A RESEARCH PROJECT ON

STUDY OF MICRO ECONOMICS FOCUS ON INDIAN TELECOM INDUSTRY Submitted in partial fulfillment of requirement of award Of the degree of

MASTER OF PHILOSOPHY
Meerut Institute of Engineering and Technology

Submitted To:

Submitted By:

CONTENTS
TITLE
Telecom In India Evolution of Indian Telecom Industry

PAGE
4 5

Timeline

6 8

Current Market Scenario

Size, Players and Trends Tele-density Market Players When the Prices Decline

8 10 11 15 16

Economic Indicators

Concentration Ratio H Index Synopsis of Demand and Supply Situation

16 17 18 24 26

Conclusion Bibliography

INTRODUCTION
Economics is studied from two different perspectives, the macro view and the micro view. Macroeconomics is the study of the determination of economic aggregates such as national output, the level of employment, the price level and the rate of economic growth. Microeconomics studies resource allocation and income distribution as they are affected by the free working of the price system and specific government policies. How, for example, do firms and households make spending choices? What determines an individual's wages? How does the availability of public housing affect supply in the housing market? Scarcity, Choice and Opportunity Cost Scarcity of resources forces everyone to make choices. For example, faced with a fast approaching mid-term exam, a student could either study or go to a party. In this case, the cost of having a good time can be measured in terms of lost marks on the mid-term. Such a cost is called an opportunity cost. Opportunity cost, the measurement of the cost of something in terms of forgone alternatives, is fundamental to the study of economics. This concept can be illustrated by a production possibilities frontier, a graphical representation of the combinations of goods and services that are just attainable when all of society's resources are efficiently employed. Let's look at a simple example: A country can produce 50 helicopters if it produces no food, or 10 million tonnes of food if it produces no helicopters. The country can also produce any combination of food and helicopters on or below the straight line connecting these points. Plotted on a graph with the number of helicopters on one axis and millions of tonnes of food on the other, this line shows the maximum amount of food that can be produced for any given level of helicopter production (or vice versa).
4

From the preceding graph, we see that the PPF is the boundary between attainable and unattainable combinations of food and helicopters. There are unattainable combinations (above the PPF) because of scarcity: for a given level of technology, finite resource quantities limit production. If a country fails to use all of its available resources and/or its best available technologies, production will correspond to a point below the PPF. Such points are inefficient because they admit the possibility of producing more of one good without sacrificing any of the other. The problem of choice faced by all economies is illustrated by the fact that there is an infinite number of points along the PPF. Each of these is efficient in the sense of not admitting the possibility of getting more of one good without giving up some of the other. There is no simple answer to the question of which efficient point a country should produce at. Unless people's tastes are accounted for in some way, every point along the PPF can be considered as good as every other point. PPFs are generally assumed to be concave to the origin (unlike that of the preceding graph). This shape implies that the opportunity cost grows larger and larger as the output of either good is increased. For example, if a country producing only helicopters decides to produce a little food, the cost in terms of forgone helicopters is likely to be very small. On the other hand, if the country is producing very few helicopters, the opportunity cost of a small increase in food output is likely to be quite large (a lot of helicopters). The reason that we expect such results is that resources are not uniformly productive. The most efficient way of producing an additional tonne of food would be to reallocate helicopter-industry resources with the lowest helicopter-making to farming ability ratio. Doing so would mean that the relative productivity in helicopter-making of the resources lost from the helicopter industry

rises along with food output. Thus, the number of helicopters forgone increases as more food is produced. Introduction & Basic Concepts

I II III

Nature of economics. Definition. Contents. Scope. Economic systems. Some basic concepts.

* I Nature of Economics

Economics, as a social science subject, is the study of human behavior in relation to the functioning of the economy ( operation of the market mechanism ), based on a scientific approach to obtain theories which are to explain economic issues and behavior. The study of human behavior in the market is treated in two main areas microeconomics & macroeconomics. The scientific approach refers to the formation of theories for analysis & explanation through the positive methods. This approach is often called positive economics.

