2015/01/15 Hard bundles are an effective way to preserve and increase mobile ARPU in emerging markets

Analysys Mason defines a 'hard bundle' as a fixed amount of data, voice and SMS for a fixed price. Operators in developed markets such as Europe and the USA have already established hard bundles as their core pricing proposition and most smartphone users already have a bundled tariff, while operators in emerging markets have started to move towards bundles. However, the motivation to implement hard bundles is different for developed and emerging market operators. In developed markets with high penetration of smartphones and data services (3G and 4G), hard bundles are used to mainly preserve ARPU, which is under threat from increasing usage of over-the-top (OTT) services. The focus of operators in emerging markets is to preserve ARPU among high-end users and increase ARPU among low-end users.

Emerging market operators need to counter declining legacy service revenue and boost ARPU from low-end users

Our analysis indicates that increasing penetration of smartphones and data services has an adverse impact on legacy service revenue. Typically, a decline in usage of legacy voice service occurs when smartphone penetration in the network reaches a critical mass of 30–40% of active connections (see Figure 1).

Figure 1: Impact on voice minutes (per quarter) of increasing smartphone penetration (as a percentage of active connections), select operators in Brazil, Malaysia and Thailand [Source: Analysys Mason, 2015]

Increased smartphone penetration leads to the adoption of data and OTT messaging services (such as WhatsApp), which in turns enables substitution of voice calls with messaging over IP – in effect the need to make voice calls declines. This emerging scenario leads to the risk of decline in overall legacy revenue, which may lead to decline in ARPU. In recent quarters, this trend has been observed in several emerging markets such as Malaysia and Thailand. However, it is likely that similar trend might also occur in other emerging markets.

For example, in India, smartphone penetration is currently about 15% of mobile users, but it is expected to reach 30% in the next 2–3 years. This, along with increasing penetration of data services and growing popularity of OTT messaging services (70 million WhatsApp users, 45–50 million Nimbuzz users, 35 million Hike users and 33 million Viber users as of November 2014) might lead to a similar situation in India. In the last few quarters, it has been observed that minutes of use (MoU) have already started to decline in leading metros service areas (such as Delhi and Mumbai). In these circles smartphone penetration has already exceeded 30%, indicating that operators need to start planning how to address this challenge.

In addition to OTT cannibalisation, operators in prepaid-dominated emerging markets also face the challenge of how to increase ARPU among low-end or low-usage subscribers to drive revenue and improve profitability.

Hard bundles are an effective solution to the challenge of preserving or increasing ARPU

To address these issues, emerging market operators have started to move towards hard bundles. Offering hard bundles targeted towards different customer segments facilitates service arbitrage (offering more services that a certain customer group actually uses), which helps to preserve or increase ARPU.

Most operators in emerging markets offer separate packs for voice, data and SMS, which enables end users to select packs according to their requirements – thus optimising their usage – leaving no or very limited room for service arbitrage. However, given the increasing pressure on operator financials, we expect that emerging market operators will also move toward hard bundles.

Designing hard bundles includes two critical steps, which we have identified based on our past experience of working with operators in emerging markets (see Figure 2).

Figure 2: Analysys Mason's framework for implementing hard bundles [Source: Analysys Mason, 2015]

• Customer segmentation is important for understanding revenue concentration and measuring profitability for each segment. This includes assessment of usage pattern (historical and current) of each customer segment. Further categorising segments into multiple user profiles (such as high voice and low data, and low voice and high data) based on the level of voice and data usage helps operators understand customer behaviour.
• Hard bundles are designed keeping in mind the historical and expected usage pattern of different customer profiles within each segment. Hard bundles are generally designed to provide more of the declining services (more voice minutes, more text messages) and current levels of services for which usage have been increasing.

However, the following three factors in predominantly prepaid and low-ARPU emerging markets complicate the implementation of hard bundles.

• Multiple top-up frequency among users with similar usage behaviour: The complexity of designing hard bundles increases when top-up frequency of users with similar usage behaviour (voice, SMS and data) varies significantly.
• High number of user profiles to address because of the size of the market: It is easy to design hard bundles when 10–15 user profiles cover most of the market (60–70%). However, in a market with a large number of user profiles (more than 20), designing hard bundles targeted towards each user profile increases in complexity.
• Working out the appropriate bundles for each user profile (bundle pricing and the relative size of voice, text and data limits within each bundle) and providing incentives for consumers to migrate from their established plan to a hard bundle is another complexity operators need to address.

The key to successful implementation of hard bundles lies in understanding the evolving usage pattern of different customer segments and designing bundles to ensure that customers perceive value in subscribing to the specific pack designed for a particular usage profile.

Source: Analysys Mason