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Telecom: The Prepaid conundrum

Aug 27, 2004

The Indian mobile telephony sector is being hailed as one of the success stories of economic liberalisation in the country. The growth numbers of this sector are used as an indication of this success and as per these numbers India is the fastest growing mobile market in the world. While the growth numbers may be true, we must understand that the growth is at a smaller base and hence the inflated growth numbers. While it is true that opening up of the sector has provided the impetus for growth, mobile telephony service providers have struggled to capitalize on the same. For one, intense competition has ensured that mobile tariffs in India are among the lowest in the world and this has prevented many mobile operators from turning profitable even after nearly 10 years of opening up of the sector. One of the main reasons for the growth in this sector has been the affordability of the services and this, in turn has been driven by the prepaid segment, where ARPUs are one of the lowest in the world.

The table below indicates the growth seen in the prepaid segment over the years. One can readily make out that this segment has been the growth driver for the mobile sector over the years. While the growth of this segment may indicate a positive picture, the implication of the growth in this segment indicates a gloomy outlook. While growth has been strong, decline in Average Revenue Per User has been higher for the prepaid segment than postpaid.

Source: TRAI

This essentially means that prepaid customers are acting as a drag on the overall ARPUs of mobile companies. Globally postpaid customers are more profitable for the operators as they assure revenues for the operator. Also, the usage of value added services, which help operators to hedge their revenues and shore up margins, is better among postpaid customers. The operators are also under a disadvantage as the cost of acquisition, despite being same for both types of customers, yields lesser ARPUs for the operators in the prepaid segment.

Financial Year Postpaid Prepaid Blended *
ARPU % change ARPU % change ARPU % change
FY00 1560 NA 822 NA 1319 NA
FY01 1501 -4% 597 -27% 1113 -16%
FY02 1335 -11% 484 -19% 884 -21%
FY03 1176 -12% 346 -28% 634 -28%
FY04 1056 -10% 288 -17% 469 -26%
Source: TRAI
* Weighted average of post-paid and pre-paid

The prepaid segment has another disadvantage - the customer is under no obligation to keep subscribing to a specific operator if he is not happy with the same, and hence there is always a larger amount of churn in this segment. Operators ideally would always want to have a higher percentage of postpaid customers to counter all the disadvantages of the prepaid segment. The characteristic of the Indian mobile market is common to most of the other developing nations, however the ratio of prepaid to postpaid customers is still high compared to other countries like China (prepaid to postpaid ratio of 55:45).

Through this article, the message we have tried to highlight is that while there has been phenomenal growth in the Indian mobile market, investors need to analyse this growth just the same. Investors need to realise that growth without quality (of customers) would limit the success of the mobile operator. The ratio of prepaid to postpaid users gives us an indication of the quality of the customers of the operator. While price wars (like the one recently seen in the prepaid segment) may benefit the consumer, investors need to take a more critical view of its impact on the telecom companies.

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