Definition of Economics Many people treat economics as a dismal science because economists had to face with the scarcity of resources all the time. As a result, we have a certain degree of limitation imposed by the nature.

John M. Keynes, " the theory of economics does not furnish a body of settled conclusions immediately

applicable to policy. It is a method rather than a doctrine, an apparatus of the mind , a technique of thinking which helps its possessor to draw correct conclusions. " Paul Heyne, " I want beginning students to master a concept that will help them think more coherently and consistently about the wide range of social problems that economic theory illuminates ..... the principle of economics must therefore be taught as tools of analysis. "Alchian & Allen, " economics enables a more accurate inquiry into how our behavior is influenced by the kind of economic system we have. " Contents of Economics

Subject matter :

Want, Scarcity, Choice ------------------------------Concept of opportunity cost

Problems/Goals : problems

What/ How/ For Whom : to produce ? ----------Basic economic

Allocation of resources Distribution of products & income ----------Economic goals & economic Stability of prices & economy systems Growth of the economy

Microeconomics Macroeconomics

Production Theory Public National

Consumer Theory Inter.

Money &

Banking

Finance

Income

Trade

Monetary

Govt. &

Economic Trade

Factor Market Fiscal Models

Product Market Theory

Policy

Policy

& Ex.

Market Structure/Mechanism Rates

Economic Issues Existence of Externality Inflation & Unemployment.

Scope of Economics : Subject Matter

Want >

Resources for production

Scarcity ( A Constraint )

Choice & Sacrifice--------------------Cost

Competition----------------------------Rule of the game

Price competition competition

Non-price

We want ( which is relatively unlimited or ) more than we could have ( based on our resources ). As a result, scarcity arises. It is this constraint ( scarcity ) that forces us to choose and sacrifice eventually leading to different types of human behavior.

Methodology

The Nature of Science Scientists believe that : - there are rules or laws governing any phenomena or behavior ; and

- the occurrence of any phenomena or behavior must have its cause or its reason. In order to explain any phenomena ( observation, facts or behavior ) we need some abstract theories because fact cannot explain itself.

The Starting Point In Economics As a social science, economics begins with some postulates or axioms.

* The basic unit of economic analysis is the individual because it is the individual who makes a choice or decision. The individual behavior is an act of choice based on rationality. It follows that the individual behavior must be predicted ( not forecasted ). * ) for the individual. The behavior is to seek the maximum benefit ( self-interest not selfish

Man seeks to settle himself in a situation under which he finds himself in a highest-valued position based on his constraints. * to begin with, economists develop economic theories to explain individual choices & behavior which are again based on : - taste or preference - these are subjective valuation & not observable. We need to make

10

postulates about them. - constraints or opportunity sets - they include all factors which affect behavior and are measurable, e.g. income, laws, technology and culture.

Based on the changes of these constraints, economists try to explain human behavior. For example, when income changes, what is the resulting change in your quantity demanded for a particular kind of good ?

The Formation Of Economic Theory

Facts do not explain by themselves. In order to obtain the relevant facts, some sets of axioms are needed. Such a notion is the beginning of a theory.

* and a set of tested

A theory contains a set of assertions or postulates ( based on reality )

conditions or hypotheses under which the behavioral postulates are to be tested.

11

Economists start by simplifying the complicated reality into some simple postulates or assumptions based on the belief of scientifically determinable laws.

Reality

Explanation & Simplified description &

Prediction abstraction based on observation

Axioms / Postulates / Assumptions ( Unrealistic )

Hypothesis with selected variables ( Positive statements that are observable. )

A theory is said to be confirmed. Logical reasoning

Theoretical Conclusions

Empirical verification Verification ( tested, may be refuted )

12

" Theory " : first developed

Economic analysis refers mainly to the explanation of facts with the use of economic theories. Theories are different from truth. Even a good theory can be wrong, i.e. it can be refuted.

