Indus Towers
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Airtel-Vodafone-Idea: Indus Towers: Collaborating with Competitors, Coopetition Strategies

Airtel-Vodafone-Idea: Indus Towers: Collaborating with Competitors, Coopetition Strategies

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Indus Towers Presentation Transcript

  • 1. Indus Towers Bharti-Vodafone-Idea Telecom Tower Business Indus Towers Strategic Alliances & Joint Ventures Collaborating with Competitors Group 5 Sagar Gupta Radhika Bhatter Rakshit Sharma Soumyajit Sengupta Varun Gopal Aneesha Chandra Cristina Group 6 Sourabh Inani Srikunj Dalmia Mohit Ambwani Anupam Chaturvedi Varun Chopra Thomas Frohberg
  • 2. Indus Towers Bharti-Vodafone-Idea Agenda • Background • SWOT Analysis • PEST Analysis • Issues & Challenges • Coopetition Drivers & Risks • Key Recommendations
  • 3. Indus Towers Bharti-Vodafone-Idea Background: Indus Towers • Joint Venture of Bharti Airtel, Vodafone Essar and Idea Cellular • Created to build and mange the passive infrastructure of wireless telecom operators • Brought together the three telecom operators and merged their tower holdings • Largest independent tower company with 93,000 towers (2009) • Target: 1,25,000 towers by 2010 • Purpose: – Provide shared telecom infrastructure – Provide scale benefits to telecom operators around the world • Earns by charging members for tower infrastructure usage
  • 4. Indus Towers Bharti-Vodafone-Idea Why does this alliance make sense? Despite lack of complementary capabilities this alliance is sustainable •Better Return on investments through increased efficiency •Favourable environment •Shared Risks Indus Towers Resource factor Low High Political factors Low High
  • 5. Indus Towers Bharti-Vodafone-Idea Mobile Telephony in India Country ARPU (in $) India 6.83 US 52 Western Europe 40 • Fastest growing industry in the world – 10 million new users added every month – CAGR of 65% between 2004 to 2008 – Wireless subscriber base – 347 million • Third highest average minutes of usage (after USA and Hong Kong) but lowest ARPU • New growth to come from low tele-density in rural areas (implying increased infrastructure costs) and increasing affordability • Top 3 private players in the GSM segment Player No. of Circles Number of Subscribers (million) Bharti Airtel 23 88 Vodafone 22 60 Idea Cellular 15 38 GSM 74% CDMA 26% WirelessSubscriber Base
  • 6. Indus Towers Bharti-Vodafone-Idea Infrastructure Sharing Market Average Tenancy US 2.7 to 3 India 1.2 to 1.5 • Active Infrastructure Sharing: Sharing of network elements like signal transmission equipment and spectrum (not permitted in India) • Passive Infrastructure: Sharing of infrastructure that supports functioning of the network like non-transmitting equipment and backup power equipment (permitted in India) • In India, till 2007, operators shared just 25% of the towers • Rural markets : One tower per operator is not feasible due to low subscriber density • Indian government’s target of providing 500 million telephones by 2010 and introduction of 3G increased the demand for towers • India was expected to have 350,000 towers by 2010
  • 7. Indus Towers Bharti-Vodafone-Idea InfraTel’s Inception • Airtel already outsourced functions (network development & management, IT, and call centers) to leverage service providers’ domain knowledge & achieve predictable operating cost model • Management of passive infrastructure required different skill sets: – Setting up towers in rural India was difficult – Many villages did not have electricity – Others had an erratic power supply – Diesel generators were used as power backups. However, diesel outlets were limited – Security issues in some areas • Dissatisfaction with service providers because of their lack of expertise running infrastructure in rural areas led to creation of Infratel to overtake this task • Infratel’s objectives were to upgrade and maintain existing sites, set up new sites, and increase tenancy of towers • In 2007-08, Infratel was valued at $10-$12.5 billion
