Past trends show that the prepaid versus post-paid subscriber ratio is strongly inclined towards the former. In fact, the prepaid segment has been the growth driver for the mobile sector over the years. However, the downside to the prepaid growth story is its higher churn rates and sharper decline in its ARPUs compared to the post-paid segment. Industry analysts take a closer look at this trend and give their views on the key reasons for the low uptake of post-paid services and the possible steps to achieve a more even balance...
What is your view on the high number of prepaid subscribers in India compared to post-paid?
Kunal Bajaj: If we look at the overall market today, prepaid users already account for almost 95 per cent of the total connections. Indian operators also prefer prepaid service because it limits their bad debt risk and they get paid upfront before usage, thereby facilitating working capital. Prepaid service is more beneficial in a high-growth market as it allows operators to focus on customer service and customer acquisition, rather than having to worry about bad debt and enforcing contracts.
Initially, it was easier to get a prepaid plan as opposed to a post-paid plan because of the verification process involved with the latter. Over the years, prepaid service has become more attractive because it allows users to pick the best plan with a very low entry fee and get immediate activation.Also, users can shift to another service provider by simply buying a prepaid SIM card from the operator.
Nitin Gupta: Prepaid subscribers account for about 95 per cent of the Indian mobile subscriber base. Right from the early days, the share of prepaid subscribers has been high. The situation here is similar to that prevailing in other developing countries. In a priceconscious market like India, opting for a prepaid connection allows subscribers to keep their monthly telecom budget in check. Also, with micro prepaid plans, subscribers are in a position to recharge their connections for as little as Rs 10. As the subscriber is not tied down by a monthly rental, he can continue to receive calls without making calls himself. However, it is possible that a small proportion of prepaid users will, over time, shift to a post-paid plan.
Romal Shetty: In Southeast Asia, India and most of Africa, the concentration of prepaid users is higher than in the Middle East and other developed markets. But most of the global subscriber additions are now taking place on the prepaid side. Initially, prepaid plans in India were offered at a significantly higher price, 30-40 per cent more than post-paid plans. Today, there is hardly any difference between the two. But if you look at the overall package, post-paid is a costlier option with the monthly and other charges involved. Moreover, India is a budget market or a high volume, low-tariff market. People typically prefer the prepaid option because it doesn't include monthly charges unlike a post-paid plan. Prepaid plans also help users to control usage, thereby restricting the outflow of funds.
From an operator perspective, postpaid ARPUs are much higher. But prepaid is a low-risk option because the operator can collect money upfront. Moreover, unlike for prepaid connections, the postpaid segment requires services such as customer care, billing and courier. Prepaid connections help low-ARPU customers to control their budget by offering low coupon sizes (Rs 10 or Rs 25 recharge vouchers). The propensity to build up bad debts is also low for prepaid plans. All these factors encourage Indian operators to take the prepaid route.
Dr Mahesh Uppal: The high number of prepaid subscribers reflects the fact that the majority of Indian users are budget conscious and are trying to control their spending on calls. Prepaid connections allow users to control their expenditure. Prepaid connections will continue to dominate the market in the future unless operators come up with more attractive and affordable post-paid plans, and a transparent billing system.
What are the benefits of post-paid services over prepaid for operators?
Kunal Bajaj: Post-paid services have increased stickiness. If you look at some of the churn numbers, Airtel registered post-paid and prepaid churns of 1.9 per and 6.5 per cent respectively as of December 2009. Idea's post-paid and prepaid churn rates for the same period were 3.1 per cent and 9.4 per cent respectively. So, there is a clear differentiation between post-paid and prepaid plans in terms of stickiness. Another advantage of post-paid services is that they typically come with a fixed monthly rental that gives a guaranteed ARPU every month.
Nitin Gupta: Though post-paid connections have advantages like higher ARPUs and low churn rates, operators prefer prepaid plans because they do not have any billing worries. For prepaid plans, recharge coupon distributors pay operators well before the customer actually uses the service. Also, the cost of maintaining and running a billing operation is not involved, unlike for post-paid plans. Operators have managed to cut costs further by providing over-theair recharges. This has cut down on the expenditure incurred on printing and distributing recharge cards.
While the ARPU from prepaid subscribers is low, it helps the service provider to create a demand for telecom services among low-income users, which, in turn, will widen the country's telecom base.
