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INDIAN TELECOMMUNICATIONS
INDUSTRY
TEAM MEMBERS:
Tarun Daga
1
Uma Balakrishnan
2
3
4
CONTENTS
TITLE PAGE
Telecom In India 4
• Timeline 6
Current Market Scenario 8
• Concentration Ratio 16
• H Index 17
• Synopsis of Demand and Supply Situation 18
Conclusion 24
Bibliography 26
5
TELECOM IN INDIA
The Indian telecommunications market has been displaying sustained
high growth rates. Riding on expectations of overall high economic
growth and consequent rising income levels, it offers an unprecedented
opportunity for foreign investment. A combination of factors is driving
growth in the telecom market, promising rich returns on investments.
Over the past 10 years, India has registered the fastest growth among
major democracies, having grown at over 7 per cent in four years during
the 1990s. It represents the fourth largest economy in terms of
Purchasing Power Parity. According to a recent Goldman Sachs report,
over the next fifty years, Brazil, Russia, India and China - the BRIC
economies- could become a much larger force in the world economy. It
reports, “India could emerge as the world’s third largest economy and of
these four countries; India has the potential to show the fastest growth
over the next 30 to 50 years”. The report also states that, “Rising
incomes may also see these economies move through the ‘sweet spot’ of
growth for different kinds of products, as local spending patterns change.
This could be an important determinant of demand and pricing patterns
for a range of commodities”. The share of the services sector as a
percentage of total GDP is also predicted to rise from the current 46 per
cent to about 60 per cent by 2020. The boom in the services sector is
slated to come from India, emerging as a chosen destination for software
and other IT enabled services, tourism etc. According to a Nasscom-
McKinsey & Co. Study, by 2008, the Indian IT software and services sector
will account for US$ 70-80 billion in revenues; it’ll employ 4 million
people, and account for 7 per cent of India’s GDP and 30 per cent of
India’s foreign exchange inflows.
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to be concentrated in and around 60 to 70 large cities, each having a
population of one million or more. This profile of concentrated urban
population will facilitate customised telecom offerings from operators.
Over the years, spending power has steadily increased in India. Between
1995 and 2002, nearly 100 million people became part of the consuming
and rich classes. Over the next five years, 180 million people are
expected to move into the consuming and very rich classes. On an
average, 30-40 million people are joining the middle class every year,
representing huge consumption spending in terms of the demand for
mobile phones, televisions, scooters, cars, credit goods and a
consumption pattern associated with rising incomes.
On May 13, 1994, the government opened local basic and value-added
telecommunications services to competition. Mobile services were
introduced on a commercial basis in November 1994. India was thus
divided into 21 "Telecom Circles". Circles correspond approximately to
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states and are categorized as either "A", "B" or "C" according to size and
importance. Category A includes the heaviest volume areas such as
Delhi, Uttar Pradesh, Maharashtra, Gujarat, Andhra, Karnataka and Tamil
Nadu. Licenses for mobile services were also issued for the four metros
(Delhi, Mumbai, Chennai, Calcutta). As part of the license conditions,
traffic could be routed to VSNL's international gateway only by passing
through DoT/DTS's network. In 1986, the Telecom Commission was set
up with the mandate to accelerate the deployment of telecommunications
services and to implement new telecommunication policy.
8
TIMELINE:
Mid 1980s Department of Telecommunications set up
Dec 1991 DoT invites bids from Indian companies for cellular licenses in
the four metropolitan circles
Nov 1994 Licenses were issued to cellular operators in the four metros
Nov 1998 ISP business opened up to operators other than DoT and VSNL
9
Jan 2002 Bharti starts cellular to cellular long distance services with
sharp cuts in tariffs
May 2002 Bharti offers ILD services with sharp cuts in tariffs
Mar 2006 WPC set subscriber thresholds for GSM and CDMA operators
for spectrum allocation
Mar 2007 9 distinct operators had been allocated GSM spectrum. Out of
these, only Bharti has a pan-India presence.
