A Microeconomic Analysis

of

The Indian Telecom Sector

(Group-2)Awadhesh Kumar Singh 14PPM05Dharmesh Makwana 14PPM06Harish Kumar 14PPM07Hirdesh Kumar14PPM08

1975 Dept. of Telecom separated from Indian Post & Telegraph Dept

1985 MTNL carved out of DOT for telecom services in Delhi and Mumbai

1994 National Telecom Policy 1994 announced.Affordable World Class Telecom Service,Opening of FDI

1995 1st mobile telephone service started on 15 Aug 1995

1997 Telecom Regulatory Authority of India was setup

The Telecom Sector Evolution

1999 National Telecom Policy 1999 announced

2000 BSNL carved out of DoT

2002 BSNL entered in to GSM cellular operation

2003 Unified Access (Basic & Cellular) Service License (USAL) introduced

2004 License fee reduced by 2% across the board for all the access licenses

2009-10 3G auction for public and private players

The Telecom Sector Evolution (cont..)

Total subscriber 933 m

World’s second largest mobile phone users 904 m

Overall teledensity 75 : urban 146 & rural 44

Total revenue of the sector approx 2.8 lac crores

Compound annual growth rate (CAGR) of 64 per cent per annum during 2002-12

13 major service providers in the market

Market share : 89.1% Private & 10.9% State PSU

Facts & Figures

Market Structure Three type of players :

State owned companies (BSNL and MTNL)

Private Indian owned companies (Reliance, Tata etc.)

Foreign invested companies (Vodafone, Bharti Tele-Ventures, MTS etc.)

Market share of Telecom (cont..)

Competitive Scenario

BSNL established – 2000

NLD, ILD services are opened for competition – 2000

CDMA technology launched – 2000

Internet Telephony Initiated – 2000

Reduction of license fees -2000

VSNL privatized – 2002

Competitive Scenario (cont..) Launch of mobile services by BSNL – 2000

UASL regime was introduced – 2003

Calling Party pays (CPP) was implemented – 2003

Broadband Policy was formulated – 2004

Intra Circle Merger guidelines established – 2004

FDI limits increased from 49% to 74% - 2005

Number Portability was started – 2010

Prior to opening of FDI Telecom was a state owned Monopoly

It was less efficient, high consumer tariffs, long waiting list

In 1995 first time competition started in telecom sector as mobile services were launched by private firms

From 1995 to 2002 market indicated signs of competition/cartelization. The call tariffs were very high during this period. Firms earned supernormal profits and Indian market lured all big international telecom players

Emergence of competition

In 2003 state owned PSU BSNL entered in mobile telecom market which was instrumental in breaking so called cartelization of mobile private firms

From 2003 onwards there is successive reduction of tariffs by all firms one after another

The decision of one firm was/is not only dependent upon itself but also on governed by decisions of competitors, thus proving nature of interaction while taking decisions

It shows the Indian telecom market is oligopolistic in nature

Emergence of competition (cont..)

Tariff in 2000 Tariff in 2014

Long Distance

Rs 35 per Min 50 paise per Min

Local Call Rs 16 per Min 50 paise per Min

ISD Rs 85 per Min Rs 5 per Min

Incoming Call

Rs 12 per Min Free

Competition Reduced Tariffs

Competition Reduced Tariffs

Reduced Tariff rates

Variety of Mobile Handsets at cheaper rates

Value added Services (VAS) introduction e.g. SMS, MMS, M-commerce

Boost to Telecom Manufacturing Companies

Huge employment opportunities

Key driver for growth of other sectors

Benefits of Competition

The Consumers Reduced Tariff & large Range of IT

services

Social Benefits Large Emp. Opportunities

The Companies Exponential Growth

The Telecom Sector Transformed

Other Sectors Boost to dependent sectors

The country Huge Development, Income & Prosperity as a whole

who gained what

Key Regulatory Authorities Telecom Commission : Policy making DOT : Licensing WPC : Spectrum allocation & management TRAI : Regulator TEC : Telecom Equipment Approval

Role of TRAI:

Provide a fair and transparent policy environment which facilitates fair competition

To provide level playing field Price Ceiling In pursuance of above objective TRAI has issued from time

to time a large number of regulations

Demand Analysis The young generation is attracted more and more towards cell phones and this has become a trend. This assures a high growth in the industry

Most of the service providers have covered majority of the urban population

The untapped rural population further ensures growth in the industry

Significant growth each year due to the impact of economic reforms and pro-active policies of the government.

