity stake while Mittal holds 52%, adopt
new telecom technology such as OTT, 5G, value added services, IoT and offer more
cloud-based services.
12. The company also needs to continue to tap high paying customers, rural subscriber
base and postpaid customers

Client Profile for Airtel

Name of the Client Bharti Airtel Ltd.

Industry Telecom Services Company

Year of Establishment July 7th 1995
HQ Bharti Crescent, 1 Nelson Mandela Road,
Vasant Kunj, Phase II,
New Delhi - 110 070.

No. of employees 14,818

No. of customers 411 million
Markets 18 countries across South Asia and Africa
Business Segments Mobile Services India, Mobile Services
South Asia, Mobile Services Africa, Airtel
Business, Tower Infrastructure Services,
Homes Services, Digital TV Services, and
Others. The Mobile Services India segment
covers voice and data telecom services.
Stock exchange symbol NSE – BHARTIARTL, BSE – 53245

Website https://www.airtel.in

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3-year financials:

USD (mn) 2017 2018 2019

Total
Revenues 14,033 12,823 11,567
EBITDA 5,304 4,725 3,768
Net income 566 170 59

Org Structure

Business model
Airtel core focus areas are basically two – customer acquisition & servicing (retention) and
business development/expansion. All other functions – hardware, network management,
backend applications (billing etc), value added services and even telecom infrastructure –
are outsourced.
Strategy

The strategy focusses on delivering a range of telecom services to higher revenue generating
customers and to drop low paying customers who pay less than Rs. 35 per month and by
driving data consumption on its wireless as well as wireline networks. This is in the backdrop
of the massive scale and growth upside available in India with a billion potential smartphone
users. As part of its strategy, Airtel will continue its focus on building strong partnerships.

The business and market environment

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 According to Market Research Store, the Indian telecommunication services market
will likely grow by 10.3 per cent year-on-year to reach US$ 103.9 billion by 2020.
 The Telecommunications industry is divided into following subsectors: Infrastructure,
Equipment, Mobile Virtual Network Operators (MNVO), White Space Spectrum, 5G,
Telephone service providers and Broadband.
 India is expected to lead in the growth of smartphone adoption globally with an
estimated net addition of 350 mn by 2020
 The telecom industry’s contribution to GDP is estimated to reach 8.2% by 2020, by
when industry players are slated to also leverage 5G technologies
 The industry has attracted FDI worth US$ 18.38 billion during the period April 2000
to March 2016, according to the data released by Department of Industrial Policy and
Promotion (DIPP). Currently, 100% FDI is allowed in telecom, of which up to 49%
investment in a company can be done through the automatic route.
 The telecom industry has witnessed intense disruption, shrinking revenue streams,
bankruptcy and, finally, consolidation. The last three years have been monumental as
4G coverage soared and became a catalyst for the growth of mobile data and new
applications and services, especially in the content ecosystem.
 The three major challenges of the industry are intense competition, high cost structure
and exorbitant spectrum prices coupled with govt. charges and lowest ARPU (average
revenue per user)
 The telecom industry is reeling under a debt of over ₹4 lakh crore. The total amount
owed to the government by telcos stands at about ₹1.3 trillion.

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Chart 2: Wireless subscribers (mn)

Source: IBEF, October, 2019

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 Chart 2: Wireless subscribers (bn) and average data usage (mb)

Source: Panda Navadey Livemint, October 9th, 2018

Problem/Opportunity to be studied

Airtel’s financial performance is deteriorating and its market share is declining owing to new
entrant Jio’s aggressive tariff war. This is reflected in its falling revenues, declining
profitability and high debt.
Airtel’s revenues declined from Rs. 82,887.6 crores in FY 2018 to Rs. 81,071 crores in FY
2019. Over the same period, net profit declined substantially from Rs. 1,099 crore in 2018 to
Rs. 409.5 crores in 2019. Airtel’s consolidated revenue from operations for 4Q’19 grew to
₹20,602.2 crore from ₹19,394 crore in the year ago period. The company posted a loss of
₹1,377.8 crore in 4Q’19, almost triple the ₹482.2 crore loss q-o-q. In comparison, Reliance
Jio generated ₹11,106 crore in operating revenue in 4Q’19.
The company’s net debt also rose 6 percent over 4Q’18 to Rs 1.12 lakh crore. Higher debt led
to a 30 percent increase in finance costs to Rs 2,532 crore. The telecom operators is currently
raising Rs 25,000 crore through a rights issue, the proceeds of which will be used to cut debt.
The fundraise could reduce debt by about 30.5 percent

