Competitive Structure And Pricing in Telecom

Industry

Ankit Sachdeva

Heena Pahuja

Kaarthvya Chodey

Ram Narayan

Shivam Sethi

Vishnu Chaithanya 1

Roadmap

Evolution and Present Scenario Demand Analysis Competitive structure Barriers to Entry Non Price Competition Pricing Strategy Price Discrimination Future Outlook

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Evolution of Telecom Sector

Before the entry of the private players, the telecom services were provided by three public entities viz. DoT, MTNL and VSNL

Liberalisation process in the telecom services market began in 1992, when the Indian government permitted private players to provide value added services like paging , fixed telephone services.

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Telecom Industry in India

Telecom sector contributes nearly 3% to Indias GDP and has seen a tremendous growth in the last decade before relatively slower growth in last three fiscals

It has emerged as the worlds second largest network and has the third largest number of internet users in the world after China & the US

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Demand Analysis

The majority of the Indian population is in the age group of 15-54 in India.

The majority of users who use mobile phones belong to this category in India.

Hence, it is a huge market for telecom service providers. According to a study conducted by Cyber Media Research

Group the Indian Telecom sector will grow by about 20 percent CAGR in the next 3 years.

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Market Penetration

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Market Share of the Telecom Sector

As on June 30, 2014 (Source: TRAI)

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Major Market Players

S. No Company Market Share(%)

1 Bharti Airtel 22.87

2 Vodafone 18.57

3 Idea 15.19

4 Reliance 11.90

TOTAL 68.53

As per the Four-Firm Concentration Ratio analysis, it can be observed that the Indian Telecom Industry follows an oligopolistic structure.

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Herfindahl-Hirschman Index (HHI)

Company Market Share (Si) Si2

Bharti Airtel 22.87 523.04

Vodafone 18.57 344.84

Idea Cellular 15.19 230.74

Reliance 11.90 141.61

BSNL 9.78 95.65

Aircel 7.99 63.84

Tata 6.87 47.20

Telewings 4.30 18.49

Sistema 1.00 1.00

Videocon 0.61 0.37

MTNL 0.37 0.14

Loop 0.31 0.10

Quadrant 0.25 0.06

TOTAL 1467.07

HHI in terms of market share reaffirms our inference about the oligopolistic nature of the sector.

Concentration Levels

Level Concentration

Ratio Herfindahl

Index

High 80% to 100% 1,800 to 10,000

Medium 50% to 80% 1,000 to 1,800

Low 0% to 50% 0 to 1,000

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HHI based on Spectrum

HHI based on spectrum share further confirms the existence of Oligopoly.

Data Source: Crisil Research 10

Company Spectrum Share (Si) Si2

Bharti Airtel 17.19 295.53

Vodafone 9.16 83.85

BSNL 25.89 670.49

HFCL 0.24 0.06

Idea Cellular 8.96 80.21

Loop Mobile 0.35 0.12

MTNL 2.85 8.15 Reliance Communications Ltd 9.48 89.81

S Tel ** 0.53 0.28

Sistema Shyam Teleservices 1.39 1.92

Tata Teleservices Ltd 7.10 50.38

Telewings (uninor) 1.53 2.33

Videocon Telecom 1.06 1.11

Aircel Ltd 11.51 132.42

Reliance Jio 2.77 7.69

TOTAL 1424.37

COMPETITIVE STRUCTURE

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Oligopoly and Indian Telecom

Few players and Interdependence amongst them Small operators follow the large ones The industry is the price setter rather than price taker Homogeneous or differentiated products Non price competition

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Why Interdependence?

Most highlighted feature of oligopoly Dependent on each other over

Pricing Policy making Advertising

Apart from demand for service, non price competition effects setting up of prices

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Network Externalities

Customers joining a communications network obtain benefit from making and receiving calls.

Their value of being part of the network derives from being able to communicate with other people.

It therefore increases with the number of people connected to the network.

Hence, a customers decision to join a network affects both their own welfare and that of other people. This effect is known as a network externality.

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Role of Network Externalities

Important role in explaining network expansion Significant correlation between the absolute size of

telecommunications network and its growth rate

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Homogeneous or Differentiated Product?

Oligopoly Homogeneous

Differentiated Telecom:

Companies offer similar service - network for wireless communication, internet services, etc.

Does Competitive outcome in telecom industry occur with Price?

Is telecom industry a Bertrand Competition market?