In fact, a good theory includes three aspects : * It should be simple so that it can be easily understood and applicable. * It has good or strong predictive power on human behavior. * It can be falsified, i.e. it might be refuted but has NOT yet refuted.

The Context of Economics

Given the constraints or the rules of the game, economists try to predict the criterion of competition. Based on the criterion, they try to predict human behavior, the allocation of resources and the distribution of income. They try to explain how these rules of the game are formed.

II

Economic Systems

An economic system contains many sets of rules, values, institutions, laws and decision-making agents with the main of optimum allocation, distribution, stability and growth. Production needs organized actions which depends on a source of authority or a power of command.
13

Such an arrangement for the purpose of production leads to the formation of an economic system.

From anther view, scarcity leads to some sorts of competition. Competition relies on some rules and regulations as guidelines so that an economic system is required.

14

The Two Main Economic Systems : A Brief Comparison

Market Economy 1 Operation of the system Competitive market with price signal Consumers with consumer rights Private and individual Price and market

Command Economy Central planning board to form systematized markets Central planning by the state

Decision-making agents

3 4

Ownership & property Coordination and information channel Incentive on growth & development

Collective ownership Government units

Profit motive and selfinterest

Moral persuasion and political philosophy

III

Some Basic Concepts

Scarcity The condition of limited resources relative to unlimited human wants, thus generating the need for economic decision-making.

Competition Whenever there is more than one person demanding the same economic good, competition arises. It is also the method of coordinating economic activity through the free exchange of productive resources and final goods & services, under the system of ( private ) property rights.

Scarcity Discrimination : win or lose

Allocation & Competition

15

Non-price competition The competition for resources other than the use of price, or in addition to the use of price, e.g. rationing, first-one-first-served, queue, ballot or privileges.

Appendix 1 : Some Great Economists - Past & Present

Adam Smith 1723 - 1790

Adam Smith is assumed to be the father of modern economics. His family book " An Inquiry into the Nature and Causes of the Wealth of Nations " ( published in 1776 ) would appear to be classic rather than a modern economic textbook.

One of his most significant contributions to economic thought was his explanation of the importance of the division of labour, and its relation with economic development.

His central theme was the value of self-interest and laissez-faire. Economic freedom was stressed and the power of the government should be minimized. The society will be better if everyone is allowed to seek and fulfill its personal desires, based on law & order.

The market mechanism ( in Smith's famous words : the invisible hand ) should be allowed to operate freely so that everyone would be better off & satisfied.

David Ricardo 1772 - 1823

16

He was born in London. At the age of 14, he helped his father's business only after a brief education. At the age of 19, he tried on his own and in a decade, he had some 2 million pounds. He retired and in 1814 held a seat in the Parliament after buying a country estate.

One of his famous thought was the theory of rent and diminishing returns. He went on to set forth the theory of comparative advantages in the analysis of international trade. Like Smith, he was treated as a classical liberalist of the time.

Alfred Marshall 1842 - 1924

He was an early pioneer of neo-classical economist. As the Cambridge University Professor of political economy, he was also the father of modern microeconomics. He introduced many concepts in economics - the representative firm ; the dimension of time ( short & long run ) ; consumer surplus ; the interaction of demand & supply ; and also the refining of the concept of elasticity. To him, economics was not a body of truth but " an engine to discover the truth ".

Karl Marx 1818 - 83

He was a German revolutionary at first. He tried to build to his own philosophy - dialectical materialism - to explain the evolution of history. According to him, history was filled up with " class struggles ". History goes when one class rises up in the society by a revolution and wins over the previous ruling class. He severely attacked the evils of " capitalism " and laid down his philosophy - the so-called Marxism.

