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10 February, 2011

Airtel business model is the way to go.

The low cost, innovative model championed by Airtel might be what Kenya needs to take the telecommunication industry to the next level.

The cost of establishing and maintaining a telecommunication company in Kenya is quite high due to lack of adequate infrastructure. Outsourcing, therefore, offers companies’ avenues through which they can concentrate on their core business and leave the rest of their peripheral services to experts who can cost effectively exploit them to create a symbiotic relationship with the operators.

When we look at Airtel, outsourcing is at the heart of its business model. All of its information-technology (IT) operations are outsourced to IBM, the running of its mobile network is handled by Ericssons and Nokia siemens Networks (NSN), customer care is outsourced to Spanco and other local BPO operators. This leaves Airtel to concentrate on strategy and marketing.

It is not airtel networks operations that’s only outsourced, but the constructions as well, According to the Economist, when Airtel moves to a new area ,under a scheme known as ‘managed capacity’, it requests from vendors a certain amount of calling capacity and pays for it three months later at an agreed price per unit of capacity, that leaves it up to the vendor to handle the business of designing networks, putting up base stations and so on, giving it an incentive to build the network as frugally as possible. This cut costs by ensuring that operators do not pay for more capacity than they really need. The vendors, for their part, gain economies of scale because they build, run and support networks for other operators. Ericsson’s Mr.Svanberg says his firm can run a network with 25% fewer staff than an operator would need. Airtels operating expenses are around 15% lower than they would be if it were to build and run its network itself, and its IT costs are around 30% lower.

This model does not go without its own challenges; given that Equipment vendors make most of their profits when capacity is increased, rural areas tend to be affected due to its low capacity uptake raising the need to search for the right balance of cost- and risk-sharing.These challeges has forced major operators in India to review their investment plans into the rural areas some have already submitted to the government their requests to move out of those areas. The government had invited bids in 2007 to create telecom infrastructure and provide services in villages, offering subsidy. 

However, telcos opted to go there without taking subsidy, and even offered negative subsidy (instead they offered to pay to the government), either to block other service providers or because they over-estimated the potential in rural villages.

But all in all our telecoms giants should follow suit, having a  low-cost model could give them a clear competitive advantage—and help increase mobile penetration rate ,making Kenya truly the silicon valley Of mobile telecommunication.