  • 8. Indus Towers Bharti-Vodafone-Idea Establishing Indus Towers - 1 • Vodafone and Airtel signed an MOU to consider tower sharing – Decision to create an independent tower company into which tower assets would be transferred – Guaranteed tenancies from the captive tenants • Points of contention: Asset-Valuation Method – Construction/Acquisition cost vs. Market value – JV’s members agreed on point system based on weighted tower attributes to share investments • Vodafone and Airtel approached Idea and the joint venture was formed with 42-42-16 partnership • Selection of partners: distant competitor offered a minor stake, captive customer for Indus 4 circles
  • 9. Indus Towers Bharti-Vodafone-Idea Establishing Indus Towers - 2 • Contractual Framework – Two sources of revenue – Tenancy Rentals and Recoverable Expenses – Contract Length – 10 to 15 years – Build-in Escalation Clause – 2.5% annual increase in rental per tenant • Setting rules of the game: – Equal representation of all members in management committee (maintaining balance of power) – No partner given majority stake in the board of directors – Members to lease tower from Indus only, even if they quit the Joint Venture (getting commitment) • Initial wins: – Indus emerging as the dominant competitor in the landscape, having 37% market share on 2009 – Other smaller tower companies were willing to fold their portfolios into Indus, having lost the bulk of customer case
  • 10. Indus Towers Bharti-Vodafone-Idea SWOT Analysis: Internal Analysis – Strengths & Weaknesses  Strengths - Reduced operating costs and capital expenditure - Enhanced value creation for all partners - Reduced financial and political risk - Raised barriers of market entry to the new players - Existing distribution and sales networks -Crisis handling with co-operation  Weaknesses - Huge investments in research and development - Challenges faced in rural set-up - Increased pollution and radiations - Network coverage no more a competitive advantage for any partner
  • 11. Indus Towers Bharti-Vodafone-Idea SWOT Analysis: External Analysis – Opportunities & Threats  Opportunities - Access to global markets & the growing demand - Growth rates and profitability - New acquisitions - Faster access to the rural markets - Financial support by the Government to set up towers -Growth in wireless subscriber base & tele-density  Threats - Potential conflicts in the corporate objectives of the partners - Failure to adhere to international standards of emission attracts retaliation from the environmentalists
  • 12. Indus Towers Bharti-Vodafone-Idea PEST Analysis : Political & Economic Analysis
  • 13. Indus Towers Bharti-Vodafone-Idea PEST Analysis : Social & Technological Analysis
  • 14. Indus Towers Bharti-Vodafone-Idea Issues & Challenges : Transition Issues for the New Ventures • Increased network downtime and delays in repairs • Additional complexity due to splitting of network infrastructure management into “active” and “passive” categories • Adaptation to a redefined network of vendors for common activities across circles • No common data structure leading to different forms of data reporting • Lack of goal congruence among the three stakeholders • Differing approaches to capital and difference in how they measured the success of a company • Fixing of operational issues once and for all on a sustainable basis • Clear delineation of responsibilities between active and passive network managers • Redefining of Service Level Agreements (SLAa) with vendors • Establishing standards of performance and penalizing non conformation • Creation of one database with a standardized record structure • Creation of a web-based ordering system for placing requests for new towers and sharing existing ones Issues Measures Partners were required to transition to a mindset of mutual trust & collaboration to reconcile the divergent perspectives of the stakeholders. Partners were required to transition to a mindset of mutual trust & collaboration to reconcile the divergent perspectives of the stakeholders.
