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Indians love to talk and they are hooked on to their mobiles as the country's cellular operators add close to 8 mn new subscribers every month. Mobile users also like to send messages to their friends and relatives across the world but they have seen networks crashing during festival seasons, as mobile networks cannot afford to manage the heavy SMS traffic.

The addition in subscriber base has had a negative impact on the average revenue per user (ARPU) for operators because of one main reason: the moment an operator adds a new customer, the operator's ARPU falls as the new customer takes some time to add revenue to the operator's kitty.

The fall in ARPU is considered a fallout of the addition in subscriber base. This is bound to happen as operators are venturing into new territories. And the mobile operator relies heavily on value-added services. But, SMS usage has also been hit.

Despite a huge rise in subscriber base, the results for telecom operators are not satisfying. According to the latest findings of TRAI, SMS usage has now reached a record low. For GSM players, the fall in SMS usage has been 11%, while it is 15% for CDMA players for the quarter ended September 30, 2007.

The decreasing number of SMSes can be attributed mainly to the fall in voice tariff. The younger generation finds it more comfortable and affordable to call, instead of text messaging. Besides, regulatory controls and increasing competition among network providers are also supporting this trend.

According to Vijay Shekhar Sharma, MD, One97 Communications, "SMS pricing is still very high even though prices have decreased in the past, ensuring that a customer makes a call rather than send a message. This has led to a decline on average, but not in the absolute numbers. Even though overall messaging and call volumes will keep on increasing, riding on high subscriber growth, operators will have to focus more on VAS to sustain their ARPUs.

TRAI, in one of its reports, pointed out that higher charges tied with the constraint on the usage of free/discounted SMSes on festive occasions were resulting in reduced usage.

Kunal Bajaj, director India, BDA, says the decrease in SMS usage should not be a concern for the industry. The telecom industry is bound to experience this fall as operators are adding new subscribers in rural, semi-urban and urban areas.

Global SMS Market
However, the global SMS market is showing a rosy picture. The total number of mobile subscribers worldwide is set to cross the magic figure of 3 bn, and worldwide mobile penetration will cross 50% in 2008. The market size of the mobile value-added services (MVAS) industry is estimated at about $1.2 bn (Rs 4,950 crore).

The MVAS market is poised to grow by more than 65% and generate annual sales of more than $2 bn (Rs 8,200 crore) during the current fiscal. Worldwide mobile entertainment revenues are forecast to grow to $50 bn by 2007-08. According to Juniper Research, by 2011, this market is going to contribute 72% of mobile data revenues.

But, according to TRAI, while on one hand texters seem to be giving SMSes a thumb down, on the other, Acision, a messaging and charging company of choice for over 300 network operators and service providers worldwide, claims that global SMS traffic over the 2007-08 New Year period increased by 30% compared to the same period last year.

According to Boudewijn Pesch, MD, Acision, Asia Pacific: "The popularity of SMS can be attributed to its ease of use, speed of delivery, and convenience to communicate with multiple recipients. The surge in SMS traffic during the festive season is a clear indication that the service continues to be a favorite method of communication for millions of people in Asia Pacific, and will remain to be so in 2008.

Pesch also suggests that with SMS traffic expected to rise, and considering that text messaging represents a strategic part of mobile revenues, operators recognize the critical need for a robust and reliable SMS infrastructure and a high-quality end-to-end SMS solution, rather than a mix of separate point solutions.

ARPU Worries
In India, besides the falling SMS, decline in ARPU is a major source of concern for mobile operators. Besides falling SMSes, minutes of usage per subscriber have also fallen. For CDMA players, the average minutes of cellular usage per subscriber per month have come down to 413 minutes for the quarter ended September 30, 2007, compared to 462 minutes in the previous quarter.

The fall in minutes of usage and number of SMSes has resulted in the decreasing average revenue per user per month. The all India blended ARPU per month has declined by 7.4%, from Rs 297 in June 2007 to Rs 275 in September 2007. For operators, the steadily falling ARPU is offset by increased subscription.

Valid Reasons
Falling ARPU doesn't necessarily mean there is no growth. In fact, ARPU is falling because there is growth. ARPU provides an indication of the effectiveness with which revenue-generating potential is exploited. ARPU trends are related to market penetration and the developed cellular markets generally have steady ARPUs, but as market penetration rises, ARPUs start falling.

No one reason is behind the constantly falling ARPU. There are a number of factors responsible for this fall. Low ARPU has the probability of influencing both cash flow and feasibility. The falling ARPU is an indication that new subscribers are generating lower revenues for operators.

According to the telecom industry, since most new users are coming from semi-urban and rural India, their usage is less, thus dragging the overall minutes of cellular usage downward.

Today, major telecom operators are migrating to rural areas as well as low-end and middle-class users in metros and other cities. The launch of new services and the entry into overseas markets will help companies reduce their dependence on the domestic mobile market, which is likely to see further reduction in ARPU as operators reach out to rural areas.

According to Ramdev Sharma, CTO, Huawei, "Indian telecoms have entered an era where growth is led by the rural market segment, which is characterized by lower ARPU and increased price sensitivity. SMSing has shown a decline, attributed mainly to 'increased SMS tariff' and 'rural market-led growth'. Value-added services and application suiting local needs will be a panacea for falling ARPUs. As there is no killer applications, operators need to provision an enriched bouquet of value-added services to consumers."

