The industry’s reservations about the low tariff model practiced by Indian operators have been increasing of late, mainly due to doubts about its long-term sustainability. While offering services at rock-bottom prices did help operators steer through a market comprising over half a dozen players, the model is now becoming increasingly unsustainable.

Huge debt burdens and increasing costs are making it extremely difficult for operators to survive on wafer-thin margins. This has resulted in massive profit declines from which the industry is yet to make a full recovery. Moreover, with significant policy and regulatory corrections over the past two years, the sector is heading towards maturity and stabilisation. The cancellation of licences in 2012 resulted in pricing power returning to some incumbents, following which there were multiple rounds of tariff hikes in the voice segment.

Data tariffs followed a different path. During the better part of 2014, operators hiked mobile internet tariffs to encourage service adoption, a move that worked out well as they registered higher revenues. At the same time, it set the stage for a much-awaited tariff rationalisation in the industry.

Together, tariff movements across the voice and data segments resulted in a positive impact on the ARPU of operators. For instance, Bharti Airtel’s overall ARPU in the past two years grew from Rs 177 during the quarter ended September 2012 to Rs 192 in the corresponding quarter in 2013. In the quarter ended September 2014, it was Rs 198. Similarly, the ARPU for Idea Cellular increased from Rs 164 to Rs 176 between September 30, 2013 and September 30, 2014.

During the year, operators continued to revise rentals in order to increase their voice average realisation per minute (ARPM) and improve profitability. Most of the revisions, however, were in the form of cutbacks on discounted offers and freebies, rather than direct slashes in headline tariffs. Operators reduced the benefits on promotional pack recharges, such as those related to validity and free talktime. In the most recent instance, Airtel announced an increase of about 12 per cent in its monthly post-paid charges in select plans in Delhi and the NCR, effective December 2014.

The data segment also witnessed a hike in tariffs, which is a less frequent phenomenon in India. For most of 2013, operators continued slashing 3G tariffs to bring them at par with 2G tariffs and enhance 3G uptake. This trend was reversed at the end of the year, when some operators reduced free data usage at the rate by 40-60 per cent in their most popular packs. Throughout 2014, several operators hiked their 2G rates to make them comparable to prevailing 3G rates. The July-September quarter in particular reported a sharp increase in mobile internet rates. Vodafone changed its base 2G tariff pack (1 GB) from Rs 155 to Rs 175 in a phased manner across circles. Airtel and Idea Cellular also increased their rates for 2G data plans. The rack rates, charged without any offer or scheme, were increased by up to 100 per cent, from Re 0.02 per 10 kb of data usage to Re 0.04 per 10 kb. Recently, Aircel also hiked its base data tariff in the Mumbai circle from Re 0.10 per 10 kb to Re 0.15 per 10 kb.

Challenges persist

While 2014 witnessed a certain level of rationalisation in tariffs, there continue to be several challenges that prevent operators from hiking prices. Despite having one of the highest ARPMs in the industry, operators like Vodafone have not increased their tariffs substantially because of the reluctance of several smaller players to hike rates accordingly. This is because it is probably the only factor that differentiates them from the incumbents. Hyper-competition is the biggest challenge facing the industry today, with the merger and acquisition policy guidelines that were released in early 2014 failing to bring about any form of consolidation in the sector.

The Telecom Regulatory Authority of India (TRAI) is also insistent that consumer interest be central to all such price hikes. TRAI has stated that it does not expect headline tariffs to change much in the near future but if they do, the regulator reserves the right to revisit the tariff forbearance policy.

Future outlook

Low tariffs have been the single largest growth propellant for the wireless industry in India for several years. However, as the market heads towards course correction, a maturity can be seen in the tariff regime as well. The 2014 trends clearly point towards the low-tariff regime slowly being pushed out of the sector.

Operators have already made huge payments for spectrum acquisitions and an equally big outgo awaits them in 2015 when spectrum in various bands will be put on sale. As a result, marginal tariff increases are crucial for sustaining profitability. Stabilising voice revenues have reduced the possibility of a fierce and competitive war in this segment, and tariffs are thus not expected to go down in the near future. In addition, with mobile broadband uptake already on the rise, data tariffs should also continue to follow an upward trajectory in 2015.