F Group10 TelecommunicationDataServices

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TELECOM DATA

SERVICESAn economic analysis of the market structure

ABSTRACTA detailed study of telecommunication data services

industry in India to understand the type of market

model which exists. The report tries to analyse the

characteristics of the market like number of firms, type

of product, control over price, entry/exit conditions,

non-price competition, etc. and thus understand where

does the telecommunication data services market lie in

the market structure continuum

Rashmi Bangar F004

Mitali Bansal F005

Anubhuti Bansal F006Rajat Bansal F007

Ronak Garg F018Ankit Jain F023

Microeconomics


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Contents1. Introduction .................................................................................................................................... 2

1.1 EDS (Enterprise Data Services) ................................................................................................ 2

1.2 VAS (Value Added Services) .................................................................................................... 2

1.2.1 Data services ................................................................................................................... 2

1.2.2 Traditional VAS ................................................................................................................ 3

1.3 InternetDial-up and Broadband .......................................................................................... 3

1.3.1 Wireline broadband ............................................................................................................... 3

1.3.2 Wireless broadband ............................................................................................................... 3

2. Telecom Data Services Market ....................................................................................................... 4

2.1 Government Regulations ........................................................................................................ 4

2.2 Spectrum Technologies, Unified License, Sharing .................................................................. 5

2.3 Profit ....................................................................................................................................... 6

2.4 Not enough FDI inflows ........................................................................................................... 6

2.5 Number of Sellers ................................................................................................................... 6

2.6 Incumbents Wrath................................................................................................................. 6

2.7 Homogeneous/Heterogeneous products ............................................................................... 7

2.8 Entry and exit barriers............................................................................................................. 7

2.9 Customer Switching Costs ....................................................................................................... 7

2.10 Non price competition ............................................................................................................ 8

3 Analysis ........................................................................................................................................... 9

4 Conclusion ..................................................................................................................................... 10

5 References .................................................................................................................................... 10

6 Annexure ....................................................................................................................................... 10

6.1 Enterprise Data Services ....................................................................................................... 11

6.2 VPN ........................................................................................................................................ 11

6.3 VSAT ...................................................................................................................................... 12

6.4 Wireless Service Providers (GSM, CDMA & FWP) ................................................................. 12

6.5 Wireline Subscriptions .......................................................................................................... 13

6.6 Broadband (wired+wireless) Subscriptions .......................................................................... 13


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1. IntroductionA phone has been transformed from a luxury good to a necessity connecting millions of people.

The idea of phones has changed from fixed line/wireline phones to mobile/wireless phones

connecting people everywhere and anywhere. The concept of connectivity has also changed. The

term telecommunications now includes many other services namely Internet services, radio pagingservices, Very Small Aperture Terminals (VSATs), Public Mobile Radio Trunk Service (PMRTS) and

global mobile personal communication by satellite (GMPCS). The telecom data services industry can

be broadly divided in to three main categories viz.:-

1.1EDS (Enterprise Data Services)Enterprise Data Services (EDS) offer network connectivity across various locations and users in an

organisation. The data service used by organisations may differ depending on the span of area of

usage. Over the years, the requirements for data connectivity are getting complex with organisations

demanding quality service in a cost-effective manner. Enterprise data services are broadly classified

as below:-

(Source: CRISIL)

1.2VAS (Value Added Services)Non-voice or Value added services (VAS) by telecom operators can be broadly classified as:-

1.2.1 Data services

These constitute 2G/3G/4G services. The increased smartphone penetration, improved coverage of

3G/4G services and competitive data charges will see a shift will spur data usage among users. The

fall in tariffs is evident over the past few years when 3G tariffs have fallen substantially since launch.

However, headline tariffs for 3G still remain higher than 2G. As a result of the rise in volumes, the

average realisation per MB is likely to decline at almost a 10 per cent CAGR, during the next 5 years.


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(Source : CRISIL)

1.2.2 Traditional VAS

Traditional VAS services include the Caller Ring Back Tone (CRBT), wallpaper downloads, music

downloads, video downloads, astrology, health etc. which are not subscribed through data (internet)

but rather provided by the telecom operator through modes such as interactive voice response

(IVR)/ SMS/ WAP modes. In the traditional VAS, CRBT is one of the major contributors to the overall

revenues. Revenues from traditional VAS had been growing steadily, but in the last few years with

the growing popularity of internet based-services and the effect of 2013 TRAI regulation, this

segment's revenues have been impacted. While subscribers are steadily adopting data services, a

large number of subscribers still own feature phones, which do not support high-speed data. The

proportion of feature phones was around 90 per cent as of 2013-14, which over the next five years

will gradually decline to around 40 per cent in 2018-19.

