In Pakistan, the Telco industry finds itself at a crucial juncture, grappling with several challenges amid the ever-changing economic landscape. One of the most significant hurdles is the inevitable increase of Telco tariffs, driven by the escalating costs of fuel and electricity. To understand the magnitude of this issue, let’s explore the current situation in the market and how these rising energy tariffs are affecting the industry.
As of the present, fuel prices have surged by a staggering 106%, and electricity prices have risen by 105% compared to January of the previous year. Energy costs have always constituted a substantial portion of operational expenses for telecom companies. With the recent hikes in fuel and electricity tariffs, this contribution has only intensified, exerting additional pressure on the industry’s financial viability. This situation is compounded by the unavailability of reliable electricity, leading to widespread load shedding. Consequently, telecom companies rely heavily on fuel to power generators which serve as a primary raw material for their operations. The reliance on fuel to compensate for energy deficiencies further elevates operational costs, putting additional strain on the Telco sector.
One of the reasons for the low ARPUs in the Pakistan market is the high prevalence of non-recharging customers. These are those customers that are availing incoming-only services without spending anything at all. Think about the people who have an active phone connection but either just make missed calls or ask you to call them instead of calling themselves. Given the high Onnet (same network) minutes in all bundles, bundle active users have no qualms in calling back in response to missed calls from acquaintances anymore. According to some estimates, up to 25% of the monthly active base of operators is non-revenue generating and has grown significantly over the last 2 years. The increase in balance validities and perpetual incoming validity has created a lucrative opportunity to continue availing basic connectivity without the need to recharge. This is one of the factors keeping the ARPUs low despite increase in spending of the high-end data active base.
A comparison with the mobile telecommunications market of India shows how our neighbor has tackled this problem. Faced with escalating costs and a fall in profitability due to the price war triggered by Reliance Jio, all operators have finally worked towards taking away loopholes from their pricing structure. As a start, all top-ups/recharges have strict validities (like the Pakistani market used to have a few years ago). Most importantly, after the end of the recharge validity there is a one-month grace period after which incoming calls also get blocked, effectively ending all forms of connectivity. The aim is to make sure that all users pay for connectivity. The pricing tariffs can be different between the operators, but the common logic is that a user only gets connectivity as long as he/she is recharging. This strategy has been effective is raising ARPUs in India and bringing viability to the business models of telecom operators there. Conversely, in the Pakistani market there are no checks on recharge validity or incoming barring leading to a quarter of subscribers continuing to avail basic free connectivity. The purpose of this comparison is to show how broken the pricing model in the Pakistan telecommunications sector is and is contributing to the unprofitability of the sector.
While structural changes are needed over the longer term that reduce reliance on energy through effective network sharing and that fix the loopholes in the tariff structure, over the short-term price increases are the immediate need to offset some of the cost increase. As energy costs continue to soar, the burden of maintaining operations and offering quality services becomes unsustainable without adjustments to tariffs. While this increase in tariffs may be unwelcome news for customers, it is a necessary step for the industry to remain viable in the long run.
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