Tariff hikes may slow migration of feature phone users to smartphones: Experts

The steep tariff hikes in the telecom industry announced over the past two days are likely to increase the base of 4G feature phone users since they are the least impacted by the revised rates, and may slow down their migration to 5G smartphones, according to industry executives and market trackers.

The price increases may also lead to increased activity from smartphone brands in bundling free data with new purchases, to spur handset sales, they said.

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To drive 5G monetisation and increase average revenue per user (ARPU), the three private telcos — Reliance Jio, Bharti Airtel and Vodafone Idea — increased their tariffs by 10-25% for most users. The hikes are the sharpest in the entry-level plans for unlimited 5G: 46% higher for Jio and 71% more for Airtel users.

The migration from 250-million-strong feature phone user base to smartphones used to happen at 5 million handsets per month before the pandemic, but has since slowed to 3.0-3.5 million, with shipments declining every year. “With the tariff hikes, this may slow down even more to 3.1 million in 2024,” said Tarun Pathak, research director at Counterpoint Research.

The tariff hikes impact mainly smartphone users, with 2G and 4G feature phone users largely insulated or facing the least amount of increase. However, those migrating to 4G smartphones, either through a refurbished device or a premium smartphone purchased on financing, may face increasing financial stress due to costlier prepaid plans now and ongoing monthly instalments for the devices, said Sumit Singh, product head of Lava International, India’s second largest feature phone brand.

“The average age of a feature phone user has increased to 40 years now, from 30-35 years a few years back, with 80% feature phone users unwilling to migrate to a smartphone. The remaining 20% users are aspirational and want to switch to a smartphone, but will now find it even more unaffordable,” Singh added.

With a sharp increase in prepaid tariffs for smartphone usage, users will likely now shift faster to 4G feature phones (where Jio has 100-120 million active subscribers), given the bouquet of entertainment and other content that come packaged with 4G feature phones like the Jio Bharat phones, said Arijeet Talapatra, chief executive of handset maker Transsion.

Transsion operates the Itel, Infinix, and Tecno mobile phone brands. Itel is the largest feature phone brand by volume in India.

5G users, however, may not reduce data usage as nearly a decade of cheap data rates have made data consumption inelastic, they said.

Reliance Jio increased prepaid tariffs in the smartphone segment in a range of 12-25%, while Airtel announced a rate hike of 11-21%. Vodafone Idea increased its rates by 10-23%.

The rate increase may also spur smartphone brands to go in for more data bundling deals with new purchases to push handset sales, said Navkendar Singh, associate vice president at tech research firm IDC.

“Brands like Xiaomi and Realme, who are aggressively launching affordable 5G smartphones, may look to ink deals with telcos to bundle free data and other benefits,” Singh said. Brands like Poco and Motorola that are seeing an upsurge in demand may also consider enticing users with free data plans, he added.

The rate hikes will not deter data guzzling 5G users from continuing to consuming content, experts said.

“The operators have worked hard to make adoption levels of fast data very high, and in absolute terms, the incremental amount is not too significant in some of the plans, so users will not be deterred from paying more to sustain their lifestyle,” said Talapatra.

“Historically we have seen some SIM consolidation and negative elasticity impact post tariff hikes. While anticipating a similar negative impact this time as well, we think the magnitude of the impact may be lower this time around,” Bank of America Securities said in a research note.

This is because the larger part of SIM consolidation has already happened, and data is getting sticky such that consumers may not downgrade as much, BofA added.