Hong Kong-based Hutchison was an ideal partner for an Indian telecom company. It was at close quarters to India making travel, time zone and general liaison easy. Its management was aware of Asian cultures, but since Hong Kong was still a British colony, Hutchison’s best practices reflected European openness and social structure.
Analjit Singh’s team, led by Ashwini Windlass and Sandip Das, designated head of cellular from heading the pager business, had proven their efficacy as they began to run the Mumbai operations in competition with BPL Mobile. Their logical partners for the equipment were Motorola and Ericsson. Singh considered the venture a success even though, from its inception, he believed it was cash-crunched, especially in contrast with the competition. Singh’s Hutch Max spent Rs 15 crore on marketing. In Singh’s opinion, BPL was spending several times that amount and therefore captured a larger chunk of the market share.
To compete with a moneyed opponent, Singh and Windlass decided to take a different path to network planning. Max launched the cellular service in Mumbai with around 65 base stations or points of signal emission and reception (Delhi’s Airtel started with 108 and ramped up quickly). The network covered only the posh South Mumbai up to a fairly central suburb, Santacruz.
Hutch Max, the joint venture between Analjit Singh and Hong Kong-based Hutchison, launched a service under the brand Max Touch in a campaign titled “Hello Bombay”. From there, instead of focusing on expanded coverage, the company brought its attention to indoor coverage.
The move was designed to attract more high-paying corporate users. They required network inside the building in fixed locations rather than long distances in the outdoors. The capital expenditure on it was higher to cover a smaller footprint compared with outdoor coverage. Hutch charged a premium for the service. It was successful in capturing its target market but later came under pressure when competitors started adopting predatory pricing, meaning they were offering customers call rates below the cost of carrying one to stem the cash deficit from licence payments rather than aim for profitability.
The uptake from the urban rich peaked within a couple of years, and the middle class was still too conservative to spend on mobile phones. Airtel in Delhi, for instance, had a static customer base of around 1,00,000 for a year with no additions and high churn. The back debts, too, ballooned because people would not pay. In Mumbai, Hutch Max was watching the growing trend with trepidation even though it enjoyed a significantly higher per-customer revenue each month than its competitors. Singh felt the company was falling behind the competition from BPL Mobile. Hutch Max saw the need to unlock a bigger market.
As the team discussed the country’s advantages, it awakened to the micro economy of India’s mega population. This was a market for shampoo sachets and single cigarette sticks sold by the corner store to daily wagers at a price of Re 1, much like the chocolate eclair toffee, for which there were many takers. How could Hutch unlock this segment of subscribers?
Hutch Max decided to launch a service called prepaid, which would be sold for a nominal charge, but receive cash up front, and when the amount ran out, while its owner could not make or receive calls, a ring would land on the instrument – a missed call. There were scant studies to suggest the use of the prepaid internationally; none that had sustainably or successfully worked. The Indian market proved unlike others.
The early adopters of prepaid mobile technology were small and medium companies with large field staff. The offering capped bill shocks and still delivered the connectivity. This was the turning point of mobile connection sales to the fast-moving consumer goods model.
The operator faced a dilemma: What would offering the phone service to a low-income group mean for the premium customers who saw social status in their mobile phones? Moreover, the cost structure of a high-end marketing organisation would never justify a low-revenue product.
Windlass and Das elected to distinguish the services in both brand and technology back-end. Hutch Max prided itself in its Motorola and Ericsson network, but the company bought a system from Nokia for prepaid. At the time, Nokia’s representative for Hutch Max was Rajeev Suri, who later ascended to the global CEO position of the Finnish equipment maker. Nokia agreed to a low-cost, per-customer billing structure so that Hutch Max paid a revenue share from the subscribers using the system instead of an upfront capital cost. Its concern now was how to lure the customers.
The company created a twin structure with a parallel marketing outfit. It rented a new office in Prabhadevi, Mumbai. It was close to the existing one, but not in the same building. “We didn’t want the cultures to mix at all,” Das recalls. No high-end marketing budgets, no high-profile hires, and staff in the new office comprised largely of an on-ground sales force with the ability to get its hands dirty. Salaries that were rich and fixed for the Hutch Max post-paid service offering were commission-based for the new team onboarded for prepaid card selling. Nearly three-fourths of the wage bill here was success-based with very low fixed salaries. For the team selling post-paid connections, this would have been blasphemous because the industry was already stagnating, and sales for some months ran in the hundreds and not more.
The new sales team was selling a distinctly different product under a new brand name – “Ace”. It was intentionally designed to avoid any correlation between the premium post-paid service. Hutch Max, the post-paid service, bore an orange-and-black logo, while Ace had a green one.
The eight metro city operators had formed a cosy group, knowing that none was truly competing with the other and joining forces made them stronger as part of an industry voice when dealing with the regulator. It had become common for founders to exchange ideas, and good relations between Sunil Mittal and Analjit Singh pre-dated even the licence applications.
When Bharti Airtel realised Hutch had already launched a prepaid service, Bharti Airtel’s Sanjay Kapoor along with his colleague Deepak Gulati travelled to the Mumbai headquarters of Hutch Max to learn from its prepaid strategy and experience. Then, Bharti replicated a similar model for Delhi under the brand name “Magic”.
