Last week, Reliance and Bharti Airtel reported their Q1 earnings. Jio reported ARPU (average revenue per user) of INR 140 per month, growing 7% QoQ. ARPU for Airtel stood at INR 157, 1.2% higher than the last quarter. In today’s post, we discuss the phoenix-like comeback of ARPUs and where they are headed.
Where does the market stand today?
We have 87 subscribers per 100 people, which is still quite behind the global average of 107, indicating substantial headroom for growth in the coming years.
The total number of subscribers has actually contracted in the last couple of years. Since 2016, the subscriber count has gone up by just 2%. With Jio’s entry, this count had gone up by 3.5% in 2017 alone, only to come down later as transitioning users completed their migration from previous providers to Jio.
Given the high barriers to entry, the telecom sector has an oligopolistic nature with only a handful of few players. Assuming that there will be no new players entering the market in the near future, the current firms are expected to realize growth through focus on margins, rather than competing by underpricing.
The market was going through a similar phase of organic growth between 2010-2015 (before Jio’s entry) when ARPU rose consistently on the back of firms improving customer quality (by retaining their most valuable customers and maintaining a healthy level of churn).
Where are we headed?
(Also read: The future of Indian telecom)
The dust has now started settling after Jio’s disruption. All major players have started increasing tariffs again, with the largest hikes coming in December 2019. This is signalling a reversal to the point of equilibrium where firms try to maintain growth by focusing on margins instead of underpricing to gain market share. In fact, since Jio’s disruption led to the exit and consolidation of some players and permanently impacted the financial health of others, underpricing is even less likely to be the order of the day with fewer competitors remaining.
As the market matures and subscriptions start growing again, ARPU and AMPU (average margin per user) are both set to rise. With a few more rounds of tariffs hikes, ARPU could be touching the 200+ zone. This is expected to be driven by the following trends:
India currently has the cheapest data in the world at just USD 0.26 per GB. ‘ARPU as % of per capita income’ was more than 1.6% before Jio’s entry in 2016. This number dipped to 0.69% in FY 2019, and became 0.86% in FY 2020 with a 30% increase in tariffs. Firms can comfortably raise tariffs further and still be well within consumers’ spending capacity.
Share of data users among subscribers is growing rapidly. Three years ago just 17% of subscribers used to pay for data, and today more than 50% do. Data is no longer a value-added item and is quickly taking shape as the primary service. This trend will only grow stronger with higher smartphone penetration and 5G rollout.
If you would like to read more about the Indian telecom sector, check out some of our past posts: