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Telecom Service

Providers
Economic Analysis

Telecom Service
Providers
Economic Analysis

2010
Submitted To: Submitted By:
Dr R K OJHA Akshi Bhatia
Alok Shukla
Amanjot Kaur
Amit Gupta
Anjali Srivastava
Acknowledgement

We take immense pleasure to acknowledge the efforts of the following people who helped our
group to make this project a reality. We express my gratitude for their suggestions, guidance
and intellectual influence.

We express our sincere thanks to Dr R K Ojha, Core Faculty, for making this project a reality.

We are thankful to all our Lecturers for their help and kind co-operation throughout the course.
Last, but not the least, I would like to thank our parents and friends who always supported in all
our endeavors.

AKSHI BHATIA -- (JIML-10-011)


ALOK SHUKLA -- (JIML-10-012)
AMANJOT KAUR -- (JIML-10-013)
AMIT GUPTA -- (JIML-10-014)
ANJALI SRIVASTAVA -- (JIML-10-015)
Contents

EVOLUTION OF THE INDUSTRY AND MILESTONES................................................4

BSNL ....................................................................................................................... 6

BHARTI....................................................................................................................6

VODAFONE..............................................................................................................6

RELIANCE.................................................................................................................6

TATA TELESERVICES................................................................................................7

IDEA ........................................................................................................................ 7

AIRCEL.....................................................................................................................7

MTS INDIA................................................................................................................ 8

Optimising Producer’s behaviour................................................................................9

The main indicators of production process............................................................10

The productivity of labour resources.....................................................................10

Productivity and profit...........................................................................................10

Impact of technology upon labour recruitment.....................................................11

The importance of non-price competition under oligopoly ...................................13

Investment Opportunities and Incentives..............................................................14

Opportunities.........................................................................................................14

POSTPAID Vs PREPAID USERS................................................................................15

PRESENT COMPETITION.........................................................................................16

THREAT FROM COMPETITION.................................................................................16

THREAT OF SUBSITUTES........................................................................................17

THREAT OF NEW ENTRANTS..................................................................................17


INTRODUCTION

The Indian telecommunication industry, with about 600.69 million mobile phone connections as
of February 2010, is the third largest telecommunication network in the world and the second
largest in terms of number of wireless connections of 563.73 million. The Indian telecom
industry is one of the fastest growing in the world and is projected that India will have 'billion
plus' mobile users by 2015. Projection by several leading global consultancies is that India’s
telecom network will overtake China’s in the next 10 years. For the past decade or so,
telecommunication activities have gained momentum in India. Efforts have been made from
both governmental and non-governmental platforms to enhance the infrastructure. The idea is to
help modern telecommunication technologies to serve all segments of India’s culturally diverse
society, and to transform it into a country of technologically aware people.

EVOLUTION OF THE INDUSTRY AND MILESTONES


WIRELESS SERVICES IN INDIA

The Mobile telecommunications system in India is the second largest in the world and it was
thrown open to private players in the 1990s. The country is divided into multiple zones, called
circles (roughly along state boundaries). Government and several private players run local and
long distance telephone services. Competition has caused prices to drop and calls across India
are one of the cheapest in the world. The rates are supposed to go down further with new
measures to be taken by the Information Ministry. The mobile service has seen phenomenal
growth since 2000. In September 2004, the numbers of mobile phone connections have crossed
fixed-line connections. India primarily follows the GSM mobile system, in the 900 MHz band.
Recent operators also operate in the 1800 MHz band. The dominant players are Airtel, Aircel,
Uninor, Reliance Infocomm, Vodafone, Idea cellular and BSNL/MTNL. There are many smaller
players, with operations in only a few states. International roaming agreements exist between
most operators and many foreign carriers.

Major players and their market share

MAJOR PLAYERS IN INDIAN TELECOMMUNICATION


INDUSTRY
BSNL
Bharat Sanchar Nigam Limited is a state-owned telecommunication company in India. BSNL is
the sixth largest cellular service provider, with over 57.22 million customers as of December
2009 and the largest land line telephone provider in India. Its headquarters are at Bharat
Sanchar Bhawan, Harish Chandra Mathur Lane, Janpath and New Delhi. It has the status of
Mini Ratna, a status assigned to reputed public sector companies in India.

