The series of mobile tariff cuts have pushed down the average revenue per user (ARPU) for operators. Given the fact that ARPU is an important benchmark to measure the profit margins of operators, this situation is being viewed with concern. Telecom experts comment on current ARPU trends and possible solutions to the problem…
How serious is the problem of low ARPUs vis-a-vis the global scenario?
Archana Sassan: The global scenario relating to mobile ARPUs can be divided into two segments ?? the developed market and the developing market. Europe and some Asian countries like Hong Kong, Singapore and Malaysia are developed markets where stagnation has set in. In such countries, the ARPU was high and has remained so. It is not seeing any marked increase. In countries like China, Africa and India, the growth in the mobile industry has been fast and they have seen better growth in ARPU over the last few years. However, in recent times, even developing markets like India are not seeing a great increase in ARPU. This is primarily due to the fall in tariffs over the last few years which has made mobile calls in India one of the lowest in the world. Compared to the global scenario, this is not a very serious situation as many countries are not experiencing substantial improvements in ARPU. In fact, India is at a distinct advantage due to the large untapped population and the vast potential for increasing mobile-related services. Thanks to this, the scope for increasing ARPU is vast.
Rajat Sharma: While the global average ARPU is ~$21, the Indian average ARPU is a mere ~$8. The ARPU has been decreasing almost 25 per cent year on year since cellular services first commenced. Thus, Indian operators only make one-third the revenues per subscriber compared with their global counterparts, whereas their capex-related spends, for example on network set-up, are similar. This is a serious issue and one of the primary reasons why telecom operators are not willing to set up networks in rural India where ARPUs are expected to be even lower.
Prashant Singhal: Low ARPUs in India are not a serious problem. This is a phase similar to that of China where the trend in ARPUs during the initial stage was high. Then the ARPUs came crashing down and then went up again. When a country like China has been through a similar experience,why should it be considered a serious problem for India?
Today, operators are concentrating on increasing the teledensity in middleto lower-income groups in urban and rural areas where the purchasing power of those who would subscribe is bound to be low. So penetration into these areas will mean lower revenues which leads to low ARPUs.
Mahesh Uppal: India’s ARPUs are among the lowest in the world and declining. This may not hurt immediate profitability. More importantly, it means that operators do not have the surpluses to expand their networks to rural and other uncovered areas that are, at least initially, going to deliver even less revenue.So the problem is real. However, a mitigating factor is that volumes make up for the low margins.
What measures can be undertaken to improve ARPUs?
Archana Sassan: Since India is a developing country, mobile service providers must come up with a business model that allows the inclusion and the introduction of technology-based services which lets them maximise ARPUs while overcoming technology limitations.
The value-added services segment is growing at the rate of 30 per cent to 40 per cent annually. At present, though, it accounts for only around 5 to 12 per cent of the total revenue of a service provider.Looking at the growth rate, this is one of the areas that need to be explored to earn higher ARPUs. Enhancing the current infrastructure with the ability to classify, manage and control internet protocolbased traffic such as interactive gaming, video on demand, streaming, etc. will help operators to optimise network capacity and thereby improve ARPUs.
Operators need to manage and control subscriber traffic through service control technology which enhances transport network. In this way, operators can optimise network performance constraints and ensure that infrastructure is used for maximum return on investment. Further, higher mobile penetration, combining various mobile services in a cost-effective manner and specific market-oriented packages will lead to improved ARPUs.
Rajat Sharma: There are two ways to achieve higher ARPU. One is by increasing the call rate and the second is by enticing customers to increase their use of mobile phones. Since the industry has already established such low call rates, the customer base will not favour any increase in rates.
This means that only persuading customers to increase their usage will help players achieve higher ARPUs. Here, value-added services play a critical role. Innovative services by operators both for voice-based and data-based value-added services can help them witness increased ARPU levels across certain segments. Finally, the introduction of 3G can provide the necessary impetus to raise ARPUs. But that comes with its own limitations as well.
Prashant Singhal: Operators should embrace next-generation services and should take up new services at the same rate that the revenues are falling. Mobile operators in countries like Japan and South Korea have already reached 40 per cent penetration of 3G services and provide valuable lessons for mobile operators in other regions. Telecom operators need to modify their business model and focus on value-added services instead of vanilla voice services.Legacy revenues are falling and the demand for new services is yet uncertain.MMS and m-commerce are out in the market today but the level of acceptance is not as high as expected due to device limitations. This is an opportunity that could be seized by technology vendors who should work on innovations and devise methods to overcome the limitations.Being a mere content provider will not help increase revenues. Providers should realise that there is need to extract value and provide services that are unique and different. Next-generation services can help avoid a drop in revenues.