1.3InternetDial-up and BroadbandThe different technologies currently available worldwide to provide broadband service are:-

1.3.1 Wireline broadband

Wireline broadband solutions may be grouped into DSL-based cable and fibre Ethernet solutions.

Fibre-based models such as fibre-to-the-home (FTTH) and fibre-to-the-curb (FTTC) have the

advantage of being future proof, given the immense bandwidth capacity of fibre. However, they

necessitate significant investments upfront.

1.3.2 Wireless broadband

Wireless broadband technologies include point-to-multipoint technologies such as local multipoint

distribution system (LMDS), multipoint microwave distribution system (MMDS), wireless fidelity (Wi-

Fi), worldwide interoperability for microwave access (Wi-Max), ultra wide band (UWB) and mobile

broadband technologies. Other technologies used for providing broadband services include satellitetechnologies and broadband over power line.


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2.Telecom Data Services MarketThe telecom data services industry is highly regulated. The market has seen evolution from being a

monopoly market structure to a regulated monopoly and is currently a mix between regulated

monopoly and perfect competition i.e. a Monopolistic competition exists. With technological

advancement, the regulatory body TRAI (Telecom Regulatory Authority of India) continuously makesnew policies and reviews existing ones to promote competition. The following exhibit gives a

timeline of the evolution of the telecom data services market.

(Source: DnB)

Following are the factors which helped us in understanding the market structure:-

2.1Government Regulations

The process of liberalization in the country began in the right earnest with the announcement of theNew Economic Policy in July 1991. Telecom equipment manufacturing was de-licensed in 1991 and

value added services were declared open to the private sector in 1992, following which radio paging,

cellular mobile and other value added services were opened gradually to the private sector. This has

resulted in large number of manufacturing units been set up in the country. As a result most of the

equipment used in telecom area is being manufactured within the country. A major breakthrough

was the clear enunciation of the government's intention of liberalizing the telecom sector in the

National Telecom Policy resolution of 13th May 1994. The entry of private service providers brought

with it the inevitable need for independent regulation. The Telecom Regulatory Authority of India

(TRAI) was, thus, established with effect from 20th February 1997 by an Act of Parliament, called the

Telecom Regulatory Authority of India Act, 1997, to regulate telecom services, includingfixation/revision of tariffs for telecom services which were earlier vested in the Central Government.


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The TRAI Act was amended by an ordinance, effective from 24 January 2000, establishing a

Telecommunications Dispute Settlement and Appellate Tribunal (TDSAT) to take over the

adjudicatory and disputes functions from TRAI. TDSAT was set up to adjudicate any dispute between

a licensor and a licensee, between two or more service providers, between a service provider and a

group of consumers, and to hear and dispose of appeals against any direction, decision or order of

TRAI. Following figure gives a few milestones in the Indian enterprise data connectivity market till

date:-

(Source: PWC)

2.2Spectrum Technologies, Unified License, SharingSpectrum is the radio frequency on which all communication signals travel. In India spectrum

allocated for telecom services is divided into various bandwidths, which cater to different

technologies or generations, as shown below. In 2012, the government introduced a unified licence

to allow the use of spectrum in any band for providing services in any technology. Following figure

shows the various spectrum technologies:-

(Source: CRISIL)


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TRAI in July 2014 released the recommendation for the spectrum sharing which if accepted would

enable telcos to share spectrum among themselves. Given the significant number of telcos across

circles, the spectrum holding per telco is fragmented. This results in less efficient utilization of the

spectrum. The recommended guidelines, if implemented, will provide opportunities to telcos to pool

their spectrum holdings and thereby improve spectral efficiency and also help a telco add to its

capacity wherever it faces network congestion. The denial of renewal request of licenses bySupreme Court means that new entries can be made into the market though the entry cost is very

high.

2.3ProfitThe Indian telecom sector has been highly debt laden. The price wars in 2009 and spectrum auction

in February 2014 has resulted in cumulative debt of the industry at INR 250,000 crore while the

annual revenue of the industry is at INR 180,000 crore. The new 4G technology would need more

spectrum and capital expenditure to deploy and maintain. Hence, most of the profits go into debt

serving. This makes the industry not so attractive to new entrants.

2.4Not enough FDI inflowsDespite 100 percent FDI allowance in telecom, the FDI inflow in telecom in comparison with the total

FDI inflow in the country is quite less. The uncertainty of policy and other factors like unfavourable

M&A policy, 2G scam, and highly competitive market are discouraging the investors. The new

government has to take actions for better inflow of FDI and thus deployment of better next

generation technologies and quality of service in telecom services.

2.5Number of SellersAlthough the telecom industry started off as a monopoly and was an oligopoly with few strong and

influential firms until few years back, strong regulatory reforms by the government after

recommendations from TRAI, the Supreme Courts decision to deny renewal of licenses, freshauctions of spectrum with low base price has improved competition and increased the number of

players to more than ten. Hence, the market is moving towards pure competition in the market

structure continuum and has features of both regulated monopoly and perfect competition.

