Pakistans cellular industry has been showing signs of saturation throughout the last two years and recent numbers released by PTA confirm the same. Its penetration has nearly reached its medium-term limits as well, considering that out going fiscal year witnessed a meager growth of 1.3 percent in cellular subscription compared with average annualised growth of 90 percent in the preceding three years.
The countrys teledensity, nearly 62 percent at the end of FY2009, seems to have stretched its limits too, given that majority of the untapped population is either too young to have cell phones or living below poverty levels. This implies that once the ongoing price competition on voice dies in upcoming years, growth can only be extracted from value added services. The race would then be on data revenues, mobile-banking and advertisement on SMSs amidst other ancillary services.
The trends have been changing elsewhere in the region as well. For example in India, which has teledensity of just 37 percent, 30 percent of total cellular subscribers are using internet services - allowing telecom firms to earn Average Revenue Per Unit (ARPU) of $4.3 despite increased level of price competition.
In contrast, ARPU in Pakistan has declined to $2.6 from $4 a couple of years back - particularly after the last entrant China Mobile, with its typical Sino strategy, started playing on volumes and squeezed much of whatever was left in premium pricing, as most new subscribers in the last two years belonged to price-elastic low-middle class segment.
Hence, value addition is not option but a necessity, if firms have to justify their huge investments. Even a cursory look shows that for late entrants, China Mobile for the sake of example, it would take 32 years before its investment in Pakistan starts paying back. And this is assuming if China Mobile increases its market share three times to 20 percent at current level of average industry revenues, with 20 percent cash flow (EBITDA) margins as enjoyed by Mobilink in 2008.
So would any sane investor pump $2.5 billion with a payback period of three decades in an ideal case scenario? The obvious answer is no - leaving no way forward but value addition. Industry leader, Mobilink has already started venturing into m-commerce and its not far before others follow - enabling mobile banking to permeate in both urban areas and rural areas.
Payment of utility bills, banking transactions, e-shopping and many others would all be done through your cellular phones and billed by service providers, who would charge their fees as intermediaries. And who knows, very soon, all you will have to do get your favourite pizza at your doorstep, is just send an SMS. After all convenience is virtue, isnt it?
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Pay back period calculation for China Mobile
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Assumed Actual
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ARPU (Rs) 206 122
Subscribers (mn) 19 6
Mkt share (%) 0.20 0.07
Revenue (Rs mn) 46,733 9,381
EBITDA at 20% margin (Rs mn) 9,347 1,876
Investment - Acquiring cost ($ mn) 460 460
Committed Investment ($ mn) 2,000
Total Investment @ Rs 80/$ (Rs mn) 196,800
Pay back before taxes (years) 21
Pay Back after taxes (years) 32
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Source: BR Research & PTA
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