The three bodies that couldn’t kill Airtel

**Akshara** (0:04)
In today's episode, we'll break down two important stories. First, we'll talk about the three bodies that can't kill Airtel, and then we'll talk about whether the RBI can bring in the big bucks. Welcome back to The Daily Brief by Zerodha, where we cut through the noise to help you understand what's actually happening in the most important stories from business and markets. I'm your host Akshara, and today is Friday, 17th July. Today's edition is slightly different from the ones we've done before. Our first story today is authored by Rohindharma Kumar, CEO of The Ken, one of the best independent business journalism publications in India. It's based on their deep dive into the history of Airtel, which was released as part of their long-form podcast series Intermission.
If you have the time, we highly recommend watching it in full. They also have a cool companion site for the episode, containing charts and visualizations created by Anuj Debnath, The Ken's data visualization journalist. Coming to the first story.
So picture Sunil Mittal, the founder of Airtel, surrounded by three very powerful planets orbiting him. Physics has an analogy for this situation called the Three-Body Problem. And you might be aware of it through the hit book franchise of the same name by science fiction author Liu Cixin and the adapted Netflix show. So the Three-Body Problem says that when three bodies are orbiting each other in space, it's virtually impossible to predict their path. Eventually, it starts to become chaotic and they crash into each other.
In his book, Liu Cixin described an alien race that lives under three suns, making their world's climate unpredictable and forcing them into brief windows of order punctuated by devastating collapse. Swapping for a different setting, Liu could have just as easily been describing India's telecom sector. For 30 years, Airtel has lived inside exactly the chaos that has fogged the industry and changed it. Now, in our real world, the three bodies are regulation, technology and competition. Airtel has been hammered by India's regulators by every wave of telecom technology you can think of and by its biggest competitor, Reliance, twice. Yet, it's managed to come back stronger each time. But first, why was the fight even worth it? See, telecom is fundamentally a regulated oligopoly. In any market, anywhere in the world, this sector typically has at most three or four players. It's essentially a business where the regulatory moat is disguised as a license, and those with that license sell an incredibly addictive and recurring service. Nobody cancels their mobile number. You might cancel your OTT subscription, you might decide not to order from a quick commerce platform, but you're never going to cancel your number. Let's say I got my number from Airtel in 2001
That's 25 years of paying Airtel bills every month, and I could buy a very good car today with what I've spent to keep my one number. Once you build that pipe, you have the optionality to sell many services over it, so the business compounds on itself.
Meanwhile, high fixed costs act as a moat against new entrants, and that's paired with nearly zero marginal cost. Airtel's incremental abidda on a new 4G customer is not of 80%.
In some ways, it's the holy grail of business models, and that's why Airtel was always going to be on the radar of very powerful entities. So Indian telecom regulation is a shape-shifting reality. One of the truths of Indian regulation of any kind is that everything is always open to subjective interpretation. Who knows the pattern until it's settled in a court, and who knows whether that's true until it's settled at the Supreme Court. Now to start with, in the mid-1990s, the state awarded licenses in four cities based on qualitative points. Airtel almost lost out before locking in to Delhi, and that was entirely subjective, almost as if it were a beauty pageant, which is exactly what industry insiders called this process. And naturally, it was prone to flip-flops.

**SPEAKER_1** (4:00)
And the grading and this mechanism of awarding licenses was what was called a beauty contest, right? Why?

**Akshara** (4:09)
Why a beauty contest?

**SPEAKER_1** (4:10)
A beauty contest because people are given points based on these criteria.

**Akshara** (4:15)
And then, for the expansion of the next 18 cities, auctions were introduced. They were more objective, and for the first time, Spectrum was unbundled from licenses and priced separately. But the payment schedules were heavily front-loaded. You were forced to match the highest bid, and roughly 57% of the value was due in the first three years, even though building networks took much, much longer. That combination broke companies. By 1999, the whole sector was on the verge of collapse. Every company had defaulted on its license fees. The flaw in the system was bidding fixed license fees, because nobody had a clue how much money they would eventually make. Even in the best case, you would have to go nearly bankrupt before you got rich. And then, the same year, the government announced a new telecom policy, NTP, which was a welcome change. It was a recognition of the fact that if every company in the sector went under, there would be nobody left to offer telephony. So the NTP helped make a shift from a fixed license fee to a revenue share model, gave Spectrum an explicit value, and carved out an independent regulator in Tri. For the first time, the industry had a viable business model, and it helped Airtel not only survive the regulatory body, but also keep emerging as the biggest player as it contended with every change. Here's how the intermission episode describes it.