For telecom companies, the next cash cow is post-paid subscription
By: Farooq Tirmizi
KARACHI: For Pakistan’s mobile telecommunications companies, the next source of revenue increases is one that has been with them all along: post-paid subscribers. All they need now is a strategy to make this market segment work for them.
The marketing and business analysis departments of the mobile telecommunications companies in Pakistan are used to thinking of the post-paid consumer segment as a niche market and they often assume that this market will always be a very small one. They are wrong – dead wrong – and their mistake is going to cost their companies potentially billions of rupees in revenues every year.
Most telecom companies do not break out their subscription base by pre-paid and post-paid customers. Yet we feel that Telenor Pakistan – the only company that does do so – offers a fair comparison for the industry as a whole. For Telenor, its overall subscription base has increased by an average of 13.4% per year between 2008 and 2012. Yet its post-paid subscriber base increased by a much higher average of 20.4% per year during that same period. Revenues from the post-paid segment increased at an even higher rate of 25.3% per year. And that number is after taking into account the depreciation in the value of the rupee against the Norwegian krone.
It is entirely likely that is the other mobile telecommunications companies break out their revenue numbers like this, they will see a similar divergence. The number of post-paid subscribers is growing at a much higher rate than the overall subscriber base and revenues from that segment are growing faster still.
The justification that telecom companies offer for their lack of attention for the post-paid subscriber base is that it still constitutes only 3% of the overall market. That 3%, however, is by the number of subscribers. By revenues, that number is closer to 10%. And this number is only going to keep growing.
What the telecoms giants appear to be struggling with is the fact that as Pakistan’s teledensity for mobile phones reaches 75%, it has started to plateau. They can no longer rely on continuing to add subscribers as a way to increase revenues. The only way to do that now is to increase average revenues per user (ARPU). And the best way to do that is to get more people into the more lucrative post-paid segment.
One of the most overlooked facts about the telecom boom in Pakistan is how it has come of age. A large number of the subscribers who first signed on in 2006 and 2007 were high school and college students. Many of those students are now working professionals who are using their pre-paid connections out of habit, even though they can now afford post-paid packages.
The industry needs to be shaken out of its complacency, and one great way to do that would be for a private equity company – a player like Abraaj Capital, for example – to buy out one of the smaller players and use sophisticated data-mining techniques to identify pre-paid customers who are likely to be ready to be moved to post-paid packages. The boost in total revenues from the acquired company may not be high initially, but they will grow over time.
More importantly from the perspective of the buyer, the increase in operating profits is likely to be very high, given the high level of fixed costs that these companies tend to have. That is likely to increase the exit value of any investment in a Pakistani telecommunications company.
It is now public knowledge that Warid Telecom is up for sale. While it may be the smallest Pakistani player, it has a very strong presence in Punjab, the part of the country that has seen the fastest increase in disposable incomes, meaning higher potential for conversion from pre-paid to post-paid. And China Mobile Pakistan is likely to be a willing buyer of a stronger Warid once a private equity player is done improving its business.
Whether or not Abraaj, or any other private equity player, is open to buying such a company is a tantalisingly open question. If that were to happen, though, it would shake up the entire industry in a very good way.