Rural India has lower income as compared to urban India. Mobile phones are not very cost effective for these people. Landowners and businessmen may benefit from wireless connections, but mobile phones are of no use to landless farmers and laborers. However a part of the industry is not apprehensive about the negative growth.

According to BDA's Kunal Bajaj, telecom operators don't consider ARPU as the benchmark. They are looking at average realization per minute on the system. This means the falling ARPU cannot be a serious concern for them, provided they add customers and start utilizing the network.

The growth in India is also phenomenal. India has added 8 mn new mobile subscribers in the month of September, bringing the total number of Indian mobile subscribers to 248.6 mn as against 225 mn for the quarter ended June 30, 2007, thus registering an increase of 10.5 % during the quarter.

Rural areas are expected to drive the next wave of telecom growth in the country, and they have a potential of adding at least 150 mn new subscribers. The mobile industry players are eyeing rural India as their new area of opportunity.

Indian operators have a lot of plans for rural expansion. BSNL will install 7,871 additional towers by mid-2008 and about 11,000 towers by 2010 to roll out 3.4 crore new connections. BSNL also plans to invest Rs 550 crore in the next three years to cover 90% of rural India by 2010.

Bharti Airtel plans to double its tower strength to 80,000 in rural areas by 2008. Its next 50 mn subscribers will largely come from rural India as our plan is to reach 5,200 census towns and over five lakh villages, covering 96% of the Indian population.

Reliance Communications wants to invest Rs 16,000 crore for network expansion in 2008. The company will cover 23,000 towns, or every single Indian habitation with a population of over 1,000 persons. It also plans to extend its network coverage to 600,000 villages by March 2008.

Financial Review
Quarterly results of major telecom operators, however, are giving a different picture. Major operators are showing strong financial performance and subscriber growth. This is because operators are adding revenues from a number of subscribers, who are the cash cows for any operator.

The subscriber base of Idea Cellular has increased to 18.7 mn, adding 2.5 mn subscribers during the quarter ended September 30, 2007. The consolidated revenues-Rs 15,643 mn-grew by 54% and EBITDA-Rs 5128 mn-grew by 43%. The net profit for this quarter stood at Rs 2,203 mn.

Bharti Airtel has maintained a strong growth momentum. In the quarter ended September 30, 2007, the total revenue was Rs 6,337 crore, up 45%. The net profit was Rs 1,614 crore, a growth of 73% over the same period during the previous year.

Spice Communications' subscriber base reached 3.5 mn this quarter. The total revenue for this quarter (Rs 2,650 mn) grew by 42.2%.

International Scenario
In the GSM prepaid segment, there is not much difference in the ARPU for Indian and Chinese operators. But, ARPU for the postpaid segment is much higher in China. Similarly, ARPU for CDMA services is also higher in China as compared to India. But, the minutes of usage (MOU) of mobile phone services is much higher in India when compared to China's cellular phone services.

Interestingly, China Mobile was also unable to report any significant increase in its ARPU during the year ended June 2007. In the first eleven months of 2007, mobile users increased to 78.3 mn, a 27.1% increase from the same period in 2006. In November 2007, new mobile users rose to 7.9 mn, a 32% increase from November 2006.

According to Juniper Research, China's VAS market will total $15 bn in 2008, and it might reach $21 bn by 2010. Juniper Research stated that mobile SMS and ringtone downloads have been the main source of revenue for Chinese mobile operators.

In 2007, a number of value-added telecom services enterprises will experience negative growth. But this is not true for a country like the US. The US wireless data market continues its striking growth, reaching $5.8 bn in service revenues for the July-September quarter.

Subscribers in North America generated the highest monthly ARPU from mobile data services worldwide, raising to $8.90 in the second quarter, according to a new report from Informa Telecoms and Media. The total data revenues for North America amounted to $6.97 bn in the second quarter, a 66% y-o-y increase.

The total data revenues in Western Europe grew 35.6% y-o-y. Subscribers in Western Europe generate, on average, only $7 per month. Strong uptake of 'all-you-can-eat' data packages, a near three-fold increase in 3G subscriptions y-o-y and rapid growth in SMS traffic in North America were the main reasons for the 43% rise in data ARPU in the region in Q2 '07.

Bright Future
With falling ARPU for voice and data services, mobile communication providers are offering premium multimedia content in order to compensate for their reduced voice and data revenue per subscriber.

It is visible that all major operators are witnessing a fall in their ARPU. Falling ARPU results in reduced profitability, making it essential for operators to improve efficiency in costs to maintain profitability. Therefore, it is important that operators work on increasing their ARPU. But, bringing ARPU up is going to be a major challenge for operators.

The Indian telecom sector has been growing at an exciting pace, emerging as one of the key sectors responsible for India's economic growth. The industry has achieved significant distinctions during 2007-the lowest call rates, subscriber base growing at a great speed, and the cheapest mobile handsets.

Though ARPU-for both voice and data-is a major area of concern, telecom operators are adding new subscribers and RoI will not be a major issue for the industry.

Arpita Prem & Baburajan K
arpitap@cybermedia.co.in

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