BSNL currently has a customer base of 90 million as of June 2008. It has footprints throughout
India except for the metropolitan cities of Mumbai and New Delhi which are managed by MTNL.
As on March 31, 2008 BSNL commanded a customer base of 31.55 million Wire line, 4.58
million CDMA-WLL and 54.21 million GSM Mobile subscribers.

BHARTI
Bharti Airtel is the largest cellular service provider in India, with more than 124 million
subscriptions as of February 2010. With this, Bharti is now worlds third-largest, single-country
mobile operator and sixth-largest integrated telecom operator. It also offers fixed line services
and broadband services. It is known for being the first mobile phone company in the world to
outsource everything except marketing and sales.

The businesses at Bharti Airtel have always been structured into three individual strategic
business units (SBU's) - Mobile Services, Airtel Telemedia Services & Enterprise Services. The
mobile business provides mobile & fixed wireless services using GSM technology across 23
telecom circles while the Airtel Telemedia Services business offers broadband & telephone
services in 95 cities and has recently launched a Direct-to-Home (DTH) service, Airtel Digital
TV.

VODAFONE
Vodafone Essar, formally known as Hutchison Essar is a cellular operator in India that covers
23 telecom circles in India based in Mumbai. Vodafone Essar is owned by Vodafone 67% and
Essar Group 33%. It is the second largest mobile phone operator in terms of revenue behind
Bharti Airtel, and third largest in terms of customers.

The whole company was valued at USD 18.8 billion. Despite the official name being Vodafone
Essar, its products are simply branded Vodafone. It offers both prepaid and post-paid GSM
cellular phone coverage throughout India with good presence in the metros.

RELIANCE
Reliance Communications, formerly known as Reliance Infocomm, along with Reliance Telecom
and Flag Telecom, is part of Reliance Communications Ventures (RCoVL).

Reliance Communications Limited founded by the late Shri Dhirubhai H Ambani (1932-2002) is
the flagship company of the Reliance Anil Dhirubhai Ambani Group. The Reliance Anil
Dhirubhai Ambani Group currently has a net worth in excess of Rs. 64,000 crores (US$ 13.6
billion), cash flows of Rs. 13,000 crores (US$ 2.8 billion), net profit of Rs. 8,400 crores (US$ 1.8
billion).

The Equity Shares of RCOM are listed on Bombay Stock Exchange Limited and National Stock
Exchange Limited. The Global Depository Receipts and Foreign Currency Convertible Bonds
are listed on Luxembourg Stock Exchange and Singapore Stock Exchange respectively.

TATA TELESERVICES
Tata Teleservices is part of the Tata Group. Tata Teleservices spearheads the Group’s
presence in the telecom sector. Incorporated in 1996, Tata Teleservices was the first to launch
CDMA mobile services in India with the Andhra Pradesh circle.

The company acquired Hughes Telecom (India) Limited [now renamed Tata Teleservices
(Maharashtra) Limited] in December 2002. With a total Investment of Rs 19,924 Crore, Tata
Teleservices has created a Pan India presence spread across 20 circles that includes Andhra
Pradesh, Chennai, Gujarat, J & K, Karnataka, Delhi, Maharashtra, Mumbai, North East, Tamil
Nadu, Orissa, Bihar, Rajasthan, Punjab, Haryana, Himachal Pradesh, Uttar Pradesh (E), Uttar
Pradesh (W), Kerala, Kolkata, Madhya Pradesh and West Bengal.

IDEA
Idea Cellular is a wireless telephony company operating in all the 22 telecom circles in India
based in Mumbai. It is the 3rd largest GSM Company in India behind Airtel and Vodafone and
ahead of state run player BSNL.

The company has its retail outlets under the "Idea n' U" banner. The company has also been the
first to offer flexible tariff plans for prepaid customers. It also offers GPRS services in urban
areas. Idea Cellular won the GSM Association Award for "Best Billing and Customer Care
Solution" for 2 consecutive years.

AIRCEL
Aircel is a mobile phone service provider in India. It offers both prepaid and post-paid GSM
cellular phone coverage throughout India. Aircel is a joint venture between Maxis
Communications of Malaysia and Apollo Hospital Enterprise Ltd of India.