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 Chart 3: Airtel and Jio’s consolidated net profit

Source: Pandey Navadha, Livemint, May 7th, 2019

Background of the problem

Jio’s predatory pricing and anti-competitive tactics
Airtel’s financials are under tremendous pressure owing to low-cost tariff plans of Reliance
Jio, a unit of Reliance Industries Ltd, which was launched in September 2016. It forced rivals
to get into a price war, thus drastically reducing their tariff revenues and hurting profit
margins.
Jio initiated a price war by offering free voice calls and roaming charges and data charges at
1/10th of the prevailing rates. Data rates per GB in Japan are $30, China $15 and India $3.5.
Revenue from telecom sector to govt. is Rs. 45,000 crores.
As a result of the price war, smaller companies were either shut down or acquired, leaving
just Airtel, Jio and the merged entity of Vodafone and Idea to compete in the Indian market.
Jio had 306.7 million users as of 31 March, 2019.

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 Chart 4: Subscriber base of Airtel and Jio (percent)

Source: Pandey Navadha, Livemint, November 1st, 2018

Unfavourable govt. policy

The reduction in international termination rates also adversely impacted the telco. ITR is paid
by international operators to local networks that receive calls. The change in ITR made things
worse for incumbents that were already reeling under the impact of a 57% reduction in local
interconnect charges last year. TRAI ignored Jio’s predatory pricing schemes.
The other thing is IUC, which is paid by telcos generating calls to networks that receive them.
Profits of incumbent telcos Bharti Airtel and Vodafone, were hit by TRAI cutting the
interconnect usage charges (IUC, also known as terminating charges) by 57 per cent to 6
paise per minute effective October 1, 2017 from 14 paise currently. In two years, the charges
would come down to zero. This cost incumbent operators over Rs15000 crore a year and
benefited Jio by nearly Rs10,000 crore rupees – and in International termination charge, and
also lowered forex revenue to the government by Rs2000 crore. Jio purchased RCom after a
hostile takeover. However, the govt. remains unfazed.
India has raised basic customs duty on $21b of telecom equipment and imposed duties on
printed circuit boards used to make these as the country looks to curb non-essential imports to
address its current account deficit and also boost ‘Make in India’. All these helped Jio. Govt.
revenues fell by a further Rs. 800 crores as a result of Jio’s subsidies.
Jio is presenting a number of issues –the most prominent of which was the company’s free
data strategy which snowballed into a major regulatory mess that had multiple common
threads: the exploitation of loopholes in India’s telecom regulations, allegations of regulator
bias, loss of government revenue and the threat of being the final nail in the coffin for the
banking system’s precariously-placed telecom loans. Further, there was an 86% decline in
data prices year-on-year, while voice prices fell 40%.
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In October 2019, the Indian Supreme Court ruled that mobile network operators (MNOs)
have to pay the government a combined $13 billion in adjusted gross revenue as spectrum
usage charges and license fees, within 90 days.

The Indian government and telecom operators are disputing how gross revenue should be
calculated. The government has mandated that license and spectrum fee needs to be paid by
operators as a share of their revenue. Telcos have argued that only core income accrued from
use of spectrum should be considered for calculation of adjusted gross revenue. Jio is not
disputing the revenue collection methodology. Since it owes a mere $1.8 million to the
government.

High fees, frequent flip-flops, endless tax demands from an unsympathetic bureaucracy and
greedy govt. that treated MNOs as cash cows have driven many operators aground.
Auction of air waves and sale of licenses is fetching revenue to govt. but resulting in huge
losses for the sector. Spectrum costs in India are among the highest in the world. Airwave
costs as percent of revenues at 7.6% are among the highest in the world. The band allocation
for 5G airwaves of 3,300-3,600MHz has been priced at ₹492 crore per megahertz.

Chart 5: Airtel, Jio and IUC

Source: Parbat Kalyan, 2019, Economic Times, October 10th, 2019

Research Methodology and Chaperization

Objectives of the report

1. To study the financial performance of Airtel in terms of key metrics such as revenues,
profits, market share and ARPU

2. To identify the underlying causes for Airtel’s deteriorating financial performance

3. To suggest recommendations for meeting the company’s primary objectives of

retaining existing customers while acquiring new customers.

