Telecom Service Providers

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Telecom Service

ProvidersEconomic Analysis

2010

Telecom Service

ProvidersEconomic Analysis

Submitted To:

Dr R K OJHA

Submitted By:

Akshi Bhatia Alok Shukla

Amanjot Kaur

Amit Gupta

Anjali Srivastava

mailto:[email protected]




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





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.

BHARTIBharti 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 servicesand 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 AndhraPradesh, 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 venturecompany 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 X1 (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. Itis 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) product2. 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. Itis perfectly possible for many smaller firms to operate on the periphery of an oligopolisticmarket, but none of them is large enough to have any significant effect on market pricesand output

3. Interdependent decision-making: Interdependence means that firms must take intoaccount likely reactions of their rivals to any change in price, output or forms of non-pricecompetition. In perfect competition and monopoly, the producers did not have toconsider a rival’s response when choosing output and price.

4. Non-price competition: Non-price competition s a consistent feature of the competitivestrategies of oligopolistic firms. Examples of non-price competition includes:

a. Free deliveries and installationb. Extended warranties for consumers and credit facilitiesc. Longer opening hours (e.g. supermarkets and petrol stations)d. Branding of products and heavy spending on advertising and marketinge. 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

http://en.wikipedia.org/wiki/Oligopoly

http://en.wikipedia.org/wiki/Paul_Sweezy


http://en.wikipedia.org/wiki/Oligopoly






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 Rs275,444 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

TOTAL REVENUE

0

5000

10000

15000

20000

25000

30000

35000

40000

TOTAL R

COMPANY TOTAL REVENUE

BSNL 35422

BHARTI AIRTEL 26546

RELIANCE 19227

VODAFONE ESSAR 15480

TATA TELESERVICES 8204

IDEA 6720

OTHERS 3200



CONCLUSION

We believe telecom market will enjoy good growth rate owing to lower tele-

density, stiff competition and lower tariffs. So far, subscribers growth hasbeen 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 consolidationphase 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”

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/

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/

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