In 1848, Marx and Friederick Engels published a pamphlet - the Communist Manifesto - to declare international communist movement as well as their philosophy and social ideals. In 1867, the first volume of Marx's great work - The Capital - was published. It analyzed the concepts of labour, labour value and capital. He supposed that under socialism the society can reach a state which : " from each according to his ability, to each according to his work. "

17

Under communism, it is a society without a state, a government and even police. The society can reach a state which : " from each according to his work, to each according to his need. "

All socialist nations proposed Marxism as orthodoxy until the year 1989.

John Maynard Keynes 1883 - 1946

Keynes was brilliant in contemporary economics and the father of modern macroeconomics. When the world was hard-hit by the Great Depression in the 1930's Keynes declared that the market mechanism had its failure to cause the collapse of the world economy. It could only be remedied by government action - the use of fiscal policy - which becomes an important topic in public finance.

His masterpiece - the General Theory of Employment, Interest and Money - was published in 1936 which led to the analysis of economics in a macro-view.

Milton Friedman 1912 -

As one of the leading monetarists and member of the Chicago School of economics, the 1976 Nobel Prize Laureate advocates the confinement of the role of government. He suggested that the central bank should have a stable increase in money supply to cope with economic growth, and at the same time, to maintain a monetary policy so as to prevent inflation. In short, inflation is basically a monetary phenomenon so that money matters very much.

Paul A. Samuelson 1915 -

He was notable in his extensive application of mathematics in economics with innovative results. He won the Nobel Prize in 1970.

18

Appendix 2 : The Scope of Economic Analysis

The following terms are helpful in understanding the methodology in economics.

Axiom a statement accepted as truth without proof or argument.

Fact observation which has been verified by formal investigation.

Positive statements statements concern with what was, is or will be. They involve verifiable facts.

Normative statements statements concern with what ought to be. They involve value judgement of good or

bad.

Deductive method ( from general to particular )

the treatment of a problem by commencing from a premise accepted as being true, and with the use of logical reasoning, arriving at one or more conclusions. Its usefulness depends upon the correctness of the reasoning, and the truthfulness of the premise.

Inductive method ( from particular to general ) a logical process starting from the examination of facts with the intention of arriving generalizations.

at

19

Hypothesis

statement showing the relation between ( observable ) variables. They are often expressed in the form of " if A then B ".

Tautology

statement which cannot be falsified under all circumstances. Such statements are void in itself.

Logical reasoning

the reasoning must be logical and consistent. The hypothesis of " if A then B " can be represented by "AB" where A : antecedent ; and B : consequent.

Once A is confirmed to be true, it follows that B is also true.

However, there are two logical fallacies : the fallacy of confirming the consequent such that " A B " is true but " B A " is only a fallacy. the fallacy of denying the antecedent such that " A B " is true but " not A not B " is also a fallacy.

10

Fallacy of composition

what is true when applied to an individual or single item may not be true if applied to the whole.

11

Usefulness of a theory all useful theories are unrealistic. To be useful, an economic theory must be able to :

(1) the goals ;

isolate the importance economic variables that help to explain the behaviour of

20

(2) create useful generalizations to describe the relationships among groups of variables ; & (3) test whether the generalizations have predictive power.

12

Prediction

economic theories have predictive power, not forecasting power. Though useful theories are unrealistic, the core is whether or not the implications of such theories are " realistic " enough that they can be observed, tested and refutable by evidence.

21

OBJECTIVE OF THE RESEARCH

To study micro economics focuses on Indian Telecom Industry To Study productivity of Indian Telecom Industry To Study factor affecting Productivity of Indian Telecom Industry

22

RESEARCH METHODOLOGY

Research in common parlance refers to a search for knowledge. Research is a systematic search of pertinent information on a specific topic. Systemized effort to gain new knowledge - Redman and Mory The manipulation of things, concepts or a symbols for t he purpose of generalizing theory to extend, correct or verify knowledge aids in or in the practice of construction of an art