  • 15. Indus Towers Bharti-Vodafone-Idea Issues & Challenges : Mobile Telephony Reaching Maturity • Mobile Phone Operators were concerned with operational performance and strove to maximize tower ownership, preferred being self-dependent as far as rollouts were concerned • Tower Operators endeavored to improve tower tenancy which determined their success. Also they required skills to manage multiple customers • Key Challenge : Reconciliation of completely differing mindsets of mobile phone operators and tower operators. • To overcome this challenge, – Operating team held regular alignment and governance meetings which had representatives from all three stakeholders. These helped in clearing out issues and understanding each others’ perspectives. Also, Indus strove to overcome operators’ suspicions and establish impartiality and neutrality in all of its dealings • Master Service Agreement: – Defined the commercial aspects of leasing out and building new towers – Non-compete clause stipulating that in circles where Indus was present, stakeholders had to request Indus to build the tower. In the 7 circles where Indus had no presence, there were no binding clauses – Additional premium paid to Indus for building a tower within a specified distance • Road Ahead – Plan for Indus to own 35% of the tower market in India and to build international presence – To appoint a permanent CEO who had to be an outside candidate – To decide whether focus should be on rural or urban expansion, mode of increasing revenue etc – Team composition of mainly technical people could be a disadvantage as they did not interact with the end users – Difficulty in defining success in the absence of peer benchmarks which could create complexity in a possible IPO – Operational and sourcing challenges as the company scales up
  • 16. Indus Towers Bharti-Vodafone-Idea Key Drivers & Risks : Competitor Radar Screen Reliance Infratel BSNL Telecom Telecom Towers Airtel Vodaphone TATA Reliance Idea MTNL Loop MTS UninorViber Whatsapp Skype BSNL Indus Towers ETIPL Bharti Infratel MTNL GTL Infra ATC Current Competitors Distant Competitors Near-Term Competitors
  • 17. Indus Towers Bharti-Vodafone-Idea Key Drivers & Risks : Coopetition Drivers Setting Standards This was the first instance of sharing of infrastructure in the Indian telecom towers sphere as earlier there were independent towers and telecom operator-run towers Sharing Risks Building telecom towers requires large capital expenditures. By outsourcing this to Indus Towers, the three telecom operators were able to share the risks of this huge investment and focus on their core operations Entering Emerging Markets Opportunities to expand internationally Expanding Product Lines Reducing Costs Most appropriate for direct competitors. In this case, Bharti Airtel, Vodafone and Idea required the same kind of assets (Passive Infrastructure - telecom towers) and thus, they were able to gain economies of scale and reduce cost by collaborating Gaining Market Share Sharing of infrastructure allows the companies to access those markets which would not have been viable had they been setting up the towers alone Creating New Businesses The three companies were able to combine their assets and capabilities (employees, management) to create a new business which is currently the largest telecom tower company in the world with around 1,12,000 towers
  • 18. Indus Towers Bharti-Vodafone-Idea Key Drivers & Risks : Risks Exposure Technology Leakage Telegraphing Strategic Intention As the tower construction precedes foray into any market, thus, the telecom operators become aware about the strategic moves of other operators. Example, Airtel wanted first- mover advantage in penetrating rural areas while Vodafone wanted to strengthen its position in urban areas Customer Defection As all operators had similar coverage in atleast 16 circles, in these regions chances of customer defection increased considerably Slow Decision Making Indus towers had to ensure that they did not favour any customer over the other while making key decisions. Thus, ensuring collaboration between the operators led to slow decision making. Example they had to undertake informal mechanism to bring about mindset change and to resolve contractual matters
  • 19. Indus Towers Bharti-Vodafone-Idea Key Recommendation 1 : Increasing Tower Count • Consolidation of smaller players is a major threat that Indus Towers faces • As the company is focused on only 16 of the 23 circles, other players (new & old) have the advantage of a pan-India presence • Indus should take up a concrete plan of consolidation to keep its competitive edge & also increase coverage. • Increasing the number of sites through Capital Expenditure is not a sustainable viable option as the costs associated are too high and the returns variable leading to financial weakness • Acquisition of smaller tower companies could prove to be less cost-intensive as well as achieve the twin objectives of reduced competition and higher tenancy. • Setting up towers takes longer than acquiring already existing towers. • Faster tower base increase will help Indus tap the growing number of telecom players in the industry, as telcos prefer dealing with large base tower companies for reduced negotiations and larger deal sizes.
  • 20. Indus Towers Bharti-Vodafone-Idea Key Recommendation 2 : Executive Hiring & Decision Making Process • Instead of sourcing candidates from the partners in the JV, the top management should be an external panel to ensure no biasness in operating decisions. • For the external candidates, the prime criteria should be past experience in leading a growing organization, proven business credentials, credibility & good interpersonal skills. • Other milestones could be people being brought in from companies which have exemplified best practices in specific areas of management. • As the professional talent pool in the relevant business is limited in India, people from various consultancies should be considered so as to lend in-depth domain knowledge. This would help counter the customer-centric issues that operators associated with telecom towers faced. This would enable faster response times. • Decision making should be sped up for effective and efficient operations by way of providing good service to the tenants and hence, the customers. This can be facilitated by the proposed executive appointment method as they will add managerial capabilities, operational know-how and unbiased decision making. • However, speed should not override the need to collaborate between the different operators.
