India's 3G adoption has been underwhelming so far, with optimistic estimates stating that there are currently 39 million 3G subscribers. However, we believe that the actual number of active 3G subscribers is approximately 25 million.
The latest round of price competition has been sparked by Airtel’s decision to cut its 3G tariffs by up to 70%. Airtel was not the first operator to reduce its tariffs, with BSNL and Aircel previously reducing their prices. However, the scale of Airtel’s tariff cut has forced other operators to react, and Vodafone, Idea and Reliance Communications (RCom) have all made similar 3G price reductions.
Ovum believes that the price cuts will have a positive impact on the affordability and adoption of 3G services in India.
While they will also have a net positive effect on the top-line revenue growth of 3G operators in the short to medium term, their impact on margins will take time to determine. However, as 3G adoption increases, operators may face challenges from their limited spectrum holdings.
If additional 3G spectrum is not made available, there is a risk that the 3G network could encounter the same quality issues that have negatively affected 2G services in India.
3G suffers on perceptions of limited value
A year and a half after the launch of services, 3G adoption in India continues to be underwhelming. It is clear that subscribers have not been attracted by the 3G value proposition. A lot of this has to do with operators’ premium pricing of 3G services.
In our November 2010 report 3G in India: Operator Launch Strategies, we predicted that Indian operators would adopt a voice-centric strategy for 3G services and price data at a premium. This was due to the significant capacity constraints on 2G networks, and the need to “ration” the use of 3G.
Up until now, most operators have priced 3G with the “10 paisa per 10kb” tariff, which worked out to approximately 17 Rupees (€24 cents) per MB. When one considers that monthly ARPU is approximately 150 Rupees, it isn’t difficult to understand why 3G adoption has been slow. In an attempt to increase adoption, operators offered data packages and bundles, but the damage had already been done.
The slow adoption of 3G has been further exacerbated by poor user experience due to the lack of true nationwide coverage from any single operator, and the patchy coverage even within licensed circles.
New 3G plans include prepaid and “snacking” options
While Airtel was not the first operator to cut its 3G tariffs, it was the first to cut them on such a significant scale. Airtel’s new plans have reduced its postpaid tariffs by up to 40%, and its prepaid plans by up to 70%.
Under its new tariff structure, a 2GB plan that previously cost 650 Rupees per month now costs 450 Rupees. However, the new 3G tariffs are still more than double those of a similar EDGE service, which is available for approximately 200 Rupees per month. Ovum does not believe that these tariff cuts will be as damaging as the price wars that previously occurred in India as competitive intensity in the market has eased in recent years.
Airtel has also introduced “snacking” and postpaid add-on options as part of its revised 3G proposition. The operator now offers entry-level prepaid 3G data offers starting from 10 Rupees for 30 minutes of usage. These options extend to a 10GB data bundle for 1,500 Rupees that is valid for 30 days.
As well as its “snacking” options, Airtel offers “Smartbytes” add-on bundles that complement its existing monthly postpaid plans. Airtel’s Smartbytes options range from 80Rupees to 300 Rupees, and must be used up with existing monthly allowances. These types of options were necessary additions to make 3G more affordable for the average user, and to add flexibility for postpaid users that do not want to exceed their monthly allowances.
Airtel will be best positioned after this round of price cuts
Different operators have various motivations for making price cuts. Airtel’s decision to reduce its 3G tariffs has more to do with the launch of LTE and the positioning of its services than with the competition in the market. Airtel is positioning LTE as a premium service, and has indicated that it will look to migrate all of its high-end subscribers to the new technology.
This strategy has made rebalancing its 3G proposition a necessity. We believe that this will leave Airtel in the best position to provide a comprehensive offering across all pricing tiers and service levels. If its LTE strategy is successful, it will have a positive cascading effect that will rebalance traffic flows across all of its networks and boost its margins.
Airtel’s aggressive tariff reductions have forced Vodafone, Idea, and RCom to follow suit or risk losing their premium subscribers to Airtel. While BSNL and Aircel tested the waters with their limited cuts, they have also had to respond to Airtel’s move with significant reductions. The reduced 3G tariffs are far better suited to enticing users to upgrade to 3G, and we believe that Airtel’s move and the competitive responses that are sure to come will have a positive impact on 3G adoption in India over the next six months.
Shiv Putcha is a principal analyst in Ovum’s emerging markets team. For more information, visit www.ovum.com/