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October 21, 2009

"Real ARPUs are 25% higher"

In an article for Business Standard, Unitech Wireless's Chairman Sanjay Chandra says that despite the profitability issues in the short-term, the industry's size will double in five years.
ARPU numbers as reported by players currently are understated. The historical subscriber-linked spectrum allocation methodology used by the regulator in India incentivises operators to take advantage of flexibility in reporting churn and hence overstate the number of subscribers. The real subscriber number in India is estimated to be 20-30 per cent lower than that reported. This implies that the real ARPU is 25-35 per cent higher than that reported. At a 25 per cent higher ARPU, the per subscriber and per tower economics suddenly seem much more viable.

Two, the total size of industry in terms of revenue is expected to more than double from the current $22-25 billion to over $50 billion in five years. In addition, the cost of new operations is much lower now than that of existing operations because:
1. a matured industry offers a much more aggressively outsourced model for passive infrastructure, IT, GSM equipment etc;
2. further cost efficiencies are being tapped (through active network sharing, for example). Hence, the annual revenue threshold for running a profitable venture has come down significantly. Even a 5-8 per cent market share of the $50 billion industry can easily support a profitable pan-India operation with current price trends.

Finally, pricing and subsequently margin pressure in an industry that has 12-plus operators only means that consolidation is imminent. In addition, the economics of scale for spectrum usage at the 4.4 MHz level that new operators have been initially allotted are tremendous. Doubling spectrum from here much more than doubles the subscriber carrying capacity. Therefore, spectrum consolidation will change value economics substantially. As a result, consolidation will lead to emergence of viable and much more value-creating operations.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at