>TELECOM SECTOR (EDELWEISS)

Telecom – Can VAS salvage falling ARPUs for Indian telecos?

Indian telecos are facing a peculiar situation whereby subscribers are growing at an exponential pace, but incremental subscribers (primarily prepaid) are contributing significantly lower ARPUs. This has raised concerns on future revenue growth and profitability of operators, particularly given increasing competitive intensity and falling tariffs. Value-added services (VAS) are increasingly being considered critical to boost ARPUs as voice services get progressively commoditized. In this context, operators are counting on the introduction of 3G services to enhance data usage, while also enabling to ease the spectrum crunch by shifting voice traffic from congested 2G networks at a lower cost structure.

Our study of the experience in various telecom markets globally, however, indicates that VAS have largely failed to stem ARPU decline, though the share of ARPU has increased substantially. We have studied the trend in ARPUs of top operators in various telecom markets (the US, Japan and Europe). While data ARPU continues to be on an uptrend, blended ARPUs have been declining or at best remained stable owing to a sharply falling voice ARPU component that continues to dominate the customer spend. In our sample universe, over the last 12 quarters, voice ARPUs have declined at ~0.7-4.3% CQGR, while data ARPUs have improved at ~0.6-2.2% CQGR, with aberrations like the US (where data component has grown at ~10% CQGR) and some European countries (where data component has declined Q-o-Q). In our sample universe, only AT&T and Verizon have shown an improvement in ARPUs owing to increasing data ARPUs.

In India, data services still comprise a small proportion of ARPUs at sub-10% levels, and this proportion for the top Indian telecos has barely improved over the last several quarters. At present, given the low telecom spend by incremental customers, absolute data ARPU is also on the decline. We acknowledge that 3G services are yet not available in India, and could drive data usage among subscribers in future. In other telecom markets, despite higher income levels, overall customer spend on telecom has largely remained steady over time, with VAS at best providing stability to ARPUs. For Indian telecos, keeping in view the market conditions, customer profile (large base of prepaid customers) and demographic profile, a deviation from the trend seems unlikely. India, being a price-sensitive market, one can also not rule out the possible commoditisation of VAS services as operators resort to lower price points to drive volumes.


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