Jan 2008 Govt of India allocated start-up spectrum to all prior licensees
awaiting spectrum (does not include LOIs issued in January
2008). These include Aircel (14 circles), Idea (2 circles),
RComm (14 circles) and Vodafone (6 circles).
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CURRENT MARKET SCENARIO
The major players in the Indian telecom industry, excluding Reliance and
Tata Teleservices, are operating in the GSM market. After the release of
TRAI recommendations in September 2007, there was a flood of
applications for UASL (Unified Access License Seekers). This was probably
because of the hope of pan-India start-up GSM allocation at a very
economical price (US$240m). The armed forces are expected to vacate
20MHz of GSM spectrum. This would be around 70% of average GSM
allocation currently.
11
All India GSM Cellular Subscriber Base-Circle Wise
12
GSM Industry Indicators for 2007
TELE-DENSITY IN INDIA:
While the tele-density in the urban areas is over 50 percent, in rural areas
it is around eight percent only. Clearly, the future lies in the rural areas.
Telecommunication access to rural India is going to be the most
important development since the Green Revolution. Research analysts
feel that mobile voice is overwhelmingly the engine of growth followed by
Next Generation Network (NGN), broadband and data.
MARKET PLAYERS:
13
14
No. Service Total Market Trends
Providers sub share
figures (%)
in 11 circles.
15
6. AIRCEL 680506 2.98 Operates only in Metro(Chennai)
6 and Circle A(Tamil Nadu)
16
Total Future Projections (Mobile Subscribers)
As can be seen from the figure of demand graph, the demand in the
telecom industry in year 2007 is around 230 million now we will see does
the main players in the industry has the capacity to fulfil the appetite of
the demand side.
Here we are considering only the top 4 companies which almost consist
80% of the market shares.
• Bharti Airtel
• BSNL
• Vodafone Essar
• Reliance communications
The key highlights for the Indian telecoms sector in 2006 were the
emergence of India as the fastest growing region in the world - overtaking
China - plus increased interest from the overseas telecom majors,
together with a drop in tariffs across the various segments.
The near 8% growth rate expected to be achieved by the Indian Economy
for FY07 augurs well for the telecom sector. The wireless segment
performed well again, with the subscriber base reaching 228.5 million
(GSM, CDMA and WLL-F) as of December 2007. Given the outlook for the
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Economy, another year of high growth is expected, led by a greater focus
in the 'B' and 'C' circles. Even the overall tele-density reached 22.5% in
December 2007, from 16.6% in November 2006.
Wireless Penetration
The Indian market remains one of the few telecom Markets to exhibit
continued growth, and the industry is expected to achieve the
government's target of 330 million telecom subscribers by end 2008.
Further impetus is expected from the introduction of Mobile Number
Portability (MNP) and the possible 3G rollout in the end of year 2008,
coupled with expansion in value-added services (VAS).
Industry operators have substantial investments ahead of them, owing to
the sustained high growth phase of the industry. For the next financial
year, all major operators have significantly increased their capex plans.
FY08 industry capex is likely to exceed USD18bn, approximately twice the
level for FY07. On account of their heavy capex, most operators would
continue to be free cash flow negative (FCFN) during FY08,
notwithstanding strong growth in operating cash flow.
While debt would remain the primary source for funding these
investments, equity through IPOs for some of the unlisted entities could
also emerge as an option. BSNL has already announced its IPO, to be
commenced during late 2008. Hutchison International has also sold its
stake to Vodafone which used the existing subscriber base of Hutchison
Essar to gain a strong foothold in the already vibrant Indian
telecommunications market.
GSM players in India added 101 million new subscribers in FY08. The
public sector BSNL has registered negative growth in five of the 21
telecom circles where it offers services. Overall, the PSU has added just
29.86 mn new subscribers in FY08 compared to 50.69 mn by Bharti Airtel
and 38.53 million by Vodafone-Essar. This also implies that the PSU,
which had lost its position as the second largest GSM player in the
country to Vodafone Essar in May 2007, has slipped further down.
