The ARPU (Average monthly Revenue Per User) is an important metric used commonly to measure the performance of a telecom service provider. The ARPU has been falling for over the past decade now and is alike in developed as well as developing markets. An advancement in technology, intense competition leading to price wars and increased usage of data over voice have contributed to this fall. In order to understand if the falling ARPU is a matter of concern, one needs to look at the entire scenario from a different perspective.
For instance, in developing markets, where most telecom service users are prepaid subscribers, the ARPU does not take into account multiple connections per user and provides a distorted picture. Moreover, users with multiple prepaid connections or devices will scatter their traffic across, pushing the ARPU downwards.
What really matters here is not the traffic per connection, but the traffic per unique user and these trends are indicated in the below chart.
The above depiction of the falling ARPU in developing markets is valid to a certain extent, for mobile penetration. As the penetration increases further and reaches lower strata of the society. A fall in the ARPU is unavoidable because a mobile phone is primarily used to receive calls, this restricts the companies with limited options for revenue generation.
However, developed economies have a higher share of post-paid users, therefore, the decline in the ARPU is a matter of concern. The platforms like Skype, WhatsApp, Viber and, BBM are increasingly slicing the revenue share of the conventional voice call operators. This is because the data cost is low as compared to the voice calls (actual data prices per month are between one-quarter and two-thirds of the value of voice service). Thus, substitution of voice with data has resulted in a decline in the total ARPU. Further, data now accounts for more than 60% of the total revenue in mature markets. Furthermore, increasing use of Wi-Fi services has resulted in a negative ARPU.
Source: Quarterly Financials
Source: Quarterly Financials
In order to arrest this fall in the ARPU, service providers have resorted to a host of measures such as monetising content, data tiers (2G, 3G and now 4G), data sharing plans (ability to share data between several devices and users), and bundled fixed and mobile plans. While most of these measures have not provided desirous results, rapid migration towards 4G-LTE is providing some uplift in the ARPU. In South Korea, Japan and the United States ARPU of 4G customers has increased by ~40% due to the premium charge for 4G Data services. However, pricing wars have already commenced in many markets. The operators in France and Spain are offering 4G services devoid of a premium along with a host of other services.
It is interesting to note that despite the falling ARPU telecom operators have survived and even improved their EBITDA margins in few cases by adopting several cost reduction measures. This includes, lower network and operations cost with the help of technology coupled with controlled spending on selling and advertisement. This has resulted in improved EBITDA margins. The higher leasing revenues in mature markets have further compensated for the falling ARPU.
In conclusion, faster internet speed through 3G and 4G technology is expected to increase data consumption by the users across the globe, but pricing wars will take away the premium and ARPU is set to fall further albeit at a slower pace. Additionally, telecom operators will continue to remain efficient and advance technologically to remain profitable. Newer technologies will require further investment and therefore will give birth to novel products on one hand (having more of ‘heavy user’ post-paid customers) and broader usage (working on economies of scale) on the other. This will likely be the recipe for survival for telecom players.
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