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Airtel: still caught up in the elastic
Who would have thought that the primary difference between people in Africa and people in India might be something as obscure as price elasticity? It's a long time since I got my head around this one in my Economics classes, but its one of those key truths that one has to understand if you ever try and sell something.
The rule is a simple one: if the price of a product rises then people buy less of it, but if the price drops they buy more.
Well, the answer seems to be some of the time.
Because you can have a situation where the product will sell in the same quantities at any price: raising or lowering the price makes no difference to the number of items sold.
You can see this in the markets where people 'need' the product or service. Petrol might be a case in point: the price keeps going up but we keep on driving. Well, we keep on driving and writing to our political representative maybe. Nothing like a good tweet to make one feel better.
Would we drive more if the price went down? Well some of us might.
What would be the price of learning this fundamental economic lesson?
In Bharti Airtel's case, the USD 10.7 billion it paid Zain for its African operation back in early 2010.
In May 2012 Airtel told the Mobile World Congress 2012 in Barcelona that the African market had not responded as expected when it had dramatically cut call rates. The Airtel model, developed in India, assumed that as rates were cut, usage would increase, so that subscribers would spend the same but make longer, or more, calls.
However the Airtel discovered the hard way that the volume of calls remained at previous levels after the rate cuts were made; consumers preferring to spend the savings on essentials, such as food. Well you would, wouldn't you?
Bharti termed the outcome as an 'unexpected and surprising' response. An elastic market - where demand for services rises as prices fall - was critical to supporting Bharti's low-cost model.
Chairman and Managing Director Sunil Mittal, was quoted as saying: "Unlike India, we were surprised that in Africa, lower tariffs could not increase volumes. In Africa, subscribers use the money saved on lower-calling rates to buy food and not to talk more. This means that we have to think of a new model that works there".
So it comes as no surprise this week to learn that Airtel has reported profits below expectations due to higher network costs and competition at the half-way mark in 2012. As a result of its international expansion, it is also carrying significant debt. Bharti had 194 million subscribers in India and South Asia at the end of June, and a total of 250 million mobile subscribers across the 20 countries it operates, the company said (although as readers of AMETW know, the basis Airtel calculates its active subscribers is uniquely different to the way everyone else does it).