Demand Analysis (cont..)

The share of private sector in total telephone connections is now 77% as against a meager 5% in 1999

It is also envisaged that internet and broad-band subscribers will increase to 50 million and 25 million, respectively, by 2014

Investor-friendly FDI environment for the growth. At present, 74% to 100% FDI is permitted for various telecom services

Supply Analysis Degree of Concentration : The telecommunications industry is a vast one with a large number of private players who are constantly bringing down the cost to consumers thereby making services more affordable and helping improve life in general and business in particular

Ease of entry: Friction exists between existing players and the newer entrants, as also between the providers of services based on different technologies. The same is resolved through the regulator in order to further improve the services

Although the industry requires huge capital investments and due to high entry barrier the sector is monopolized by small number of players

Supply Analysis (cont..)

Industry capacity: Conservative estimates put a tag of a 3% increase in the growth of GDP for every 1% rise in the tele-density in the nation

Accordingly, the sector has received a great thrust from the government for investments and development

Mismatch between demand and supply The supply of spectrum by the Government is not meeting the demand of the service providers

The supply for landline telephones are more but the demand for landline telephones are getting reduced as a result extensive use of mobile phones

There is a demand for hi-speed internet connection in different parts of the country but those demands are not met by the service providers in telecom industry and the supply of broadband connection by service providers are not meeting the demand in market

Cost and Price ElasticityThe spectrum prices have increased considerably and as the result the expansion requires huge capital investment.

Though the subscriber is increasing year on year, but due to heavy competition the tariff rates are lowest in the world

The call rates dropped from INR 16.80 in 1995 to INR 0.30 in 2013

Operators have been announcing new promotional schemes including reduction in tariffs for voice call, slashing roaming charges and many more such lucrative offers.

Cost and Price Elasticity (cont..)Due to the fierce price war the profit margin and return of capital has been declining over the years

Providers are trying to maintain the profit margins by “economics of scale” and by providing “value added services”

Customers, due to competitive pricing have become “elastic” and easily switch to the provider who provides the services at a lower tariff

There is not much of brand loyalty as there is hardly any differentiation in the services

Conclusion (cont..) Economies of Scale

Subscribers

Cost

per

min

ute

Market dominated by few players

Barrier to entry of new firms Barriers are economy of scale High input cost Govt imposed barriers – spectrum

Game theory Linking of spectrum with subscriber base – incentive were so great that firms acted in ways that resulted in lower profit

Characteristics of Oligopoly

Oligopolistic Market Structure (Wireless)

Top 5 players have 77% of market share – Market Oligopolistic in Nature

Each player takes into account other player’s activities – Importance of Strategic Interdependence on certain parameters like prices, promotional schemes, etc

Barriers to Entry - Investment and licensing impediments – Sector exhibits characteristics of Oligopoly

Declining ARPU: Average revenue per user (ARPU) has been falling year on year and most of the major players have been losing between 10 to 20% in ARPU and going to decline further. This trend is having negative impact on the bottom-line of all the players

The EPS for almost all telecom companies are going down and a result share prices is in a declining path

The tariff war and the trend in declining revenue per user is not a sustainable model going forward as bottom line growth is seems muted in the coming years

Challenges faced by the Industry

Challenges faced by the Industry (cont..)

Challenges faced by the Industry (cont..)

Return on Capital Market Share of Operators

Conclusion The Indian mobile subscriber base is likely to sustain the growth

Presence of skilled labour pool, improving telecom infrastructure, favourable demographics, rising disposable incomes of consumers, declining tariffs, increasing demand, growing attraction for mobiles with new features and greater availability of handsets at lower prices, are expected to continue driving the growth of the telecom sector, going forward.

However, the companies are likely to encounter a more challenging business environment in the near future, given the sustained fall in ARPUs, rapidly increasing competition and consequent pressure on margins and regulatory risks

Conclusion (cont..)

Companies with good rural coverage, better operational efficiency, and superior quality of service are likely to stay ahead of competitors

The industry will also witness the mergers of relatively smaller companies with the big players. Only big three or four players will dominate the market and direct price war may stop and Industry will agree on a standard pricing and competition will on the services and offerings

Thank You