2.6Incumbents WrathThe new entrants into the sector used to depend on the incumbents. The incumbents used to grow

because of an established network presence, a brand that consumers are aware of and sheer

economies of scale. By leveraging these points of strength, these players were able to fight late

entrants and challengers more effectively. That is what was happening between the incumbents

(Airtel, Vodafone, Idea, Reliance Communication, and Aircel) and the challengers (Datacom, Unitech,

Swan Telecom, Shyam, and Loop). The piece under contention was the mobile termination charge

which one operator paid to the other when the customer of the further used the roaming charges of

the later. This was charged to the consumer as the cost of roaming. With an all India footprint (or

80% coverage), the incumbents effectively didnthave to pay termination charges. The full coverage

ensured that calls are terminated within their network. The incumbents had either been pocketing

the termination charges or passing them to consumers no roaming charge kind of schemes.

However, NTP 2012 recommendation to have free national roaming has been accepted by the union

government which would make the industry attractive for the new entrants and investors.


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2.7Homogeneous/Heterogeneous productsIn telecom data services, although the products are homogeneous, the telcos create brand names

which cause consumers to perceive differences that do not really exist. The differentiation is also

brought about through after sales services. All the companies are dealing in the same product, i.e.

providing network for wireless telecommunication. The introduction of a new technology by any

player is disruptive and competitors try to replicate the same. In the long run, products and

technology offerings are the same and this leads to high price sensitivity of buyers and poses a

constant price war threat to the industry. Following gives the broadband internet rates for 128 KB

and up in Mumbai as on September, 2014.

(Source: http://www.internet-compared.com/)

2.8Entry and exit barriersInitially, the barriers to enter the telecom industry were very high and large sunk costs were involved

in the construction of essential facilities and infrastructure such as local networks. However, the

government took steps to promote competition. The price of NLD and ILD licenses were reduced

from INR 100 crore to INR 2.5 crore and this saw the entry of several new players in the market. The

base price for auctioning various spectrum technologies was also reduced. For DLC, all service

providers were obligated to share their facilities with other service providers. FDI was relaxed to

100% and the industry saw the entry of foreign players like BT and AT&T into the Indian market.

BSNL started allowing leasing its towers which helped both the older and newer players to penetrate

into new markets. These factors make the telecom industry moderately attractive for the new

players and investors.

2.9Customer Switching Costs

The cost of obtaining a new connection is negligible nowadays in fact free in a number of cases. TheCUG connections were offered free of cost to new students of NMIMS this year. With the

introduction of mobile number portability, switching has become very easy. TRAI set the ceiling price

of switching to INR 200 and some operators do it for free. For broadband, ISPs give monthly plans

which allow the customer to switch to another provider with ease. These factors give new entrant

and investors a reason to entry this industry.


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2.10 Non price competitionThe competition in telecom industry covers various aspects that a consumer looks at rather than just

price. Non-price competition in telecom includes competition over:-

Better coverage of network Aggressive advertising techniques Branding

Celebrity endorsements Better customer service

Diversifying into related product line

Non price competition occurs because of the fear of price wars eventually affecting the revenue of a

particular firm and also the industry as a whole. The core behind non price competition is the

difficulty faced by competitors to counter techniques like aggressive advertising, personal selling, or

improvement in the product or service. The only risk associated with non-price competition is the

acceptance of changed product by the existing consumers. But, on the flipside the consumers do get

a better product at the same price. It leads to innovative behaviour amongst the competitors.

E.g.To attract masses market leader Airtel always endorses superstars of Bollywood with its brand.

Superstars like Shahrukh Khan and Amitabh Bachchan are associated with the brand for a long time.

On the other hand, Vodafone created animated characters called Zoozoos for its strong advertising

campaign which created a buzz in the market. To lure consumers and target a larger market share,

both the companies have indulged in non-price competition of advertising.


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3 AnalysisShort run Equilibrium (Firm Equilibrium)

In the short run, a monopolistic competitor makes an economic profit over and above the normal

profit, known as supernormal profit. The figure below demonstrates these aspects of monopolistic

competition:-

From the above graph we can see that the point A where MC intersects MR gives us the equilibrium

quantity q. Point C, where the equilibrium quantity q intersects AR (which is also the demand curve

for the consumer) gives us p, the price which the consumer pays. The difference between p and p

gives the supernormal profit for the firm.

E.g. Data services propelled Airtel to 61% profit growth in Q1(June 2014), as per business standard.