Sources of data

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 1. Secondary sources such as company website, newspapers, journal articles, e-databases
such as Emerald and Euromonitor, search engine such as Google

2. Primary sources where a structured questionnaire will be administered to a sample of

50 respondents to understand their views on Airtel’s customer satisfaction levels and
recent increase in tariffs.

Scope of the study and Limitations

1. The study pertains to only Airtel and not the entire telecom industry

2. Specifically, it addresses concerns around the company’s declining revenues and

profits

3. Since the reliance on secondary sources is predominant, the writer does not have
access to sensitive financial information which could throw further light on the
analysis.

4. The study makes specific recommendations for meeting the company’s twin
objectives of customer acquisition and retention,

Time period of the study

The time period of the study is limited to FY 2017-19

Defining the company’s objectives

Primary objectives:

1. Design strategies to arrest declining revenues, profits, market share and subscriber
base and retain existing customers
2. Develop strategies to acquire new customers and explore new revenue sources
Secondary objectives:
1. Build long term strategy for capturing high revenue paying customers through
customer engagement and customer experience management
2. Switch from voice calls to data consumption to drive revenues and profits.

Main Findings/Recommendations of the Report

Problem 1 Declining revenues, profits and market shares

1. The report identifies that Airtel posted its first quarterly loss in 14 years amid a brutal
price war unleashed by Reliance Jio that has destroyed competition and reshaped
India’s telecom market.
2. Airtel reported a substantial ₹2,866 crore loss in the 3Q’19 from a net profit of ₹97
crore in 3Q’18 as finance costs rose and it incurred a one-time loss of ₹1,445 crore.
This is despite recording higher data and voice consumption.
Causes

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 1. Airtel’s losses owe to cost of managing multiple networks given its users are also on
2G and 3G. This hurts Airtel’s economics in the short run.
2. The launch of low-cost tariff plans by Reliance Jio, forced rivals to drop their rates,
hurting profit margins.
3. Unfavourable Supreme Court verdict that upheld the government’s broader definition
of revenue on which it calculates levies on telecom operators. The apex court rejected
the contention of telecom operators to exclude revenue from non-core telecom
operations such as rent, dividend and interest income.
4. Partial Govt. policies – regarding IUC and customs duties on telecom equipment
pricing. Lack of action on Jio’s anti-competitive free plans. Two years ago, TRAI had
cut IUC by about 57%, which resulted in huge savings for Jio and dealt a massive
blow to the incumbents.
Recommendations (mapped to Causes)
1. Upgradation of technology – Airtel needs to urgently upgrade its entire network,
towers and technology to 5G. This could substantially reduce operational costs and
increase profits. For efficient 5G services, a telecom operator would need at least a
block of 75 MHz-100 MHz, which would cost between ₹36,900 crore and ₹49,200
crore. This could push up the company’s capex.
2. The best way to counter Jio is to:
a. focus on call quality, reducing call drops, expanding coverage, strong network
signals and build an ecosystem with low data consumption rates.
b. The company has to focus on increasing ARPU since it is one of its best
metrics, and also tracked closely by the industry
c. Strengthen its rural base where it has a higher market share than Jio by
attractive plans, data subscription plans, advertising and delivering high
quality content
d. Diversify to other services such as ecommerce since it already has the
infrastructure in place. In fact, a similar strategy is being considered by Jio
3. Since judiciary is a regulatory challenge, the company can do little in this regard
4. For this the company has to actively mobilize public opinion and highlight how
customers are being adversely impacted due to partial govt. policies and also
challenge the govt.’s stance in judicial courts and use all legal means such as RTI and
consumer courts.

Problem 2 Declining customer base

1. In just one year, RJio has garnered 14 per cent revenue market share and 160 million
subscribers. And the numbers are going up every month, making survival difficult for
weaker players. Jio is backed by the deep pockets of billionaire Mukesh Ambani’s oil-
to-petrol empire. It received a ₹1.75 trillion equity infusion from its parent, Reliance
Industries Ltd, has the least leverage in the industry.
2. The moment that RJio achieves the critical mass of 300-350 million, they will be able
to dictate terms and drive away competition barring Airtel and a very weak Idea-
Vodafone,

