With India rolling out 5G services, can telcos get the sizeable 350-400 million 2G customers to upgrade to 4G, or even better -- but very improbably -- straight to 5G?
Reliance Industries Ltd (RIL) Chairman Mukesh Ambani has publicly stated that he expects India to become 2G “mukht” (free) soon, but do remember he does not have any 2G customers because he does not run a legacy network and started out with 4G.
His competitors, Bharti Airtel and Vodafone Idea Ltd (VIL), as well as BSNL do, and they have to continue providing them services until they upgrade -- which means, these telcos will run three networks: 2G, 4G and now 5G.
So, how does one speed up the conversion of 2G customers to 4G?
In 2021, around 40 million 2G subscribers upgraded to 4G. At that pace, it might take nearly 9-10 years for all of them to upgrade to 4G. With customers changing their 2G mobile phones every three years, the addressable market of customers who could upgrade from 2G to 4G is around 125 million.
The question is, how many will actually shift, and how quickly?
There are serious challenges to achieving this.
Says a senior executive of a mobile device maker: “Some 60-70 million 2G phones are still sold every year in India – starting from a base price of Rs 800; and many are replacing one 2G device with another. To upgrade to a 4G smartphone with reasonable features would mean buying a phone at a base price of Rs 4,000-5,000. So the cost of upgrading for a subscriber is pretty steep. And the price of the phone with all the specs cannot go further down substantially.”
To put it in perspective, a study by World Wide Web Foundation, which benchmarked smartphones across 187 countries late last year, says that the average cost of a smartphone in south Asia (including India) is 40 per cent of a customer’s average monthly income. The global average is only 26 per cent and a mere 2 per cent in North America. And also tariffs on 4G, which start from around Rs 75 a month, are also far higher than the flexibility offered in 2G.
Reliance Jio tried to break the upfront cost barrier. It came with an offer for 2G customers to upgrade to 4G by forking out around Rs 1,100, which included the phone with which one had to buy a six-months prepaid service of Rs 99 a month. The phone would be locked into Reliance.
While Reliance Jio did not see a massive shift of 2G customers, in over three years it has been able to draw 110 million customers from 2G to 4G. But Jio’s rivals say the cost of subsidy is too high and it is an unviable option since it does not make money for them – and so, they have kept away.
So what are the options?
Telcos say there are only two. One is to push the government to provide subsidies on the cheaper 4G phones, maybe through the Universal Service Obligation Fund (USOF) to make the upfront cost of upgradation closer to 2G. The government has shown no interest in any such move.
Two, and the more likely option, say telcos, is for companies to offer easy finance on these phones, many of whose buyers are in smaller towns and rural India -- just like finance is available freely for mid-range and premium smartphones. That would make the monthly EMI more affordable.
So the scenario for the next few years is pretty clearly discernible: 4G is here to stay for a long while, even though 5G is being launched. That is because there is still a large 2G subscriber base, which will have to first upgrade to 4G, even though many 4G customers will make the same move towards 5G.
According to a India Mobile Broadband Index 2022 report released by Nokia, research agency Global Data’s projections show that there will be 329 million 5G customers in India by 2026. Assuming that the total number of subscribers remains at the current level, that will still be only 30 per cent of the mobile subscribers. The bulk will continue to be 2G or 4G customers.
In terms of revenue share, the report says that India would hit $9 billion from 5G in 2026 -- which is 37.7 per cent of Indian mobile operators’ service revenue. In contrast, the global shift of revenue will be far higher, at 64 per cent.
But can someone upset the entire applecart -- and use rock-bottom tariffs and subsidies to get even 2G customers to shift to 5G? That seems highly unlikely: 5G handsets have still not reached sub-Rs 10,000 category. So, the scope of subsidising them to win over 2G subscribers is out of the question.
Telcos like Reliance Jio are concentrating on wooing the large 4G customer base. Sources in the company say around 150-200 million customers change their handsets every year. They expect around 120 million to upgrade to 5G. That is the market to tap.
In the initial stages, at least, telcos do not see any premium in their tariffs from 4G, since that strategy will be needed to build the market.