ARPU under scrutiny

Falling ARPU of GSM operators is a matter of concern

This time last year, GSM operators in India didn’t need to be
overly concerned about falling Average Revenue Per User (ARPU). The number of
net subscribers being added annually was more than enough to compensate for the
same. However, with mobile markets now approaching saturation point and the rate
of customer acquisition inevitably slowing down, ARPU levels are under
increasing scrutiny.

The average revenue per user of private cellular operators have
dropped by 17 percent in 2003-04, from Rs 523 in the Q1 to Rs 432 in the Q4,
mainly due to a continuous fall in tariffs.

According to Cellular Operator Association of India (COAI), this
decline occurred despite a 30 percent rise in the total industry’s revenue
during 2003-04 to Rs 8,308 crore and the fact that the total sub-scriber base
doubled to 20.5 million by the end of the fiscal.

It is estimated that the number of subs-cribers with a monthly
ARPU of less than Rs 500 has gone up from 28 percent in 2002 to 46 percent in
2003. While there could be several fac-tors leading to the fall in ARPUs that
needs to be evaluated sepa-rately, its important to understand that the number
of people re-gistered on the net-work does not gives a true indication of an
operator’s perfor-mance. Instead, acqui-ring and retaining the higher value
custo-mers is more impor-tant for them. Besides low ARPU, the indus-try is also
grappling with high cost of duties and levies. Mobile operators have also so far
failed to identify the type of customer interested in information services. What
needs to be understood is that it’s not just important to have
information-based services like sports news, weather and stock update, it is
equally important is to create a pull and make subscribers hook on to these
services by providing real utility value like in case of SMS. It’s also
important that the service providers spruce up their infrastructure to provide
these services ‘real time’.

Another perennial weakness of operators is the fluctuating
pricing factor in the industry. Though India has the lowest airtime charges in
the world, but tariff is still a bone of contention for customers. It keeps on
fluctuating and is sometimes perceived too high for customers and operators
haven’t been very effective at getting that message across. For instance many
customers prefer not to avail roaming facility, with the service still being
considered unaffordable by majority of the subscribers. No wonder ten, operators
have failed to even generate revenue from the services that customers are
willing to avail. It’s possible only when the pricing and marketing are right
that operators can hope to ramp up ARPU.

In a highly competitive market like India where operators are
offering similar value-added services, prices will inevitably be pushed
downwards and threaten ARPU growth. Operators can’t make money by selling
megabytes to customers. It’s services that are going to drive up ARPU.

It’s clear that hiking up ARPU is no easy task making cost
reductions all the more important. The strategic objective of mobile operators
should be to emphasize on cost control and margin management. Primarily, this
has necessitated greater effort in retaining the higher value post paid
customers, and to migrate the higher value pre-paid customers onto post-paid
customers. What this means is that despite pre-paid generating lowest ARPU for
operators in comparison to post paid, it still remains central to their business
strategy.

Operators would definitely be happier if all of their customers
were on post-paid because they would be hitting better ARPU levels. But pre-paid
consumers have not yet demonstrated that they really want to go towards
post-paid on a mass scale. Also, pre-paid has been great for operators, as it’s
made mobile a mass-market phenomenon by reducing the cost of mobile usage and
making it accessible to a larger share of the population.

Another important aspect is that cellular operators would need
to provide choice to customers and a lot of end-users will always want the
perceived freedom that pre-paid provides them. On their part telecom operators
are trying not to force pre-paid users to migrate to post-paid but show service
benefits that some of the end-users would gain if they go for post-paid.
Nevertheless, cellular operators can derive better ARPU only if end-users
migrate to post-paid.

Interestingly, though the revenue from prepaid is lower than
post paid, the cost of maintaining a pre-paid customer is considerably less.
This is due to lower customer acquisition costs.

The majority of mobile data services today are communication and
entertainment, but offerings that produce the highest ARPU are in the business
sector. Also the youth market is the key driver in the early adoption of mobile
Internet applications. But operators ought to target business sector as the
biggest revenues are definitely in this sector.

Also mobile operators, eager to increase ARPU, are
understandably anxious that applications such as Multimedia Messaging Services
(MMS) should match the success of SMS. But as with all new services, mobile
operators need to manage customer expectations in a realistic manner.

Rahul Gupta

(CyberMedia News)