Group A2 Eco

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Advertising

Assuming a linear demand function of mobile servicessubscribers, following eqn. shows dependence number ofsubscribers on advertisement expenses:

Qd = a + bPCI - cPTS+ dA

where

Qd: Demand of mobile phone subscriptions

PCI: Per Capita Income of subscribersPTS: Price for Telecom Services

A: Advertisement expenses


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Advertising Contd..

For the firms, advertising is a major decisionFirms can make profit maximizing advertising decisions

depending on the characteristics of demand curve. = PQ(P,A)-C(Q)-A

where: Total profitP: Price of the productQ(P,A): Quantity demanded depending on price and advertising expenses

A: Advertising expenses

C: Cost of production.


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Advertising Contd..

Given a price, more advertising results in more sales

But there is a particular profit maximizing advertisingexpenditure

Increase the advertising until the marginal revenue froman additional rupee of advertising, Mr

ads, just equals the

full marginal cost

Mrads

= 1+MC(Q/ A)


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Quantity

Price(Rs/Q) MC

AR

ACAC

MR

AR

MR

Q0 Q1

P1

P0

0

1


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Advertising Contd..

Rule of thumb for Advertising: To maximize theprofit, advertising to sales ratio should be equal to minusthe ratio of the advertising and Price elasticity of demand.

A/PQ = -(EA/E

P)


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Advertising Expenses and MarketShare: Major Indian Telecomplayers


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Bharti Airtels data

Year AdvertisementExpenses (in Cr. Rs)

Sales Revenue ( inCr. Rs.)

Advertising/Sales

Subscriber Base(in millions)

Marketshare (%)

2002 9.22 636.19 0.01449 1.35 0.206

2003 0.42 1431.51 0.00029 3.07 0.236

2004 0.11 4,831.99 0.00002 6.5 19.294

2005 325.6 7,903.03 0.04120 10.98 21.022

2006 400.73 11,231.47 0.03568 19.58 21.722

2007 402.47 17,851.60 0.02255 37.14 22.494

2008 566.47 25,703.51 0.02204 61.98 23.741


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Vodafone Essars data


Sales Revenue( in Cr. Rs.)

Advertising/Sales


Marketshare (%)

2002 0 388.97 0 1.27 19.418

2003 27.84 333.63 0.0834 2.16 16.615

2004 9.37 292.83 0.03199 5.15 15.286

2005 26.46 484.4 0.05462 7.8 14.933

2006 33.54 396.36 0.08462 15.36 17.040

2007 87.39 796.91 0.10966 26.44 16.013

2008 244.09 2181.42 0.11189 44.13 16.903


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Idea Cellulars data


Sales Revenue ( inCr. Rs.)

Advertising/Sales


Marketshare (%)

2002 671.22 0 0.0000 0.81 12.385

2003 851.48 0 0.0000 1.28 9.846

2004 73.18 1,165.52 0.0628 2.73 8.103

2005 78.59 1,632.04 0.0482 5.07 9.707

2006 0 2,007.07 0.0000 7.37 8.176

2007 200.62 4,366.40 0.0459 14.01 8.485

2008 322.43 6,719.99 0.0480 24 9.193


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R&D Expenditure in Indian Telecomindustry


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R & D in Telecom Industry

R&D: Pushers And Drivers

PUSHERS DRIVERS Addition of 6.5 mn mobile users

every month and enterprises increase

spent Under pressure to keep cost of

providing services to an absolute

minimum Upgrades service providers require

are almost continuous India to be a leader in developing

technologies suited for emergingmarkets

Surge in Indian economy Infrastructure boost Lowering costs of associated

hardware and mobile devices Improving speeds in broadband Demand for high quality content Global aspirations


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Recent R&D developments

3 G and Broadband Wireless Services - allow

telecom companies to offer additional value added

services such as high resolution video and multi media

services in addition to voice, fax and conventional data

services with high data rate transmission capabilities.

Mobile Number Portability - allows subscribers toretain their existing telephone number when they

switch from one access service provider to another

irrespective of mobile technology


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What drives R&D expenditure

Economic and technological forces influence a firm'sR&D investment decision

Firm can spread the cost of R&D over its total sales,the expected market size of a firm's product should

be positively correlated with the incentive to investin R&D

R&D is high-risk investment, external financing isexpensive, and therefore internal cash flow is

preferred to external borrowingLack of funding is often cited to explain low levels of

R&D expenditure.


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R&D expenditure in Total cost

Total Costs

TC = F + MC*Q + R + A

where

F: Fixed costs of productionMC: Marginal costs of production

Q: Output

R: Research and development expense

A: Advertising expense


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Effect of R&D Expenditure

Quantity

Price

Profit

= Total Revenue - Total Costs

= P(Q)*Q -TC


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Important Telecom Policies andAct: Impact on Indian Telecom

Industry


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Situation before 1994

Telecom Industry primarily driven bypublic sector

monopoly

Resulted in only a marginal growth

Tele-Density increased only 1.92% between 1948 and

1994


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National Telecom Policy 1994

Provision of world class services at reasonable prices,

Ensuring Indias emergence as major

manufacturing / export base of telecom equipment

Availability of basic telecom services to all villages


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TRAI Act 1997

The TRAI Act constituted an independent regulator

for the telecom industry

Its mandate was to ensure a fair and transparent

policy environment

To promote a level playing field and facilitates fair

competition


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National Telecom Policy 1999

Migration from fixed license fee to revenue share

regime

Achieve efficiency and transparency in spectrum

management.

Strengthen research and development efforts in the

country

Increased penetration in rural markets


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Major Changes in Telecom Policy

Introduction of Calling Party Pay (CPP) regime

Unified Access licensing regime

Introduction of revenue share regime

Ceiling of tariffsNew Recommendation: Mobile Number Portability

Introduction of Mobile Termination Charges


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Situation after 1994

Telecommunication development started at slowpace with NTP 1994.

Accelerated later with the formation of TRAI and

introduction of NTP 1999India became the second largest wireless network in

the world in 2008


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Pre TRAI


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Thank You

Documents

Group A2 Eco