For telecom companies, the next cash cow is post-paid subscription

A private equity buyout of a smaller player could shake up the industry in the right way.


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.

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.

Published in The Express Tribune, January 21st, 2013.

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COMMENTS (7)

Mehroz Siraj | 11 years ago | Reply

Post paids are actually cheaper, much cheaper. For example, if you look at Ufone, its post paid packages offer you enough free minutes of calling, up to 6800 on the u1999 plan. If you were to pay for that on a per minute basis, you could well end up paying in excess of Rs 10,000 a month, similarly ufone and other operators have packages that suit for international calling and other wide range of needs. Post paid also enables you to better utilize services and contribute to business and economy, than prepaid. In prepaid, profit margins for retailers are very low.

Regards Mehroz Siraj australianaffairs.wordpress.com

Mr.Multan | 11 years ago | Reply

All good comments above but keep in mind Abraaj is already mired in power business in Pakistan; no PE player wants to touch geared institutions like Warid. There are no chances of further leverage to gain efficiencies and there is very little progress on restructuring the existing debt. There are also no further prospects for operational improvements because of the catch 22 situation that it requires cost cutting in a business that needs to invest. Given the excessive salaries being paid to the management it is unlikely that they have the business interests at heart and therefore in the chaos the advisors and head office in Abu Dhabi can continue to boost titles and positions while merrily sailing in a sinking ship. Look at the people hired and the legal teams that handicapped Warid to SingTel the agreement was so in favor of the Singaporeans that people wonder if Adeel Bajwa even had the qualifications to address them. Look at what Tariq Malik did or even Muneer Farooqui is doing as a simple puppet in a show without true leaders along with other clowns like Tariq Gulzar. Unfortunately the institutions are a reflection of a wider problem. It is unlikely PE can address them.

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