Romal Shetty: A post-paid connection allows customers to analyse their bills and select a better tariff plan. The post-paid segment also allows operators to provide complex offerings like value-added services because they can bill subscribers at a later date, unlike in prepaid services. Telecom companies typically face a 2-3 per cent leakage in revenue across their revenue cycle. For a post-paid connection, if an operator doesn't bill the user on a particular date, it can still manage the billing before the billing cycle or, at least, before the next billing cycle unlike for a prepaid connection. And typically, the ARPU for a post-paid customer is much higher.
Dr Mahesh Uppal: Operators will not have any major preference for post-paid service because prepaid plans ensure they are paid in advance for their services, which is a big advantage, especially in a business like telecom where the operator does not want to risk having users who may default on payment after using the service. So from an operators' perspective, prepaid service is the preferred option.
However, prepaid connections, in some cases, can be restrictive. If I have a month to pay, I can try out an entertainment-related service. But, if it involves an upfront payment, there remains a disincentive to try out new services.
Where does India stand compared to markets like the US, Europe and Southeast Asia in terms of the post-paid to prepaid user ratio?
Kunal Bajaj: Compared to more mature markets like North America, Japan, Australia, Singapore and Western Europe, India has a very high number of prepaid users. In the US, only 18 per cent of subscribers use prepaid services. In Canada, Japan, Australia and Singapore, the share is 20 per cent, 1 per cent, 45 per cent and 50 per cent respectively. Similarly, emerging markets like Indonesia, Pakistan, the Philippines, China and Africa have a substantially higher number of prepaid users than India.
A higher prepaid percentage promotes growth because of the lower cost of entry and because it allows users to easily pick the best plan, thereby promoting competition. In the Indian post-paid market, the competition may not be as severe. But at the same time, the downside for the operators is that since there is lower stickiness and no guaranteed ARPU levels, they have to constantly compete with other operators to acquire more customers and manage their churn rates more aggressively.
Nitin Gupta: In mature telecom markets (like the US and Europe), which are also high-income regions, the share of post-paid (contract) subscribers is much higher than in developing markets like India. Prepaid subscribers account for 60-65 per cent of the total subscriber base in the US and Europe. In Southeast Asia, the figure is over 80 per cent. However, following the global economic slowdown in 2008, the demand for prepaid services has risen in the Western developed markets as well.
Romal Shetty: The US typically has a higher percentage of post-paid users. But now, most subscriber additions are taking the prepaid route. In Southeast Asia, Africa and India, prepaid users account for 70 per cent, 95-97 per cent and 90-95 per cent of the market respectively. In the Middle East, though the percentage of post-paid users is high, prepaid plans also have substantial usage due to the vast population of labourers, migrants and workers.
Dr Mahesh Uppal: We have a much higher level of prepaid users than most other markets. Since the majority of the subscribers belong to the low-income budget-conscious bracket, most developing countries have a bigger prepaid subscriber base.
What steps can be taken to increase the uptake of post-paid services in India?
Kunal Bajaj: More emphasis should be placed on the enterprise, and small and medium enterprise segments, as these tend to attract more post-paid customers. If telecom operators can reduce the committed charges for post-paid connections (for example zero rental and zero start-up costs), post-paid services will become more attractive. But at the same time, operators do not want very low ARPU post-paid customers because they also have to bear billing and collection costs. So they have to weigh the decision of opting for post-paid services in terms of the cost of serving the customer versus driving greater post-paid penetration.
In addition, a lot of users are worried that if they subscribe to a post-paid plan, they will not be able to know how much money they are spending and, thus, will cross their spending limit. So, fixing a user-definable cap or a limit on the user's expenditure may also facilitate the uptake of post-paid plans.
Nitin Gupta: It is unlikely that there will be a significant increase in the post-paid subscriber base in India.
Romal Shetty: It can be achieved through segmentedtargeting by identifying specific segments like corporate, semi-corporate and medium corporate, as they are more likely to use post-paid services. Similarly, professionals like doctors and engineers should also be targeted. In addition, innovative and complex product offerings would facilitate the uptake of post-paid plans. It is easier to churn from prepaid services than from post-paid connections. Therefore, if an operator's loyalty factor and quality of service are high, users may move to post-paid services.
Dr Mahesh Uppal: It is important to remove the uncertainty associated with post-paid plans. Also, the provision of discounted post-paid services, which offer a huge commercial advantage, may force prepaid users to opt for post-paid connections. Otherwise, both subscribers and operators in developing countries will prefer prepaid service because it enables service providers to collect the payment upfront, thus giving them an incentive for investment and removing huge defaults.