Slesinger&M.Stephenson TYPE OF RESEARCHES:-The basic types of researches are as follows: 1. Descriptive vs. Analytical 2. Applied vs. Fundamental 3. Quantitative vs. Qualitative 4. Conceptual vs. Empirical From the above different type of researches, this project work can be described as Quantitative vs. Qualitative. DATA COLLECTION The success of any research project depends critically on data. So data as the important aspects of research there mainly are two type of data which are used for any research project. Primary data
23

Secondary data

PRIMARY DATA:- Primary data are those which are collected afresh and for the time, and thus happen to be original in character. In case of this project work primary data was collected through interview and structured Questionnaire asked to the individuals in different age segment. Secondary Data:- Secondary data are statistics not gathered for the immediate study at hand but which have already been collected by someone else and which have already been passed through the statistical process. In case of this project work the secondary data has secondary importance and the same is collected from sources like. 1. Internet 2. Books 3. Brochures For taking secondary data I take the help of companys brochure, pamplets and website. I also use some books for taking some theoretical aspects related to productivity.

24

Sample Size Number of the sample units selected from the population is called the size of the sample. Sample of 50 respondents were obtained from the population.

25

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 worlds 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; itll employ 4 million people, and account for 7 per cent of Indias GDP and 30 per cent of Indias foreign exchange inflows. Population projections from the Planning Commission of India suggest that the share of the working age population (15-64 years) in total population will grow from the current 59 per cent to about 65 per cent, translating into 882 million by year 2020.According to the Vision
26

2020 document for the Planning Commission of India, the country will witness continued urbanisation. The urban population is expected to rise from 28 per cent to 40 per cent of total population by 2020.Future growth is likely 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.

27

EVOLUTION OF THE INDIAN TELECOM INDUSTRY

Until the 1980s, the Department of Posts and Telegraphs (under the Ministry of the same name) had the mandate of regulating and offering telecommunications services. It was governed by the Indian Telegraph Act 1885 and the Wireless Act of 1933. In 1985, the

Department of Posts and Telegraph was split up into the Department of Telecommunications (DoT) and the Department of Posts. The DoT was established as the state operator, regulator and licensor. It was only in October 1999 that the activities of the operator and licensor were somewhat separated, by the creation of the Department of Telecommunications Services (DTS). This separation, however, was a largely artificial one. Although the DoT had been charged with operating telecommunications services, its efforts were seen as insufficient. Initial steps towards corporatisation saw the creation of Mahanagar Telephone Nigam Limited (MTNL), which started offering basic fixed services in Mumbai and Delhi in 1987. MTNL still holds a monopoly in those cities, where DoT/DTS is not present at the local level. MTNL is wholly owned by the Government of India and the DoT. Videsh Sanchar Nigam Limited (VSNL) was set up in 1986 as the monopoly operator for international gateway services. 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 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

28

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. A bill passed in 1995 envisaged the creation of an independent and autonomous agency for the regulation of telecommunications, the Telecommunications Regulatory Authority of India (TRAI). Set up in 1997, the TRAI is responsible facilitating interconnection and technical interconnectivity between operators, regulating revenue sharing, ensuring compliance with license conditions, facilitating competition and settling disputes between service providers. The TRAI cannot grant or renew licenses and this remains the DoT's responsibility. The TRAI may also set the rates for telecommunications services. Its decisions can only be challenged by the High Courts or Supreme Courts of India.

29

TIMELINE:
Mid 1980s Mar 1986 Apr 1986 Department of Telecommunications set up VSNL incorporated to provide international telecom services MTNL incorporated to provide fixed-line telephone services in Mumbai and New Delhi Dec 1991 DoT invites bids from Indian companies for cellular licenses in the four metropolitan circles May 1994 Government announces the National Telecom Policy, opening up the basic service sector to private players Sep 1994 Nov 1994 Mar 1995 Oct 1996 Jan 1997 Nov 1998 Mar 1999 Jul 1999 Entry guidelines for basic services announced Licenses were issued to cellular operators in the four metros Paging services by private operators commence Licenses for 20 cellular circles issued Telecom Regulatory Authority of India established by government ISP business opened up to operators other than DoT and VSNL Government announces NTP 1999 DoT announces Migration Package for existing operators' licensing costs, subject to compliance with certain conditions Aug 2000 Government announces guidelines for opening up domestic long distance telephony for carrying both inter-circle and intra-circle traffic, with no
30