Maxis have a 74% stake in Aircel and the remaining 26% is with Apollo Hospitals. It is India’s
fifth largest GSM mobile service provider with a subscriber base of over 27.7 million, as of
October 31, 2009. It has a market share of 12.8% among the GSM operators in the country. As
on date, Aircel is present in 18 of the total 23 telecom circles (including Andhra Pradesh,
Assam, Bihar & Jharkhand, Chennai, Delhi & NCR, Himachal Pradesh, Jammu & Kashmir,
Karnataka, Kerala, Kolkata, Mumbai, North East, Orissa, Rest of Maharashtra & Goa, Rest of
Tamil Nadu, Rest of West Bengal, Uttar Pradesh East, Uttar Pradesh West) and with licences
secured for the remaining 5 telecom circles, the company plans to become a pan-India operator
by 2010.

MTS INDIA
MTS India, is a brand owned by Sistema Shyam TeleServices (SSTL). SSTL is a joint venture
company between Sistema of Russia and Shyam Group of India.

Sistema is the majority share holder in this joint venture with a 73.71% equity stake, along with
the Shyam Group, holding a 23.79% stake and the rest 2.5% being public partake. SSTL has
the spectrum to provide mobile telephony services in all the 48 circles across the country.

Presently SSTL offers mobile telephony services in the Bihar-Jharkhand, Delhi, Haryana,
Karnataka, Kerala, Kolkata, Maharashtra (Pune), Mumbai, Rajasthan, Tamil Nadu and West
Bengal circles.
Production Function and Profit Optimization for
Telecom Industry

The personnel, engaged in a Telecommunication Firm, cover many functions which are directly
(planning, maintenance i.e.) and indirectly (marketing, accounting, management) concerned
with the running of the system. Labor is engaged either to keep full availability of network or to
provide adequate operation of the system: it cannot vary suddenly because of political, social
and economical constraints which the Firm has to satisfy. The number of employees (X2) is
taken as the appropriate reference indicator to measure operating activity.

By the scheme above, we assume that the Provider uses two main external resources X 1 (lines)
and X2 (personnel) to produce a given quantity (Q) of commodity. The matching of market
demand depends upon the size (X1) of plant provided, but the availability of network (removal of
faults) and the volume of consumption (marketing) depend upon proper and adequate operation
(X2). The two resources are used jointly to produce the output Q: by no mean labour can replace
physical network capacity or vice versa.
The variables are, then, complement not substitute.

The production process


The activity of the Provider, when performing the production process, can be described by three
different functions. The “production function” which links the two input resources, X1 and X2 , to
the quantity Q provided; the “cost function” which gives the cost of plant as a function of the two
input variables; and the “path function” which accounts with the expansion strategies.

Optimising Producer’s behaviour


The Service Producer is engaged with the choice of strategies as to optimise final outputs
provided by his activity. In the following we consider two main objectives:

1. minimization of cost (budget C0) subject to a given output (Q0);


2. maximization of profit “P”
e Q units of service. The function to maximize is:

P = p*f(X1;X2) - R1X1 - R2X2

Setting the partial derivatives of P with respect to X1 and X2 equal to zero, gives:

dP/dX1= pdQ – R1dX1= 0 (7)


dP/dX2= pdQ – R2dX2= 0 (8)

The terms “pdQ” under conditions (7) and (8) are the product of price by partial derivative of the
production function with respect to input variables: they represent the marginal product, MP, of
input variables. The marginal product is the rate at which the Service Producer increases its
revenue by increasing input variables. The input variables can be used up to a point where the
value of their MP equals their price.

Finally, as the ratio (7) to (8) takes back to the (5), it can be assumed that the maximum profit-
input combination lies upon the path function.

The main indicators of production process


The growth of telecommunication business depends upon harmonic growth of labour, of capital
invested and of revenue. If the three rates were equal the system would be perfectly balanced:
when, in fact, no external factor affects the system

The productivity of labour resources


The productivity of a variable (lines; labor) is defined as the quantity of revenue that it can
provide: a first approach to measure the productivity of a variable is the ratio between total
revenue and the value of variable (gross productivity = pQ/X1 = pQ/X2). The indicator,
nevertheless, does not account for the fact that an input resource can produce output only when
it is used jointly with other resources.

