Post on 10-Jun-2015
description
transcript
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