Idea Cellular: Case study on ARPUs

Every company needs to analyse the products that are major contributors of revenue and profits. While most manufacturing companies look for the contribution from each product segment, the service providing telecom companies search for the same nuance in the average revenue per user (ARPU), which is indicative of the revenues that these companies generate from each of its service offering like cellular mobile services, dialup or broadband services (of course, the measure for broadband is average revenue per line). In this article, we do a brief study on ARPUs as also analyse the real performance of Idea Cellular on this front.

How are ARPUs calculated?

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ARPU is calculated as service revenue (excluding activation charges and infrastructure sharing revenues) divided by the average number of subscribers for the relevant period. ARPUs can also be calculated as minutes of usage (MOU) per user per month multiplied by revenue per minute. In most cases, ARPUs are calculated for a month.

Importance of ARPUs Tariffs and minutes of usage drive the ARPUs. The tariffs are representative of the competitive pressure in the market, as increased competition will drive the tariffs down to their more competitive levels. In certain cases, tariffs may also fall on account of a reduction in the regulatory charges as levied by the regulatory body (TRAI in this case). The minutes of usage are indicative of the usage of the service by subscribers and in turn representative of the network utilisation of telecom companies. Thus, the ARPUs are an important tool for analysing the subscriber and devising strategies to maximise revenues through various tariff plans. The tariff plans are framed in such a way that they appear attractive to new customers and also incentivise the existing prepaid customers to switch to postpaid tariff plans. This helps the company to maximise its reach with prepaid customers as also to convert prepaid customers to relatively higher revenue yielding postpaid customers.

Idea's ARPUs: Case study As is evident from the table below, Idea Cellular has seen a steady decline in its ARPUs on account of increased competitive pressures. A part of the fall in the ARPUs can also be attributed to the reduction in regulatory charges like the revision in interconnection usage charges, the reduction in access deficit charge (ADC) and also due to a shift in customer profile. The company has over the years witnessed a marked increase in its prepaid customers (as a percentage of total subscriber base), which has caused a reduction in its blended ARPUs. However a fast paced subscriber addition and an increase in the minutes of usage (MOU) per subscriber per month has led to an increase in the overall revenues of the company.

Idea Cellular: ARPU and MOU

ARPU (Rs per subscriber per month)	FY03	FY04	FY05	FY06	CAGR
Prepaid	1330	1149	779	707	-19.0%
Postpaid	426	381	307	304	-10.6%
Blended	727	541	414	391	-18.7%
MOU (per subscriber per month)
Prepaid	414	583	463	523	8.1%
Postpaid	103	199	185	224	29.6%
Blended	207	279	248	289	11.8%
Service Revenue (Rs m)	9,403	12,965	22,464	29,489	46.4%

Source:Company Prospectus

What to expect?

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The TRAI, in its recent announcement, has reduced the ADC, which is expected to further bring down the tariffs. Also, as the company ventures deeper into 'B' and 'C' circles, it will see an increased number of people subscribing to the prepaid connections, which shall again yield a downward pressure on ARPUs. We thus believe that, in the near future, the pressure on ARPU will continue. However, in the medium to long-term, one can expect to see some sort of stability in the same as subscribers take to the increased use of value added services. Also, as the company is successful in converting the prepaid customers to postpaid, its blended ARPUs will benefit. The company is currently focused on subscriber acquisition to bolster growth, as is the case with all its competitors like Bharti Airtel, Hutch-Essar and Reliance Communication. However, as subscriber addition slows down in the future, it will be an imperative for Idea as also its peers to concentrate on a greater share of the pocket of each subscriber that it has on its networks.