Price making power

Telecom is a monopolistic competition like the telecom data services industry, the sellers are the price

makers. They differentiate their products through advertisements and brand ambassadors and charge

a premium and increase their profits. This ability is known as the price making power. It has been

illustrated in the graph below. However, there is a ceiling price given by TRAI which cant be exceeded.

According to the Lerner Index, Price making power = (P-MC)/P which in the graph is effectively shown

by the distance AC

E.g. Technological innovation makes a firm in telecom have the advantage to be disruptive and set the

price of the product. Reliance was the disruptor in voice by announcing INR 1 calling rates and hopes

to do the same in data after buying spectrum in all 22 circles for 4G. In India, prices are set low as a

natural consequence of progressively adding customers from lower income segments, division of

household telecommunication expenditures between separate cell connections by family members

and fall in prices due to fierce competition. After the recent spectrum auctions and consequent launchof services by new entrants, currently 10 to 11 operators in a circle jostle with each other for the same


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pie.

Ideal Long Run Equilibrium (Industry Equilibrium)

In ideal condition the market which is dominated by a single player is not a stable condition as the

supplier will keep on making supernormal profit. In order to maintain equilibrium, new players

enter the market and there is competition.

This competition leads to shift in the AC curve upwards and it continues to go up till the firms

start making normal profit from supernormal profit. The second diagram shows the firm making

a normal profit. In this condition the AC curve is tangent to the AR curve. This is the stage where

the market is in equilibrium and also is called the ideal desirable situation.

As TRAIs NTP 2012 are implemented by the current government, competition will be promoted,

number of new players in the market would increase and hence shift from supernormal to

normal profit for these data service providers.

4 ConclusionIndia is one of the most competitive telecommunication markets in the world. India is at a stage

when market forces and a tariff forbearance policy can take over from price controls. The

uncertainty and ever changing policies are barriers to valuable transitions in the telecom

landscape. The fragmented market is eagerly waiting for the liberal M&A policy which would

lead to market consolidation as well as more FDIs. The opportunities and scope of the Indian

telecom are yet to be fully tapped. The digital agenda of the government to digitally empower

every household, village, panchayat, and government office by creating broadband highways

will give huge opportunities to the telecom industry. With newer technologies like M2M, cloud,

NFC, growth in data users, rise in rural teledensity, the operators could improve their profits.

5 References https://www.dnb.co.in

http://www.pwc.in

http://www.communicationstoday.co.in

http://pib.nic.in/

http://cci.gov.in/

http://www.dot.gov.in/

CRISIL database

6 Annexure
https://www.dnb.co.in/IndianTelecomIndustry/OverviewTI.asphttps://www.dnb.co.in/IndianTelecomIndustry/OverviewTI.asphttp://www.pwc.in/http://www.pwc.in/http://www.communicationstoday.co.in/http://www.communicationstoday.co.in/http://pib.nic.in/http://pib.nic.in/http://cci.gov.in/http://cci.gov.in/http://www.dot.gov.in/http://www.dot.gov.in/http://www.dot.gov.in/http://cci.gov.in/http://pib.nic.in/http://www.communicationstoday.co.in/http://www.pwc.in/https://www.dnb.co.in/IndianTelecomIndustry/OverviewTI.asp


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The following charts show the market share of various players in the different telecom data services

segments as on June 30, 2014. The source for the data is TRAI:-

6.1Enterprise Data Services

6.2VPN

VSNL

23%

Bharti Airtel

17%

Reliance

18%

BSNL17%

MTNL

2%

Sify

5%

Tulip

6%

HCL

5%

Hughes

4%

Others

3%

Enterprise Data Services Market

Tulip Telecom

28.0%

Sify

21.7%Reliance

21.0%

Bharti Airtel

12.0%

HCL

5.9%

VSNL

5.2%

BSNL

2.2%

Others

4.1%

VPN Market


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6.3VSAT

6.4Wireless Service Providers (GSM, CDMA & FWP)

Bharti Airtel

21%

HCL

31%

Hughes

31%

Others

17%

VSAT Market

Vodafone

18.6%

Idea

15.2%

Reliance

11.9%BSNL

9.8%

Aircel

8.0%

Tata

6.9%

Telewings

4.3%

Sistema

1.0%

Videocon

0.6%

MTNL

0.4%

Loop

0.3%

Quadrant

0.2% Bharti Airtel

22.9%

Wireless Service Providers


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6.5Wireline Subscriptions

6.6Broadband (wired+wireless) Subscriptions

BSNL

64.3%

MTNL

12.6%

Bharti Airtel

12.0%

Tata5.6%

Reliance

4.3%Quadrant

0.8%

Vodafone

0.2%

Sistema

0.2%

Wireline Service Providers

BSNL

26.9%

Bharti Airtel

21.5%

Vodafone

15.0%

Idea

12.8%

Reliance

8.9%

Others

15.0%

Broadband Market

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