Telecom Tariffs: Why Chasing ARPU Can Dilute the Network Effect

Telecom companies have one favourite metric right now: ARPU (Average Revenue Per User). Every tariff hike, every plan reshuffle, every “premiumisation” pitch eventually circles back to one thing: “ARPU is improving.”

But here’s the uncomfortable question: is maximising ARPU always the right strategy for a telecom business?

Because in India, the ARPU race has come with a hidden bill: 30–35 million customers dropped off. And in a network-effect business, losing users is not a small side effect. It can change the entire economics.

What ARPU Really Means

ARPU is simple: how much revenue a telecom company earns per active user in a given period.

Investors love ARPU because it signals:

• pricing power (the ability to charge more without losing too many users),
• profitability potential (higher revenue per user supports margins), and
• capacity to fund capex (telecom networks are expensive and constantly need upgrades).

Telecom is not a light business. Spectrum costs, towers, fiber backhaul, 4G/5G rollouts, maintenance, and customer support are ongoing costs. So yes, higher ARPU helps keep the machine running.

The Profit Argument (And Why It’s Not Wrong)

Let’s not romanticise it. Telecom companies are profit-driven businesses. They must cover capital costs and generate returns for shareholders. So an “ARPU-first” mindset can look perfectly logical.

But the problem starts when ARPU becomes the only metric that matters.

Because telecom doesn’t behave like a typical “sell more at higher price” business. It behaves like a network-effect business, where scale itself creates value.

Network Effect: The Real Telecom Moat

In simple terms, network effect means: a service becomes more valuable as more people use it.

Think of it like:

• UPI, where more users and merchants make it more useful,
• social networks, where participation is the product,
• ecommerce, where scale improves delivery speed, selection, and pricing.

Telecom works similarly. More users on a network means more calls, more messages, more data usage, more reach, and more relevance. Scale makes the ecosystem stronger.

This is also how telecom exploded in India. In the 1990s, mobile services were limited and high-end. Not because technology was “bad,” but because there weren’t enough people on the network for it to feel like a mass service.

Post-2000, telecom turned into a mass product as adoption surged. More people joined, usage increased, and networks became more valuable. That’s the network effect doing its job.

Where the ARPU Race Goes Wrong

Here’s the trade-off that’s quietly playing out: to raise ARPU, companies often price out low-paying users or stop designing plans that work for them.

The result is visible: 30–35 million users lost by major telecom players because servicing them was seen as low value. The logic is tempting: these users contribute little revenue, so losing them doesn’t hurt much.

But telecom isn’t just about revenue per user. It’s also about how many active users stay connected to the network.

There’s an old idea often attributed to Dhirubhai Ambani: telecom pricing should be as cheap and accessible as a postcard. The point wasn’t literal pricing. The point was this: in network-effect businesses, accessibility drives adoption, and adoption drives long-term value.

And network effects are fragile. They take years to build and months to lose.

History is full of examples where networks lost relevance when they misunderstood participation. Postal and telegram systems were once powerful because everyone used them. Over time, as people shifted to faster communication networks, their value collapsed. Not because they were “bad,” but because the network moved away.

So What Should Telecom Players Do?

Many investors believe there’s no alternative to an ARPU focus. Without rising ARPU, telecom companies struggle to cover costs and fund upgrades. That’s true.

But it’s also true that telecom’s long-term strength comes from the network effect. So the smarter approach is not “ARPU vs users.” It is a two-metric strategy:

• ARPU to ensure sustainable profitability,
• active user base to protect network strength and long-term relevance.

This means telecom companies need to keep quality services accessible to a large base at reasonable pricing, while still improving profitability through better plan design, smarter segmentation, and efficient costs.

Also, ARPU is volatile. A lot of the ARPU growth narrative since 2020 looks dramatic partly because ARPUs fell sharply after 2015. So “ARPU is up” can sometimes be a recovery story, not a pure growth story.

Why This Matters to Investors

If you’re tracking telecom companies, ARPU is important. But it’s not the whole picture.

A business that grows ARPU while shrinking its active user base can look stronger in the short term, but it risks weakening its network effect over time. And in telecom, network effect is not a nice-to-have. It’s the core engine.

The bigger long-term question is simple: can the company grow profitability without losing the “more the merrier” advantage?

Key Takeaways

• ARPU matters because telecom is capital-heavy and needs steady cash flows.
• But telecom is also a network-effect business, where scale drives long-term value.
• India’s telecom players have lost 30–35 million users in the ARPU race.
• Network effect takes years to build but can be lost quickly if affordability drops.
• The best strategy is a balance: profitability via ARPU + stability via active user base.

FAQs

1. What is ARPU in telecom?

ARPU stands for Average Revenue Per User. It shows how much revenue a telecom company earns per active user over a period.

2. What is network effect in telecom?

Network effect means a telecom network becomes more valuable as more people use it, because participation increases relevance, usage, and ecosystem strength.

3. Why do telecom companies raise tariffs?

To improve ARPU, fund network investments like 4G/5G upgrades, and protect profitability in a capital-heavy business.

4. Can higher ARPU hurt telecom growth?

It can if higher tariffs push out too many users, weakening the active user base and diluting the network effect over time.

Disclaimer: This article is for informational and educational purposes only and does not constitute investment advice.