  • 21. Indus Towers Bharti-Vodafone-Idea Key Recommendation 3 : Expansion Focus: Rural or Urban • The telecom tower business has been growing and is expected to grow even faster @ 20% CAGR over the next 5 years. This would lead to the entry of other new players into the market • Rural expansion should figure in their plans after the initial phase of consolidation. This is important as a certain critical mass is required in the urban side before rural expansion can be undertaken. • Rural areas have lower tele-density and are far flung and thus would require ground-based towers, which would further increase CapEx. • Capex spend needs to be reduced while Operational Expenditure needs to be increased to drive the company forward, internally. Greater operational optimization will go a long way in creating a benchmark. • Rural expansion should take prominence only if Indus Towers wants to increase the telecom market size in general and create a profit centre instead of aiming for cost savings for its operators. • With BSNL already having nearly 60,000 towers in Tier 2 & 3 cities, that lesser urban market does not offer too high a profitability potential. But the rural market subscriber base is expected to grow and with it, the telecom tower requirement would increase causing Indus to view rural expansion seriously. • Rural expansion should be analysed in greater depth if there are regulatory changes made with respect to financing available as new site development is highly capital intensive and generally are unviable considering the economics.
  • 22. Indus Towers Bharti-Vodafone-Idea Key Recommendation 4 : Increasing Revenues: Rentals or Tenancy • Indus Towers should focus on increasing Tenancy on each tower, so as to reduce the costs associated with it • Increasing rentals may lead to higher revenues in the short run but with the increase in competition in the market, it is unsustainable as operators will shift to reduce costs in light of a difficult economic condition • Aggressive players (e.g. : Reliance) with deeper pockets can hurt Indus Towers if rentals are increased as they would have the financial backing of their parents to reduce rentals and take a financial hit while Indus Towers would be left to fend for itself. • Increased tenancy can lead to positive upsides for both Indus Towers & the operators as the former will be able to reap greater revenues while the latter will be able to reap higher cost advantages • With talks of licensing fees being introduced, Indus Towers faces a huge financial outlay and needs to ramp up per unit tenancy from around 1 to at least 2-2.5 to compensate. • This strategy can be followed only till the market does not deem a condition where there is over-supply of telecom towers. Once that stage is reached, the focus should shift completely to operational excellence to maintain viability
  • 23. Indus Towers Bharti-Vodafone-Idea Key Recommendation 5 : Tackling Economic Gloom & Managing Performance • Indus Towers should keep its focus on operators along with a clear roadmap for rural expansion, if and when the operators move towards the rural base due to tough economic conditions in the urban market • Rural areas have a penetration of only 38% while urban areas have a penetration of 160%. Thus the next big market for operators is the rural areas and if the company also focuses on expanding in the rural areas, then Indus can reap higher revenues even without tying-up with external parties. • External tie-ups with non-captive operators is a viable option but can be effectively handled only after a completely independent top management has been inducted to negate any scope of biased behavior. • Independency of the top management is important to also set up performance metrics that measure the business of Indus Towers as a different entity to its shareholders. These metrics should be based on the best practices prevalent in the international tower businesses. Metrics need to adapted to Indian conditions and conflicting measures need to be reduced as much as possible to ensure smooth functioning of Indus. (Increased Tenancy is important but operational excellence should be the plank for future growth if the economic condition remains down)
  • 24. Indus Towers Bharti-Vodafone-Idea Key Recommendation 6 : Tackling Sourcing Challenges for Growth • One of the biggest challenges facing the Telecom Tower Business is the shortage of energy and the irregularity of it. • There should be a clear commitment towards adopting greener forms of energy like solar. • Replacing diesel with solar & other forms of renewable energy can lead to greater cost savings as the latter entails no fuel cost. • Setting up a tower is costly and material intensive. A ground tower costs INR 30 Lacs while a roof-top tower costs nearly INR 20 Lacs with supply parts being low on quantity. Import duties on the required elements are low and thus, the physical asset based sourcing issues can be solved through imports.
  • 25. Indus Towers Bharti-Vodafone-Idea Thank You!