November 29, 2022

India’s top telcos are struggling to hold on to mainly their pre-paid subscribers, underlined by their rising monthly churn that has triggered a sharp rise in customer acquisition costs, say industry executives and analysts.

Customer churn, they said, has almost doubled in the last two years, which has resulted in the likes of Vodafone Idea (Vi), Bharti Airtel and Reliance Jio seeing sharp jumps in SG&A (selling, general & administrative) expenses in the September quarter as they strive to hold on to customers and poach new ones from rivals. Pre-paid users make up well over 90% of Airtel and Vodafone Idea’s user base, and most of Jio’s subscriber base.

Airtel, Vi and Jio’s monthly customer churn—or percentage of users leaving the network—has risen from 2.2%, 2% and 0.46% in the June quarter, FY21, to 3.3%, 4.3% and 2% respectively in the September quarter, FY23, in the aftermath of tariff hikes taken a year back.

Consequently, Airtel and Vi have seen over 50% on-year jumps in their SG&A spends while Jio’s has risen by 27.5% in the fiscal second quarter. Analysts, in fact, expect customer churn and competitive intensity to stay elevated at least for a year as both Airtel and Jio are likely to speed up pan-India 5G rollouts and target market share gains at loss-making Vi’s expense.
Jio, Airtel and Vi didn’t respond to ET’s queries.

“Elevated churn results in wasteful expenditure and the industry has been spending on consumers who are not sticky and are opportunistic, which is now showing up in the form of a spike in SG&A cost,” Kunal Vora, head of India equity research, BNP Paribas, told ET.

SG&A expenses, typically, are business costs not directly attributable to making a product or delivering a service. It includes customer acquisition costs that could be in the form of rebates, dealer/channel commissions to even port-out incentives that operators dole out to gain new users or poach from rivals in a stagnant market.

Rising customer churn, in fact, has resulted in a paltry 2 million net subscriber additions in the fiscal second quarter even though the telecom industry sold 90 million new mobile connections during the period.

“The modest net subscriber additions indicate that as many as 88 million mobile users deactivated their old SIMs and bought new prepaid connections that possibly worked out almost 40-50% cheaper as telcos, typically, offer bargain deals with larger dollops of bundled data, free minutes and text messages to grab new customers,” said a senior executive of a Big 3 telco.

At Airtel’s fiscal second quarter earnings call earlier this month, managing director Gopal Vittal had said the elevated churn was a result of poor quality customer acquisition and the existence of arbitrage in pricing, wherein a new SIM is available at a lower price—given the channel commissions—than what one would pay for an existing plan. “That leads to arbitrage…it’s something that is a menace in this industry that has been there for many years and has gotten worse in the last few months.”

Small wonder that experts say telcos are literally offering an arm and a leg to hold on to their core user base and poach new customers from rivals as real subscriber growth has slowed down sharply.

Data collated by BNP Paribas shows Airtel’s subscriber market share crept up to 33% in the September quarter, FY23, from 32% a year ago. Jio’s subscriber market share was unchanged at 43% during the period while Vi’s slipped a percentage point to 24%.

“Under current stagnant market conditions, further challenged by elevated churn, all private carriers are spending far bigger sums towards SG&A costs, which only underlines that they could end up splurging much more on customer acquisition and retention to generate an extra percentage of revenue market share (RMS) in the coming months,” Rohan Dhamija, head (India & Middle East) at Analysys Mason, said.

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