Vodafone Essar now has a total of over 44.13 million subscribers and a
market share of 19.31% when compared to 29.86 mn and 16.41% for the
PSU.
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expansion contract since October 2005. This has witnessed even regional
players like Idea Cellular and Aircel Cellular have overtaken the PSU in
terms of subscriber addition over the last year.
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ECONOMIC INDICATORS
CONCENTRATION RATIO:
In Economics the concentration ratio of an industry is used as an
indicator of the relative size of firms in relation to the industry as a whole.
This may also assist in determining the market form of the industry. One
commonly used concentration ratio is the four-firm concentration ratio,
which consists of the market share, as a percentage, of the four largest
firms in the industry. In general, the N-firm concentration ratio is the
percentage of market output generated by the N largest firms in the
industry. Market forms can often be classified by their concentration
ratio. Listed, in ascending firm size, they are:
2. RELIANCE 22.99
COMMUNICATION
3. VODAFONE 19.31
ESSAR
4. BSNL 14.99
Total =
82.69%
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The top four companies constitute almost 83% of the market, thus
showing a high concentration ratio; this implies the industry is dominated
by top 4 players thus it shows a oligopolistic market.
21
H INDEX:
H Index (The Herfindahl-Hirschman Index): H index stands for Herfindahl-
Hirschman index, which is a way of measuring the concentration of
market share held by particular suppliers in a market. The H index is the
sum of squares of the percentages of the market shares held by the firms
in a market.
VALUE IMPLICATION
1 Absolute monopoly
0 Absolute
competition
0-0.5 Monopolistic
0.5-0.75 Oligopoly
0.75-1.0 Monopoly
22
9. MTNL 0.0142 0.000202
Total =
0.18961336
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taken place with the introduction of I-Phone in the Indian market. Also
Google has announced the launch of its 3G mobile phone.
• Since there is likely to be such a major increase in demand, and it is
not yet clear when the supply will increase enough to meet this demand,
determining the demand curve is not an easy task.
• Even if supply increases enough to cater to the additional demand,
the fact that demand is increasing at a rapid pace implies that the
determination of the extent and nature of demand will not be an easy
task. This will be further complicated by the new products that are
emerging in the market.
The Figure below shows a simplified picture of the demand and cost
situation relevant to telecom pricing. DD is the demand curve for a basic
telecom service, MC is the marginal cost curve, and AC is the average
cost curve. For simplification, marginal costs are shown to be the same
for each unit of output. Since fixed costs do not change with a change in
the output level, the average total costs (comprising average fixed and
marginal costs) will be above marginal costs, but declining.
In the Figure above, the level of output Q0 is the level at which price is
equal to marginal cost (i.e., the point of intersection of the demand curve
and the marginal cost curve). It is evident that the price does not cover
costs at that level because the average cost is above the price level. The
Ramsey rule suggests the extent to which the price should be increased
to obtain the revenue that would cover costs and provide an adequate
return. The Ramsey rule requires that the prices be those given by the
demand curve, i.e. there should not be any constraint for the customer to
be operating on the demand curve.
In the Indian situation, however, there is likely to be a capacity constraint
and thus the customers are unlikely to be on the demand curve. The
capacity constraint in India arises for two reasons. One, the subscribers
linked up to the network face congestion and are thus not able to make
as many completed calls as they desire. Second, the existing network
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does not satisfy the demand of all those wanting to be linked up to the
network. The first type of constraint (i.e. congestion) implies that the
supply constraint shown by SS is the operating schedule for the
subscribers.
Some tentative conclusions could be drawn from this discussion. Due to
the prevailing excess demand, a change in price will not alter overall
demand as long as there is excess demand. In such a situation, the price
could be increased till the price is high enough to reach the demand
schedule, i.e. till the point where the supply equals demand. This does not
mean that certain subscribers will not reduce their demand, but that the
reduction in demand will be compensated by the prevailing excess
demand filling the gap till the price becomes so high that excess demand
itself becomes zero.
