In August 1995, Chief Minister of West Bengal, Shri Jyoti Basu ushered in the cellphone revolution in India by making the first call to Union Telecom Minister Sukhram. Sixteen years later, 4th generation services were launched in Kolkata.
In September 2004, number of mobile phone connections crossed the number of fixed-line connections for the first time, and presently dwarfs the wireline segment by around 20:1 ratio. The Indian mobile subscriber base has grown by factor of over a hundred and thirty, from 5 million in 2001 to 919.17 million as of March 2012: second largest in the world.
The country was divided into 23 circles when mobiles were introduced in India. Separate licenses were given out for each of the circles in 1994. From a monopoly till the early 1990s when mobile call rates were as high as INR 16 per minute, the telecom space has evolved into a vibrant industry with call rates as low as half paisa per second at the last count. The mobile operators brought in innovations like outsourcing of networks, focus on prepaid etc. to make the mobile services affordable to the masses. As a result, the prices declined significantly over the years and the base continued to increase. Additionally, the auction for licenses that took place in 2008 prompted a further spate of entry and price wars amongst the service providers. As a result, India currently has the lowest Average Revenue per user (ARPU) across the world.
The chart below gives an overview of the various events in the industry over the years and impact on effective rate per minute and adoption of the services.
Till 2009, the number of operators was around 5-6 per circle ensuring healthy competition to keep prices down yet maintaining sanity in terms of profitable growth. Earnings before interest, taxes, depreciation, and amortization (EBITDA) margins till 2009 were about 40%. However, once the Government issued licenses to 8 new operators taking the number to 14, the only way new operators increased subscribers was by way of indulging in tariff wars which in turn led to sharp decline in ARPU. The minutes of usage per customer did not increase with the falling rates so the overall revenues stagnated despite significant increase in subscriber additions. The new subscribers were from lower income groups who used the phone more as an incoming device. The falling ARPU levels were a natural consequence of progressively adding customers from lower income segments and price fall due to fierce competition.
Drivers for Mobile Subscriber growth over next five years:
Rural Growth: Rural mobile subscriber base is anticipated to grow at a compounding annual rate of 12 percent between 2012 and 2016, nearly twice the expected growth rate of the saturated urban market. It’s expected that 62 percent of new subscribers added in the next five years will be from the rural market.
Aggressive Operator Strategies: Strong focus on subscriber acquisition by operators is expected to continue. Aggressive pricing, reduced cost of network and innovative strategies will expand the addressable market and reduce cost-based entry barriers. Mobile number portability provides opportunity for operators to expand their market share.
Increase in Multi-SIMing: Recent increase in the number of multiple SIM users will be the primary reason for uptake in urban regions. This will be backed by device availability (dual-SIM phones) and lifestyle preferences (separate SIM cards/phones for work and personal use or for voice and data access).
3G Services: Take-off for the 3G services and mobile broadband ARPU have been slower than expected due to the high prices, network quality and lack of 3G content available to consumers.
Recently, certain service providers announced reduction in 3G tariffs for Indian customers up to 70 percent. The substantial reduction in data rate is aimed at increasing usage of premium data services and hence increase market share of Value added Services (VAS) for those providers who have invested in improving their 3G network.
The chart below shows that Indian consumers benefit from a significantly lower mobile data ARPU compared to other countries – added competition is expected to further benefit the Indian consumer.
Despite falling ARPUs, the 3G segment remains lucrative. Current inhibitors to 3G uptake are short-term in nature, and the subscription is expected to increase at a rapid pace (30 percent CAGR) between 2012 and 2016 to cross the 200-million mark. In addition, the number of 3G-enabled mobile handsets is expected to rise, reaching an active installed handset base of 680 million by 2016. Boosted by better handsets and data speed, mobile value-added services will boom in the future.
Is falling ARPU a concern?
Now let’s get into some hard numbers. Network cost per customer is approximately $40. Assuming 6 year life for the network, the depreciation cost boils down to $6 per year. To this, add cost of capital @ 12% p.a. and we have an additional expense of $5. Finally, add operational expenses of approximately $17 per year. The total expense per year per customer is approximately $28. Considering, average ARPUs of approximately INR 160 per month, this can be covered in approximately 8-9 months timeframe. Also, with regard to low ARPUS, while in this industry the capital expenditures are high, most of the costs are fixed costs. There is negligible marginal cost in adding a customer. Unlike in landline segment, access infrastructure (radio spectrum) for cellular is shared between customers. Customer uses access infrastructure only when he/she plugs in to talk or transfer data, generating revenue either through outgoing call charges or incoming termination charges. Therefore, larger number of customers can be dimensioned to a single tower if the average traffic is lower, especially when low ARPU customers are added to the network.
The table below provides key data (including ARPU) for leading operators:
Below statistics of March 2012 also help in assessing the growth potential in the mobile industry:
Indian wireless telecom market ended March 2012 with subscriber base of 919.17 million (addition of 8.00 million), monthly growth rate of 0.88%.
- Overall mobile teledensity stands at 76.00% (Urban: 162.82%, Rural: 38.33%)
- Rural market added 6.21 million subscribers (monthly growth rate of 1.96%), while urban subscriber base increased by 1.79 million (growth rate of 0.30%)
- According to Visitor Location Register (VLR) data, India had 683.02 million active mobile subscribers. Hence, actual teledensity in India is 56.47%
- 4.76 million subscribers submitted Mobile Number Portability (MNP) requests which is about 0.52% of total subscriber base in India
- Top 5 players in Indian wireless telecom industry account for 82.2% market share in terms of active subscriber base.
The Way Ahead
The statistics show that considerable growth potential remains in the market for newer companies to expand. More competition is a boon for the Indian customers as the aggressive pricing strategies of the companies and the invisible hand of demand and supply will leave the necessary amount of competition in the market (Top 5 operators occupy over 82% of the market) – resulting in the best price and quality for the end consumer.
The telecom reforms in India have been a crowning success as they were driven by rightly directed policies that were fully complemented by the innovative private players. One fear often expressed is regarding the low ARPUs prevailing in the industry. As statistics reveal, despite the low ARPUs, the companies continue to make significant EBITDA (average of 30% for the leading operators) – the industry remains attractive. New international players have entered the Indian market and while they may have not seen immediate success, their strategy seems to be one of providing better quality which will definitely find takers especially after the coming in of number portability.
Finally, 3G is a revolution that is waiting to happen on the Indian mobile telecom scene. Those service providers which focus on innovative strategies, expansion and quality of network, value-added-services, rural expansion will experience a shift of user base favouring them. The National Telecom Policy (NTP) 2012 has received a mixed response in aiming to abolish roaming charges and moving towards a unified license, however this is likely to benefit customer loyalty towards those service providers that are providing robust and quality network across the country. Also, with the Mobile Number Portability, churn rates in the market are around 6-7% per month per provider which means, theoretically, a new subscriber can reverse the entire subscriber base of an incumbent in 12-14 months. Hence, there is a lot of optimism for newer players in the market.
The International telecommunication industries ought to take a leaf out of the book of success of the Indian telecommunication industry.
The writers are executive students at Indian Institute of Management, Bangalore.