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Bertrand Competition

Companies compete each other over prices rather than quantity

Assumptions of the model: Goods/Services are homogeneous Firms set prices simultaneously & independently Constant marginal cost for each firm Market price is same as marginal cost

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Barriers to entry of new firms

Existing firms coming together to restrict the entry of new firms

Entry barriers:- High start-up cost Government policies and restrictions High advertising costs Licensing costs

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Non-Price Competition

The competition in an oligopoly is not just restricted to price, but other aspects that impact a consumers buying decision

Non-price competition in telecom includes: better network coverage celebrity endorsements branding aggressive advertising techniques better customer service diversifying into related product line

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Non-Price Competition

Occurs because of the fear of price wars and aggressive advertising Eventually affects the revenue of a particular firm and also of the

industry as a whole.

Taken as a more critical area of competition rather than price cutting technique to increase revenues

The only risk associated with non-price competition is the acceptance of changed product by the existing consumers.

On the other hand consumers get a better product at the same price which leads to innovative behaviour amongst competitors

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Non-Price Competition Airtel has always endorsed popular figures with its brand to attract

masses

Vodafone has never endorsed celebrities to the brand and has created animated characters called ZooZoos

Idea tries to give out a social message through its campaigns.

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PRICING STRATEGY

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Telecom Cost Characteristics

High proportion of fixed costs Network is essentially 100% fixed costs relative to usage

Variable costs: No variable cost for usage(outside peak hour), and only a small variable cost for a new access line

Marginal costs: MC close to zero, hence operators cannot charge on basis of MC

Demand considerations generally make the flat-price tariff unsuitable as a single-price option

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Evolution of Pricing

Introduction Phase (1995-2000) Growth Phase (2001 - 2005) Maturity Phase (2005 - 2009) Price Wars (2009 2012) Tariff hikes since 2013

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Is price/sec tariff good for consumers?

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Kinked Demand Curve

If any firm raises the price over and above the existing price, the competitors will not follow this change and the firm will lose the market share.

If any firm lowers its price below the prevailing market price, the competitors will also try and match the price to retain the market share. Hence the firms total revenue will decrease and output will just increase marginally.

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Kinked Demand Curve

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Price Discrimination

Charging different prices to different customers First degree higher prices during peak hours, reduced

night calling rates

Second degree high cost for initial consumption e.g. first 3 messages/day, higher price for smaller data pack

Third degree Corporate plans with lower tariff for all services

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Price Parallelism

Widely prevalent in the industry Price-fixing between competitors that occurs without any

actual agreement

Leader raises price, then others follow suit Greater profits from higher prices so long as none

attempts to undercut the others

Insufficient evidence for anti-trust authorities to penalize for collusion

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Tacit Collusion

With no formal agreement, major players collude to raise prices

Bid rigging during spectrum auction Recently, Airtel, Vodafone and Idea have been involved in

tariff hike by almost 20%

Illegal sharing of 3G bandwidth in circles where they do not have licenses

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On-net vs. Off-net Pricing

On-net calls: Where the recipient is a customer of the same network as the customer who placed the call

Off-net calls: Caller-Receiver are on different networks Usually, on-net calls are cheaper compared to off-net

ones

This is mainly because of Termination Charges

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Termination Charges

Call termination refers to the routing of calls from one operator to another

Termination charges are charged for call termination by various operators.

3 models of charging exist:- 1. Calling Party Pays (CPP) Currently existing in India 2. Bill and Keep(BAK) aka peering 3. Receiving Party Pays (RPP) rarely used

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CONTESTABILITY FACTORS

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Tower Sharing

Cell towers are expensive to maintain and operate.

Tower Sharing helps to: 1. Cut down on maintenance costs Reducing operating

expenditure

2. Expansion into rural markets - Reducing capital expenditure 3. Reduction in entry barriers for new entrants E.g. Indus Towers, Jointly owned by Airtel, Vodafone and Idea

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Spectrum Sharing

TRAI has laid out a proposal to allow spectrum sharing Under review by DoT on the various guidelines and regulations

proposed

Sharing allowed only if the spectrum were bought in an auction Both companies should hold licenses in the same band where

sharing is proposed

Increase in the utilization charge rates of both companies sharing the spectrum

Despite stringent regulations, this is a positive development for operators

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Mobile Number Portability

MNP enables consumers to retain their existing mobile phone numbers when switching providers.

Its a demand-side service and has a significant impact on the market.

The reduction in barriers to switching is of particular benefit to challenger operators against dominant incumbents.

When MNP is implemented, it sets the stage for a highly competitive market.

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FUTURE OUTLOOK

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Expansion to rural areas

Urban areas have been covered by most of the service providers.

large number of rural areas and far fledged villages of India still need to be connected.

The rural segment offers the highest growth potential for the Indian telecom sector (68.32 % population)

National Telecom Policy (NTP) has targeted 100% tele-density and 600 million broadband connections by 2020

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Opportunities

New technologies like 3G and 4G Mobile value added services like mobile banking, mobile

retailing etc.

Development of WiMAX technology Huge untapped rural subscriber base Growing number of smartphone users Shift from voice to data as primary growth driver

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THANK YOU

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