Excess demand also implies that a high price could be charged for those
telecom services for which subscribers are willing to pay a high price, i.e.
service for which the price shown by the demand curve is high at a given
level of the supply constraint. However, it is not clear what this price level
should be, because the demand curve is not easy to determine.
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EXCESS DEMAND AND CONGESTION:
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in such a way that the Ramsey rule for mark-up could be satisfied for
different services.
The fact that the price is above marginal cost means that some mark-up
already exists. Any change in the mark-up (due to a change in price) will
not affect the level of demand as long as the customers face a capacity
constraint, i.e. as long as they are on the vertical line SS above. Thus, in
effect, the elasticity of demand for each service with a capacity
constraint is the same, i.e. it is equal to zero on SS.
The fact that there is overall excess demand due to congestion does not
mean that such congestion operates everywhere. Thus, the situation
would comprise those who do not face any supply constraints and others
who face a supply constraint in certain parts of the country. This is shown
by the two demand curves above, D1D1 and D2D2. Only D2D2 is subject
to a supply constraint, and thus a change in price will affect the overall
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level of demand of those in situations D1D1 and not of those in situation
D2D2. However, the presence of a supply constraint does reduce the
elasticity (or responsiveness) of the overall demand for the telecom
service.
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EXCESS DEMAND FOR TELEPHONE CONNECTIONS:
There is considerable excess demand for telephone connections in India,
and this demand is expected to rise sharply in the near future. The
Department of Telecommunications has estimated that in the next five
years, demand for telephones is likely to more than double. While
capacity extension will continue to try to cater to this demand, this
situation adds to the difficulty created by the abovementioned capacity
constraint in using the demand situation in India to assess the telecom
price or the mark-up.
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Even if the customer is not subject to the supply constraint, it may not
be feasible to apply the Ramsey rule as long as the desired price is to the
right side of the supply constraint. Moreover, when the link to the
network is increasing as rapidly as 20 per cent per annum, and excess
demand still continues to prevail, it is very difficult to estimate demand
characteristics accurately or to use the demand curve for pricing
telecom.
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CONCLUSION
In our opinion, instead of taking a short-term view of paying capacity, the
telecom companies should focus on a long-term game. There is one word
that telecom companies are hearing a lot these days-“Volumes”. They
need volumes to sustain the network and the large employee base they
have enrolled. In this regard, companies like Reliance and Tata’s have
been aggressive over the final rollout of connections to PCO owners.
Reliance is giving upto 30% commission on each call. How they market
and distribute these connections is a tough battle indeed. If and when the
carrier access codes are introduced, there could be a tough fight among
these outlets, as far as prices are concerned. Yet, prices can go down
further by almost 40% of the present structure. Part of the price cuts
could be because of tax exemptions, if and when these companies can
lobby for the same. The other part could be earning through volumes.
New players like Virgin Mobile, which already has an international
presence in close to 17 countries are entering India. It is doing so in
collaboration with Tata Teleservices. The target market for Virgin Mobile
is the youth, which in India is around 54% of its population.
Mobile Number Portability (MNP) is to be introduced by June 2009. A
neutral third-party operator is likely to be licensed to provide an end-to-
end MNP solution. MNP could well be a catalyst in the realignment of
subscriber market share in favour of strong players with better service
quality. There are challenges like porting time, allocation of capital and
operational porting costs among participants, and other interconnect
issues. Yet, the atmosphere around the MNP issue looks positive and will
be set once the committee submits its final report on the same.
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concerned. Besides, the TRAI has identified introduction of NGN as a
priority area.
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BIBLIOGRAPHY
• www.trai.gov.in
• www.coai.com
• www.dot.gov.in
• PriceWaterHOuse Coopers
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