With low-budget billboard advertising, Ace SIM cards were distributed in a van that would set out from the southern end of Mumbai and drop them off point by point as it travelled northward. Hutch offered credit to distributors to stock and push the SIM cards, and soon stockists began to see the value. If they were able to sell the SIMs before the next stocking, they could create a cash flow and profit without putting any of their own money on the line. A new market opened and brought a fresh boost to mobile sales.
Hutch Max then elected to use the distributors of Cadbury, India’s most popular chocolate brand by multinational Fast Moving Consumer Goods (FMCG) company Unilever, called Hindustan Unilever at the time. They also onboarded the Colgate Toothpaste distribution channel. Sellers of these products were well penetrated in every corner of India, and their supply chain was already in place. Since SIM cards were low-volume items, tagging them along with the remaining goods being moved was a win-win for all parties involved. It helped the telecom company that sellers of these goods were typically respected and had personal connections with the local clientele.
Sunil Mittal’s team in Delhi first tried to tap chemists to stock chips for mobile connections – the SIM cards. It then came to the conclusion that Hutch’s approach was more effective. The rest of the industry followed closely on the heels of Hutch.
An FMCG approach to selling mobile phones requires a mirrored marketing approach. Companies explored celebrity endorsement to add a glamour factor to mass-market mobile telephony.
Bharti Airtel’s Magic brand had the first line of star endorsements. Sunil Mittal’s operator hired advertising agency Leo Burnett to curate a new sub-brand with similar values but a distinct physical personality from Airtel’s premium brand. The company went on to engage contemporary Bollywood movie star Shah Rukh Khan coupled later with Kareena Kapoor, who has a family legacy in the industry. The deal with Shah Rukh was fairly straightforward, recalls an executive. The order of negotiation with him was limited to numbers. Bharti kept the relationship professional and while he may have had requests from fans among family and friends, Sunil Mittal never let on. The company did, however, host star-studded channel partner events and awards to build trust and loyalty among the sales channels.
The new prepaid format revived demand to some extent, but most of all reduced the burden of outstanding bills for the mobile phone operators and improved cash flows.
Over four years had passed since the preparation of the first launch. Hutch Max had lost out on bids for service areas outside of Mumbai. Competitors were struggling, largely because there were no takers for calling rates pegged at Rs 16 a minute and a receiving rate of roughly half that. So, operators who had paid or were due to pay licence fees were raking up a daily bill without commensurate revenue. To top that off, the Department created numerous hurdles in interconnecting phone calls. If a mobile phone could not successfully call a landline, its use to a subscriber dropped infinitely. A war between operators and the Department had erupted on this issue.
The Department was both the regulator and chief competitor for the industry. From the private operators’ perspective, it dismissed any complaints made if they were detrimental to the state-run telecom service. “Any different moves would be thwarted with a change in regulation,” one of the telco chiefs from that time said.
Singh and his family elected to exit rather than ploughing in more money. In 1998, Analjit Singh decided to capitalise on the company’s relatively strong position compared with its peers and sell his stake. The deal he struck demonstrated the potential value in the sector still to be unleashed.
A restructuring was brewing at Sanchar Bhawan, where the telecom network operations were being spun off from the ministry to separate the company – Bharat Sanchar Nigam Limited (BSNL). It was done to allay concerns and increase the government’s objectivity in decision-making.
Hutch thus assessed India’s potential differently from Singh’s. The big collision between the private industry and the government could end in bigger business opportunities. Hutch still had faith in the millions of potential users of the service in India. It, therefore, proposed an offer that made everyone in the industry salivate. His contemporaries recall that perhaps Singh himself had not estimated the value that Hutch assigned the deal. Analjit Singh turned over 41 per cent in the company and walked away with a whopping Rs 561 crore.
While Hutch acquired economic interest, it required Indian participation in the transaction to comply with foreign direct investment norms. Uday Kotak became a joint venture partner who held equity on Hutch’s behalf. Indian rules also required Indian control of the board which Kotak and Singh held.
Hutch then strengthened its presence within the company. It took on a management restructuring which led to the appointment of Asim Ghosh. After stints at Procter and Gamble and Pepsi, Ghosh had settled in Hong Kong into the role of managing director and CEO of AS Watson Industries, the consumer goods division of Hutchison.
Hutch also looked at expanding the operation. It searched for other telecom potentials willing to do an equity swap and merge operations. Essar emerged as the deal clincher. Essar’s arm ran service in Delhi competing with Bharti Airtel. There was an equity exchange deal stitched up by Ghosh and Essar’s owners Ravi and Shashi Ruia.
Many things could have torpedoed these negotiations. For starters, if the original licensing norms were to be considered, the value of a licence in Mumbai was higher than the value of one in Delhi. Yet, in the interest of time and simplicity, the partners chose to treat the per-subscriber valuation of Mumbai and Delhi more or less at par.
Then, an even more surprising turn in this deal structure raised the hopes of aspiring telco giants further. At the end of the transaction, Essar would have been required to front around $250 million. The Indian shipping group instead negotiated that Hutch loan money to Essar to buy its share in the combined entity. Hutch also went on to finance another nearly $100 million for Essar to expand the network. By the turn of 1998, as the sector flirted with a new regulatory regime, Hutch Max was ready to fire on all cylinders.
Excerpted with permission from Telecom Wars: The Race to Capture a Billion Voices, Deepali Gupta, Penguin India.