Productivity and profit


The level of employment, corresponding to maximum productivity, fits in with the requirement of
Provider (organizational structure), the decision of assessing resources to their minimum level
provides the best possible economical objective. Theoretically, any different decision upon the
labor (more or less than minimum) would reduce the economical benefit: the ability of who
decides is to make consistent need for labor, profit and social constraints.

Impact of technology upon labour recruitment


It is important to remark that the apportionment of labor is neither a pure nor an easy
mathematical choice. Personnel have to cover different sectors in technical and administrative
Provider’s structure and are engaged to work under current production methods. But, when
technical progress (greater capacity per line, digital transmission systems) lets increase revenue
without requiring proportionate increase in labor, then existing number of employees upon the
labor (more or less than minimum) would reduce the economical benefit: the ability of who
decides is to make consistent need for labor, profit and social constraints. may turn redundant. If
new technology allows for a better management of commercial and technical process, the ratio
X1/X2 can be increased.
OLIGOPOLY

An oligopoly is a market dominated by a few producers, each of which has control over the market. It
is an industry where there is a high level of market concentration. However, oligopoly is best defined
by the conduct (or behaviour) of firms within a market rather than its market structure.

The concentration ratio measures the extent to which a market or industry is dominated by a
few leading firms. Normally an oligopoly exists when the top five firms in the market account for
more than 60% of total market demand/sales.

Characteristics of an oligopoly

There is no single theory of how firms determine price and output under conditions of oligopoly.
If a price war breaks out, oligopolists will produce and price much as a perfectly competitive
industry would; at other times they act like a pure monopoly. But an oligopoly usually exhibits
the following features:

1. Product branding: Each firm in the market is selling a branded (differentiated) product
2. Entry barriers: Significant entry barriers into the market prevent the dilution of
competition in the long run which maintains supernormal profits for the dominant firms. It
is perfectly possible for many smaller firms to operate on the periphery of an oligopolistic
market, but none of them is large enough to have any significant effect on market prices
and output
3. Interdependent decision-making: Interdependence means that firms must take into
account likely reactions of their rivals to any change in price, output or forms of non-price
competition. In perfect competition and monopoly, the producers did not have to
consider a rival’s response when choosing output and price.
4. Non-price competition: Non-price competition s a consistent feature of the competitive
strategies of oligopolistic firms. Examples of non-price competition includes:

a. Free deliveries and installation


b. Extended warranties for consumers and credit facilities
c. Longer opening hours (e.g. supermarkets and petrol stations)
d. Branding of products and heavy spending on advertising and marketing
e. Extensive after-sales service
f. Expanding into new markets + diversification of the product range

The kinked demand curve model of oligopoly

The kinked demand curve model developed first by the economist Paul Sweezy assumes that a
business might face a dual demand curve for its product based on the likely reactions of other
firms in the market to a change in its price or another variable. The common assumption of the
theory is that firms in an oligopoly are looking to protect and maintain their market share and
that rival firms are unlikely to match another’s price increase but may match a price fall. I.e. rival
firms within an oligopoly react asymmetrically to a change in the price of another firm.

The importance of non-price competition under oligopoly

Non-price competition assumes increased importance in oligo-polistic markets. Non-price


competition involves advertising and marketing strategies to increase demand and develop
brand loyalty among consumers. Businesses will use other policies to increase market share:

1. Better quality of service including guaranteed delivery times for consumers and
low-cost servicing agreements
2. Longer opening hours for retailers, 24 hour telephone and online customer support
3. Extended warranties on new products
4. Discounts on product upgrades when they become available in the market

Advertising spending runs in millions of pounds for many firms. Some simply apply a profit
maximising rule to their marketing strategies. A promotional campaign is profitable if the
marginal benefit (or revenue) from any extra sales exceeds the cost of the advertising campaign
and marginal costs of producing an increase in output.
Investment Opportunities and Incentives
An attractive trade and investment policy and lucrative incentives for foreign collaborations
have made India one of the world’s most attractive markets for the telecom equipment suppliers
and service providers.

• No industrial license required for setting up manufacturing units for telecom equipment.

• Automatic approval of 100 percent foreign equity, technology fee up to US $ 2 million,


royalty up to 5 percent for domestic sales and 8 percent for exports in telecom
manufacturing projects.

