The China Comparison
Compared to China, Indian service providers face a dual challenge in addressing the rural market. One, the ARPU generated by a rural customer is far lower than the ARPU generated by an urban customer. And two, this is compounded by the fact that the cost of roll-out is far higher in the rural segment than in the urban segment. This was the main reason why service providers were not keen on addressing the rural market. It is only when the urban market began to show signs of saturation that the service providers aggressively started looking at the rural market.

Though India is the fastest growing telecom market in the APAC region, the ARPUs are abysmally low. The ARPU generated from the rural segment is at least 25% to 30% lower than the ARPU produced in the urban part of the country. However, analysts believe that since the volumes are high, it would still be a profitable business for the service providers.

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According to a report by UK-based Portio Research, The Next Billion, around 67.2% of China's subscriber additions between 2007 and 2011 are expected to come from the rural areas. Rural penetration is already at 15% and will go up to 56% by 2011. In India, however, rural penetration is expected to go up to less than half of that at 25%, it currently is at about 6%. The monthly ARPU levels in the Chinese mobile market are expected to remain constant at $10 per month. This is starkly different from the situation in India where the overall ARPU is expected to decline to reach $6.6 by 2011.

According to the same report, the reason for this difference is the headstart. China enjoys cultivating the rural market, with special tariff plans and relevant data services such as SMS, news, weather information services, etc, which are extremely popular even for rural subscribers. An increase in the popularity of data services coupled with the 3G launch are likely to play a major role in sustaining ARPUs in the Chinese market. The scenario is vastly different in India, which is heavily dependent on voice services, especially in rural regions. Falling call tariffs will result in a decline in ARPU from the urban subscribers as well.

The Rural Pull
Gartner believes that the blended ARPU is likely to fall to around Rs 200 by 2012 and the rural ARPU is going to be far lower at Rs 120. As of now, ARPU is between Rs 160 and Rs 200. Both service providers and analysts acknowledge that there is pressure on margins but the rural segment is still going to be profitable, and that is the reason why service providers are making a beeline for this segment. Though the blended ARPU will see a decline, the drop in rural areas will be offset by the growth of data services in the urban regions, where the decrease in ARPU is expected to be much less.

A pre-paid connection is preferred over post-paid in India's rural segment and the pre-paid ARPU is lower than the post-paid. It is for this reason that bundling becomes an important business strategy for both handset manufacturers and service providers. Most service providers have formed bundling alliances with handset manufacturers to offer a winning proposition to the prospective subscribers.

"In order to make telephony more affordable in the rural areas, we are already offering highly affordable bundled packages for the benefit of our subscribers in rural India," says a Reliance Communications' spokesperson.

The issue of low ARPU from the rural segment is likely to be addressed better if operators are able for offer services, which have a direct bearing on rural life. The importance of VAS solutions is going to be critical to the success of the service providers in addressing the rural market. In fact, they are going to be the key differentiating factors between the service providers.

"Having led affordability in the Indian telecom sector, we find that the rural customer today has no less aspiration than his counterpoint in urban areas. Our studies have shown that applications that enhance productivity are greatly valued. For instance, crop updates/doctors on call etc. Their monthly spend is therefore representative of their needs-voice like any customer and VAS that help them derive more out of their mobile experience. We have seen that service quality, innovation and new products are the real growth drivers in mobile uptake. What we look at is the cost per minute and the revenue per minute and the margin we make. Our strategy is to give an affordable value-proposition for customers in rural areas that help them join the mainstream of mobile telephony," says the Bharti spokesperson.

What will Drive ARPU?
As of now, VAS is contributing around 9-10% of ARPU for an operator and this is likely to go up to 12-15% in the times to come, according to Gartner. "Data will play a major role in increasing ARPU. Applications like mobile banking and micro-finance are likely to be launched for the rural market. There are already many pilots going on in the country, which demonstrate high level of customization for the users. The data business has potential and operators will be pushing this aggressively for an increase in their ARPU and revenue from the rural segment," says Gupta.

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"A large section of our customers in rural areas use data services that drive ARPUs higher. We are also in the process of developing rural applications on the mobile platform, which would benefit our customers residing in such areas, at the same time enhancig our revenue potential," says the Reliance spokesperson. Though there is a lot of interest around 3G, analysts believe that 3G is not likely to help in the acquisition of rural subscribers. "We believe that in 3G the total cost of ownership is going to be around $200, which is way too high for a rural customer. It is definitely unlikely to emerge as an acquisition tool for the rural customer," he adds.

It remains to be seen who would finally rule the rural telecom market but the consumer is likely to get the best deal as service providers come up with strategies to have the maximum number of rural subscribers.

Gagandeep Kaur
gagandeepk@cybermedia.co.in