Mahesh Uppal: Clearly, the cost of running mobile telecom services must come down. One would expect costs like technology, personnel, operations, etc. to be optimal already since the market is quite competitive. So operators will need to expand data and other value-added services. The real support for sagging ARPUs will need to come from services such as ringtones, online music, information services and ?? if broadband takes off ?? movies, cricket, etc. Interactive gaming could be another important revenue generator.
What trends do you expect in the valueadded services segment in terms of increasing ARPUs?
Archana Sassan: As mentioned earlier, value-added services are one way through which ARPUs can be improved. Widespread use of technology platforms that allow customers to connect to various operator services such as news, sports results, horoscopes and even mobile banking services is expected in the coming years, which will see a definite increase in ARPUs.
Other value-added services such as downloading of music, streaming of TV channels, and mobile photo sharing through the internet will also see an increase in the coming years. Mobile operators are already predicting that valueadded services will help increase ARPUs in the coming years.
Rajat Sharma: The usage trends of value-added services are expected to keep increasing in the future. Currently, infotainment is the maximum revenue generator and has a 55 per cent share of the total value-added services market space. But moving forward, other services such as information and mobile valet will also drive this segment.
Prashant Singhal: The trends that can be expected in the value-added services segment could be mobile gaming, admission process over the phone, exam results, news telecasts on TV, movie downloads, full song downloads, print information made available on handsets, m-commerce, and many more.
How these trends can help increase ARPUs can be explained through an example. Today, the Class 10 CBSE exam results are made available on the phone. This is a value-added service. Along with these results, a Pizza Corner or McDonald’s could advertise a free meal for the exam toppers at one of their restaurants.
Therefore, service providers not only gain from the revenues generated by using the value-added services they offer, but also through the revenues generated by the advertisements that accompany these services. Increased ARPUs could be a direct result of this.
The important element clearly is to “own a customer” and “ensure reach to him” through this wireless device, and then sell all the products in the world to him and start increasing revenues.
Mahesh Uppal: One would expect to see more and more data-based services, especially premium services. For example, gaming, interactive SMS for voting in TV polls and game shows. Cricket and movie-based entertainment services and online music are becoming quite popular and lucrative for service providers. Government and business use of SMS should expand considerably in the coming months given the extremely low cost of reaching target audiences.
What regulatory changes are needed to impact ARPUs positively?
Archana Sassan: Less control by TRAI in areas like interconnection charges and ADC may have a positive impact on ARPU. Similarly, lower entry fees and revenue share licence fees will also help in improving ARPUs. However, ceasing all regulatory intervention in these areas may still take a long time and operators should not bank on this to achieve greater ARPUs. This is essentially because regulatory intervention is necessary to some extent to protect consumer interests, as India is still a developing market where higher access of communication network to all parts of the country at an affordable rate is a top priority.
Rajat Sharma: Currently, there are no direct regulations that can impact ARPUs positively. However, with a circle-wise licence fee reduction, the EBITDA earning for telecom service providers will increase, thereby offsetting the impact of lower ARPUs. Only such regulations can help the industry feel the heat less.
Prashant Singhal: The regulatory environment focuses on the growth of the telecom industry overall. The ultimate objective of this body is to increase the subscriber base and revenues. By addressing problems such as spectrum allocation, AGR definition and rationalisation of licence fees or entry of MVNOs into the market, it can ensure continuity of the telecom revolution in India. This revolution would help increase the subscriber base, which would lead to an increase in the services offered. This would have a positive impact on ARPUs. Therefore, though the impact of the regulatory environment on ARPUs is indirect, it is, nevertheless, significant.
Mahesh Uppal: TRAI estimated recently that regulatory costs in India are among the highest in the world. So, what would make a difference is a reduction in regulatory costs such as licence fees, spectrum charges and import duties. Fees for licences and spectrum are levied as a percentage of operator revenues. If the percentage can be reduced to below 5 per cent, the savings could be significant. There is also a case for an increase in the mobile termination rates (MTR) paid to operators on whose networks a call gets completed. India has some of the lowest MTRs in the world.
While major upward revisions may not be called for, some increase could help expand mobile coverage in India, which is still barely 35 per cent. Value-added services need support from the government and the regulators for an enabling environment for data-based services. The government and TRAI must facilitate and reward more efficient and data-friendly wireless technologies. Customer education will go a long way towards expanding this market since, unlike voice, all potential users are not aware of the possibilities and savings they can enjoy.
IT experts have been highlighting the need to have a more effective legal framework for intellectual property and privacy which is crucial if the electronic content market has to expand. This is important.
Another step is to help bring more government and private services and businesses online. If there is an increase in the currently small number of online transactions such as payment of bills, reservations, ordering of goods and services, etc., network usage will increase and so will ARPUs.
