Beyond Borders

By no means will it be a matter of 'luck by chance' for Bharti Airtel-India's
#1 wireless operator-if its proposed deal with MTN sails through smoothly this
time. It is a well-timed move to grow beyond the domestic market, where the
operator has already registered its leadership. Going by key negotiators' words,
due diligence for the proposed transaction between Bharti Airtel and South
Africa's MTN Group is likely to be completed over a period of four weeks.

The merger will make the #1 operator in the country, the world's fourth
largest. It will provide Bharti Airtel an access to MTN's nearly 100 mn
subscribers across twenty-one countries. The merged entity will have combined
revenue of over $20 bn and a combined customer base of over 200 mn. Both
operators will enjoy economies of scale, while vendors will be under pressure to
offer the best prices. But challenges are plenty.

But there is more to the 'mega merger' that the government has welcomed,
calling it a new dimension to 'south-south cooperation'. The government's
support suggests that the deal makers are confident that no regulatory
compliance issues would crop up.

The deal negotiations are a clear indication towards a new twist in the
Indian telecom growth story. Saturated urban markets, declining ARPUs, tighter
domestic acquisition laws, and the aspiration to achieve global reach are luring
Indian telecom operators to other emerging markets.

There is no denying the fact that India's mobile market is fast heading
towards saturation. DoT's recent report says that even as the mobile subscriber
base continues to grow at a maddening pace, the growth rate will taper off by
the end of next year, which is already being seen in the latest numbers.

The growth of mobile subscriber base in February was slower by 12.7% with
13.44 mn subscribers being added as compared to 15.41 mn subscribers during the
month of January. Again in May, 11.59 mn wireless subscribers were added as
against 11.9 mn wireless users in April.

DoT estimates that telecom sector will reach an inflexion point when the
mobile density reaches 44%. Considering that the current teledensity is close to
35%, it is expected that the inflexion point will be reached by the end of 2010,
after which growth rate of mobile subscription is expected to decline.

Besides, the operators are grappling to earn higher margins as their new
subscribers belong to low-ARPU groups. These are largely from semi-urban and
rural areas where subscribers have a low monthly budget of Rs 100-200 for mobile
usage. Even if mobile subscribers increase, the returns will not be very high.

Considering the potential in developing markets like Africa, Latin America,
and West Asia not only the operators but also a large number of VAS providers
are beelining to get a share of the market.

Challenging Opportunities

The African telecommunications market is yet to start its journey from where
India began about a decade back. It is expected to show higher growth for a much
longer period after the Indian market sees a lull.

The African telecom market offers its own challenges, though the country
grows fast in population, currently 900 mn plus. The economy grew 5.7% in 2008,
and the figure may drop to 3.2% in 2009 on account of the global economic
slowdown.

As one of the regions where telecom industry develops most rapidly, mobile
market in Africa is progressing exceedingly fast. At present, there are
approximately 390 mn mobile phone subscribers, but with less than 45%
penetration rate. The region still has great potential for further development.

The growth of mobile services will lead to 100% geographical penetration by
2013, but one-third of the operators are not profitable and are unlikely to
achieve net profit in the next two or three years, says a report by AfricaNext,
a telecom research firm. Market research estimated that overall mobile ARPU
levels declined by 4% last year, affected by tariff cuts and the trend away from
voice and toward emphasizing data services.

“A number of emerging market operators face significant operational
challenges, partly due to a disconnect between marketing and network operations.
Several African operators arebeing warned by regulators to tone down their
marketing, as the pace at which they are building network capacity cannot meet
with the heavy flow of new customers,” says Angel Dobardziev, Ovum's Emerging
Markets Practice Leader.

Telecoms consulting firm, Oliver Wymann, expects ARPU for Middle Eastern
telecom companies to drop by half by 2013 in African and South Asian markets
because of increasing competition, price reduction and a second wave of
customers that are predominately from lower income groups. ARPU will fall from
the current $12 to $6 in Sub-Saharan Africa by 2013, and from $6 to $3 in India
and others parts of South Asia.

Limited Offer

Even as foreign ventures are not very simple for Indian companies because of
challenges related to higher cost of acquisition, different regulatory
environment, and competition from European and Chinese telecom majors, there are
still factors favoring them. India has learned to deal with low-ARPU, and
high-density markets.

For Sunil Mittal, the patriarch of the Bharti group, life does not stop after
this deal. “We will be looking at wireless businesses in India and abroad. The
deal is a potential game changer and is symbolic of south-south cooperation,”
says Manoj Kohli, CEO and joint managing director, Bharti Airtel.

Following the merger, MTN would be the primary vehicle for both Bharti and
MTN to pursue further expansion across Africa and the Middle East, while Bharti
would be the main vehicle for both Bharti and MTN to pursue further expansion in
India and Asia.

Phuthuma Nhleko, CEO, MTN, says, “The rationale for this potential
transaction between MTN and Bharti is highly compelling. It addresses our
strategic imperative of becoming one of the pre-eminent emerging market
telecommunications companies with leading positions in three of the fastest
growing wireless markets globally-India, Africa, and the Middle East-with no
overlapping footprint.”

To avail the most of this opportunity, the Indian operators will have to be
more planned and unique in their approach as European players such as Vodafone
and France Telecom already control large part of the African continent, while a
new competition would be Bharti-MTN.

The global 'top table' of operators will include players from outside Europe
and North America. Some of the major regional players in 2009, such as Orascom,
Zain, MTS, MTN, Bharti, and China Mobile will be global players, with major
holdings outside their home regions. In some cases, this will be through
acquisitions in Europe. Some of the cash rich regional players will have bought
up tier-2 or tier-3 operators, especially single country national players that
are not part of large operator groups. There is likely to have been at least one
acquisition of a tier-1 player group by a regional player, says Jeremy Green,
practice lseader, Mobile at advisory and consulting firm Ovum.

Thus, to write a happy end to the telecom story of the country, the Indian
operators should slim their focus to other emerging markets, but strictly not at
the cost of the large chunk of unconnected rural population in India.

Heena Jhingan

heenaj@cybermedia.co.in