• Foreign equity of 74% (49 % under automatic route) permitted for telecom services - basic,
cellular mobile, paging, value added services, NLD, ILD, ISPs - and global mobile personal
communications by satellite.

• Full reparability of dividend income and capital invested in the telecom sector.

Opportunities
India offers an unprecedented opportunity for telecom service operators, infrastructure
vendors, manufacturers and associated services companies. A host of factors are contributing to
enlarged opportunities for growth and investment in telecom sector:

• An expanding Indian economy with increased focus on the services sector

• Population mix moving favourably towards a younger age profile

• Urbanization with increasing incomes

Investors can look to capture the gains of the Indian telecom boom and diversify their operations
outside developed economies that are marked by saturated telecom markets and lower GDP
growth rates.

Inflow of FDI into India’s telecom sector during April 2000 to March 2009 was about Rs
275,444 million. Also, more than 8 per cent of the approved FDI in the country is related to the
telecom sector.
MARKET SCENARIO

POSTPAID Vs PREPAID USERS


PRESENT COMPETITION

National Long Distance

• BSNL, RELIANCE, VSNL, VODAPHONE, TATA, IDEA

International Long Distance

• VSNL, RELIANCE , BSNL

THREAT FROM COMPETITION


One major threat to the companies is the fact that approximately 75% of the market
share is held by top four companies in the wireless sector namely bharti airtel,
reliance, Vodafone, Bsnl & Mtnl.
THREAT OF SUBSITUTES
• Landline

• CDMA

• Video Conferencing

• VOIP - Skype, Gtalk, Yahoo Messenger

• e-Mail & Social Networking Websites

THREAT OF NEW ENTRANTS


• Huge License Fees to be paid upfront & High gestation period

• Entry of MVNOs & WiMAX operators

• Spectrum Availability & Regulatory Issues

• Infrastructure Setup Cost - High


TOTAL REVENUE CURVE FOR MOBILE
SERVICE PROVIDERS

COMPANY TOTAL REVENUE


BSNL 35422
BHARTI AIRTEL 26546
RELIANCE 19227
VODAFONE ESSAR 15480
TATA TELESERVICES 8204
IDEA 6720
OTHERS 3200

TOTAL REVENUE

40000
35000

30000
25000

20000 TOTAL REVENUE


15000
10000

5000
0
1 2 3 4 5 6 7
CONCLUSION

We believe telecom market will enjoy good growth rate owing to lower tele-
density, stiff competition and lower tariffs. So far, subscribers growth has
been impressive and stood at 427M (wireless) in june 2009 quarter.

We believe that it will cross 900M by 2012 and thus represents a huge
revenue potential for existing players. Inspite of good growth, there is not
much differentiation among current players, additionally; switching cost for
consumer is almost zero. Lower tariffs as already impacted profit growth of
key telecom firms and resulted in negative growth In ARPU.

We believe that soon Indian telecom industry will enter into consolidation
phase which should result in lower number of players in the market. But
before that happens, Indian consumer will continue using its buying power
to choose service provider and enjoy excellent services at lowest possible
tariff plans.
References

Information has been sourced from namely, books, newspapers, journals, industry portals,
government agencies, industry news and developments and through access to database.

• http://www.capitaline.com/
• http://www.wikipedia.org/
• http://www.oecd.org/
• http://www.legalserviceindia.com/
• http://www.dot.gov.in/
• http://www.economictimes.indiatimes.com/
• http://www.ibef.org/
• http://www.domain-b.com/
• http://www.trai.gov.in/
• http://www.perry4law.wordpress.com/
• http://www.indianembassy.org/
• http://www.financialexpress.com
• http://www.pib.nic.in/
• http://www.emeraldinsight.com/
• http://www.search.epnet.com/

• Frost & Sullivan (2007), “Telecom – Catalyzing India’s New Economy”


• Banka Sanjoy (2006), “Mergers and Acquisitions in Indian Telecom Industry-A Study”
• Jain Rekha (2001), “A review of The Indian Telecom Sector”
• Fortis Investments (2006),”Global Telecom Sector”
• Sharma Seema and Lokesh Singla (2009), “Telecom equipment Industry: Challenges
and Prospects”
• Bhattacharya Manas (2000), “Telecom Sector in India: Vision 2020”