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 3. With RJio signing definitive binding agreements with RCom for buying spectrum,
towers, fibre and media convergence node, it will have more access to the 800 MHz
and 900 MHz spectrum, considered the best to deploy 4G and 2G, respectively. RJio
would have 496.75 MHz of spectrum in these bands as compared to 368 MHz for
Bharti Airtel and 283 MHz for Vodafone-Idea.
Causes
1. RJio is a disruptive market player which reshaped the demand curve of telecom
industry using Ambani’s petro dollars.
2. Postpaid is a weak segment for Jio as also building a content driven ecosystem.
Recommendations
1. Customer acquisition strategies:
a. Cheap plans – both voice and data
b. FDI – At present Singtel holds 48% equity stake while Mittal holds 52%. The
only way Airtel can survive in the market, and get the much needed cash for
customer acquisition and counter Ambani’s deep pockets is to go the Flipkart
way. Unable to withstand the money muscle of Amazon, Flipkart sold itself to
Walmart. Also, the company raised $3 billion through a qualified institutional
placement (QIP) and overseas bonds to pay dues related to adjusted gross
revenue (AGR)
Chart 5: Capex of Telco Majors

Source: Saini Navin Kumar, 2018

c. Further, the company can explore strategic partnership opportunities with

foreign partners to bring in more advanced technology.
d. The future of telecom technology is OTT, 5G and value-added services. Airtel
must build on these technologies.
e. The IoT will become a complete ecosystem that connects everything we do,
from the home to the car, to the workplace to the electrical grid. Telecoms
seem keenly aware of the potential—in 2015 the industry ranked 4th in IoT
spending, committing nearly $111 million to IoT pursuits.
f. On the consumer side, there’s a big opportunity for communications providers
to offer more cloud-based services that can be accessed, updated, and
purchased from anywhere. For example, the clunky, ugly, and outdated set top

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 boxes (STBs) that have plagued our living rooms since the 70s might finally
be on the way out.

2. Customer retention strategies:

a. The newly launched Company-Owned-Company-Operated (COCO) Airtel
retail stores are in line with the company’s endeavor to deliver the best in-
store experience for customers. The store will offer end-to-end service
customer support for Airtel mobile and dongle connections as well as instant
activation of new connections. These stores leverage the best of retail practices
and technology to offer a superior service experience to customers. The
company should expand such stores all across India
b. On the cards is Airtel Black, for international travelling customers willing to
pay Rs 999 and more for benefits such as lounge access, better content
offerings, discounts on consumer brands, international roaming, health
insurance and bundled apps and streaming services.
c. The telco is prepared to drop low-paying customers and derive more revenue
from existing ones. Customers on low-value plans are the target for Reliance
Jio Infocomm, which is targeting 500 million users.
d. The new value-rich postpaid plan will be part of the ‘Airtel Thanks’ loyalty
programme. It is aimed at boosting the postpaid business and driving
customers on lower value plans to upgrade to Black and improve customer
retention. These lower value plans include Airtel Gold catering to postpaid
customers on plans below Rs 499 and Platinum for those at Rs 499 and above.
e. Airtel’s postpaid strategy comes amidst Jio’s efforts to bolster its postpaid
business by bundling it with its fibre-based home broadband services. Postpaid
customers form 4-5% of the telecom subscriber segment and bring in 20% of
the revenue, analysts say.
f. Airtel’s goal is to make premium customers feel they are elite, they deserve
something extra, to push up the value proposition. Postpaid is a key revenue
stream for 10% cut in postpaid prices will lead to 2% cut in overall ARPU and
will lead to 6% cut in EBITDA for Airtel.
g. Airtel, with 281.13 million subscribers, is trying to increase its ARPU from
the Rs 129, which is now higher than Jio’s Rs 122 and Vodafone Idea’s Rs
108. Therefore, without cutting postpaid charges, targeting high networth
customers and delivering value Airtel can stabilize its ARPU and consolidate
its user base.

Conclusion
Airtel has lost 41m customers with the advent of Jio. This is reflected in its falling revenues,
profits and market share. The only way that Airtel can now crawl back is by relying on the
twin strategies of customer acquisition and retention.
In sum, encouraging ultra-low prices may look like a pro-consumer move now, but if this
results in a monopoly situation, it can quickly turn anti-consumer. To start with, it makes
sense for the government to ask CCI to weigh in on the concerns about pricing and give its
recommendations. Airtel must harp on this aspect.

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Further, the industry has an overwhelming debt of over ₹4 lakh crore. The banking industry
currently has NPAs of over ₹4 lakh crore. This means that if these companies fail the NPAs
of banks will double to Rs. 8 lakh crores and the NPA rate will double to 16%. This is a
potential crisis which could destabilize our already slowing down economy.

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