3G tariffs in India have declined significantly since these services were launched in 2010. In fact, there have been two instances of a tariff war in this segment in the past two years, which have resulted in 3G offerings being priced at par with 2G data services. The adverse impact of the tariff cuts on operators’ profit and loss accounts has been balanced by a growth in data uptake in the smartphone user segment. Driven by the decline in smartphone prices and the growth in data volumes, the trend of 3G tariff reduction is expected to continue. However, the rate of reduction is likely to be higher in underserved markets such as Tier II and Tier III cities as compared to metro and Tier I cities, which will be used by operators to improve their bottom line.

Slow 3G uptake drives tariff reduction

Although the uptake of 3G services was very low initially due to the lack of awareness, limited proliferation of smartphones and poor 3G network coverage, operators did not reduce tariffs as they had spent a huge amount of capital on acquiring spectrum in the auctions. Moreover, the incumbent operators were marketing 3G services as a premium to existing low bandwidth 2G data services, which were available through GPRS/EDGE networks and had, therefore, refrained from reducing tariffs. Despite operators’ efforts to improve customer perception about 3G services, adoption continued to remain low in 2011 on account of high service prices and patchy coverage.

Nevertheless, operators continued to take steps to attract customers to adopt 3G services. They launched promotional offers such as higher 3G data usage limits and innovative small data plans. In the meantime, they also improved their 3G network coverage significantly and were now in a position to offer quality 3G services on a mass scale. Consequently, they decided to reduce their 3G tariffs to drive service adoption and usage on their networks.

In May 2012, 18 months after its service launch, Bharti Airtel slashed 3G tariffs by up to 70 per cent across all data plans. Consequently, data subscribers were required to pay Re 0.30 per 100 kb as compared to Re 1 per 100 kb previously.

Other operators such as Reliance Communications (RCOM), Idea Cellular, Mahanagar Nigam Telephone Limited (MTNL) and Vodafone India followed suit. While Idea Cellular reduced its 3G tariffs by 70 per cent, RCOM curtailed its tariffs by 61 per cent across its 13 operational markets and MTNL reduced its tariffs by up to 50 per cent in the Delhi circle. Vodafone India went a step ahead and introduced new packs, which offered data services at 80 per cent lower prices (Re 0.20 per 100 kb) for prepaid customers under the pay-as-you-go model.

The first round of tariff wars, in May 2012, resulted in a significant increase in 3G service adoption. As per Nokia’s MBiT index, the data traffic generated by 3G services grew by 54 per cent between July and December 2012, although it was concentrated mainly in the metro circles. Nevertheless, lower tariffs gave 2G data customers the impetus to shift to 3G services, even in Category A and B circles.

Bridging the gap between 2G data and 3G service tariffs

To encourage 2G data customers to shift to 3G services, RCOM reduced 3G tariffs by about 50 per cent across all data plans in its circles in June 2013, which resulted in the pricing of 3G services at par with 2G data services. As a result, an RCOM subscriber would have to pay Rs 123 per month for 1 GB of data usage on its 3G network and Rs 125 per month on its 2G network. This move augured well for the company as its 3G subscriber base grew by 18.18 per cent quarter on quarter to 9.1 million as of September 2013, as compared to 6.94 per cent quarter on quarter to 7.7 million as of June 2013. Similarly, data traffic on RCOM’s network increased by 21 per cent quarter on quarter to 37.57 billion MB for the quarter ended September 2013, as compared to 13.66 per cent to 31.05 billion MB for the quarter ended June 2013.

Similar moves were made by Vodafone and Aircel in October 2013 and by Idea Cellular in November 2013. Aircel launched a unified data plan that allows subscribers to use 2G and 3G services for the same tariff. Idea Cellular reduced 3G tariffs by up to 33 per cent, bringing them on par with 2G data prices, till April 2014.

However, in December 2013, RCOM increased its 3G data tariffs by about 26 per cent and reduced offers on data plans. This was done primarily because, although offering 3G services at 2G data prices had resulted in significant 3G uptake, the realisations from 3G data services had dropped. With the tariff hike, realisations are expected to improve as the adoption of 3G services continues to rise. This will also help RCOM earn more revenues to reduce its liabilities.

Future drivers for 3G tariff reduction

Going forward, several developments are likely to result in the reduction of 3G tariffs. These include:

•Increased competition among 3G service providers: Operators have been permitted to continue providing 3G services through intra-circle roaming agreements by the Telecom Disputes Settlement and Appellate Tribunal. Bharti Airtel, Idea Cellular and Vodafone India have already resumed these services in circles where they do not hold spectrum, thereby increasing the competition in the 3G market. For instance, subscribers in the Delhi circle can now opt for Airtel, Vodafone, Idea or RCOM. While Airtel, Vodafone and Idea may not trigger a tariff war, companies like RCOM, Tata Teleservices Limited (TTSL) and Aircel may reduce their tariffs to gain market share. Meanwhile, Idea acquired spectrum in the 900 MHz band in the Delhi circle in the February 2014 auction and plans to use this spectrum to launch 3G services. With the operator using its own 3G network, it may now opt for a reduction in current data prices.

•Launch of 4G will compel operators to reduce 3G tariffs: Bharti Airtel has already launched 4G services in four cities and brought down 4G tariffs to 3G levels in order to encourage adoption. As 4G services are still limited to a few cities, operators have not altered their 3G pricing yet. However, Reliance Jio Infocomm Limited (RJIL) is likely to launch 4G services soon and may opt for the low-tariff, high-volume business model, which was the growth driver for the voice segment in the last decade. If RJIL prices 4G services on par with the current 3G tariffs, operators may be required to reduce 3G tariffs further to maintain a price differentiation between the two mobile broadband services.

Moreover, many operators, especially those that do not hold broadband wireless access spectrum, are planning to launch 4G services using spectrum in the 1800 MHz band through long term evolution-frequency division duplex technology. This will increase competition in the mobile broadband market, which may compel operators without LTE spectrum to resort to a tariff reduction in order to retain subscribers.

Future outlook

Many operators are of the view that the price differentiation between 2G and 3G data services will be negligible going forward. They contend that this strategy will incentivise first-time smartphone users and 2G data users to adopt 3G services. The industry has already witnessed some progress in this regard with a decline in 3G tariffs and an increase in 2G data tariffs in the past one year. While 3G tariffs are expected to drop even further, the scope for reduction is limited and operators will have to hike 2G data tariffs to achieve convergence.

In all, while tariff reduction has been the primary driver for 3G service adoption in the past two years, dependence on the pricing strategy will have to be reduced to ensure sustainable growth in the 3G space. One strategy could be to adopt a progressive pricing model. While this move may restrict higher data usage, it will enable operators to realise better revenues from 3G services, which has increasingly become the focus area for several operators.

Even though the current 3G application mix is to a large extent, driven by the mEntertainment segment, other applications, including finance and enterprise-based solutions, are catching up. A prominent shift can be noted from the previous basic SMS and IVR-based services to app offerings and other internet-based services with data utilisation. Socio-economic development-based applications of 3G, such as health and education, are still in progress, as 3G penetration in the rural areas of the country is low.

Going forward, the next set of 3G applications will look at the large untapped potential in the areas of governance, health care and education in rural India. Governance will include monitoring the status of state initiatives, health care will be provided via live streaming and education will entail interactive, content-rich teaching practices, all made easily available to the growing rural mobile user base in the country.