restriction on the number of players TRAI issues the first tariff order and cuts domestic and international long distance telephony charges. Jan 2001 The Department of Telecom opens up basic services to unlimited competition and allows basic operators to provide WLL services on a restricted basis. Aug 2001 Jan 2002 Apr 2002 May 2002 Sep 2002 Mar 2006 allocation Mar 2007 9 distinct operators had been allocated GSM spectrum. Out of these, only Bharti has a pan-India presence. Aug 2007 Subscriber thresholds were revised by TRAI as operators could support more subscribers with lower spectrum as compared to WPC allocation 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). Jun 2009 TRAI plans to introduce MNP (Mobile Number Portability) on a pan-India basis Opening of National Long Distance Service to competition Bharti starts cellular to cellular long distance services with sharp cuts in tariffs ILD sector opened to competition. End of VSNL monopoly. Bharti offers ILD services with sharp cuts in tariffs TRAI decides to 'forbear' from regulating cellular tariffs WPC set subscriber thresholds for GSM and CDMA operators for spectrum

31

CURRENT MARKET SCENARIO

SIZE, PLAYERS AND TRENDS:

India boasts of 300 million telephone subscribers today and has become the second largest telecom network in the world, after China. Also, the number of new mobile subscribers is growing by 8.5 to 10 million every month, making it one of the fastest growing telecom markets of the world. In 2006-07, the telecom industry also saw an estimated $8.5 bn in investment flow, out of which 6% or $550 million was in the form of foreign direct investment (FDI). According to a report by RNCOS, a market research consulting Services Company, mobile phones account for 80.2% of the subscriber base in India, at the end of March 2007. The growth of telecom in India can be attributed to liberalization, reforms and competition. The telecom policy of 1999 envisaged a tele-density of 15 percent by the year 2010. The overall tele-density of the country is already over 26 percent now. Out of 300 million telephone subscribers today, 13% are wire-line subscribers. These developments in telecom sector have resulted in massive investments and explosion in supply, which are signs of a vigorous, competitive and fast-growing sector. 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

32

price (US$240m). The armed forces are expected to vacate 20MHz of GSM spectrum. This would be around 70% of average GSM allocation currently.

33

1. PRODUCTIVITY:

Productivity in economics is the ratio of what is produced to what is required to produce. Productivity is the measure on production efficiency. While productivity is the amount of output produced relative to the amount of resources (time and money) that go into the production, efficiency is the value of output relative to the cost of inputs used. Productivity improves when the quantity of output increases relative to the quantity of input. Efficiency improves, when the cost of inputs used is reduced relative the value of output. A change in the price of inputs might lead a firm to change the mix of inputs used, in order to reduce the cost of inputs used, and improve efficiency, without actually increasing the quantity of output relative the quantity of inputs. A change in technology, however, might allow a firm to increase output with a given quantity of inputs, such an increase in productivity would be more technically efficient, but might not reflect any change in efficiency. Companies can increase productivity in a variety of ways. The most obvious methods involve automation and computerization which minimize the tasks that must be performed by employees. Labour productivity is generally speaking held to be the same as the average product of labour (average output per worker or per worker-hour, an output which could be measured in physical terms or in price terms). However, some aspects of labour productivity may be very difficult to measure exactly, or in an unbiased way, such as: The intensity of labour-effort, and the quality of labour effort generally; The creative activity involved in producing technical innovations; The relative efficiency gains resulting from different systems of management, organization, co-ordination or engineering;

34

 The productive effects of some forms of labour on other forms of labour.

One important reason is that these aspects of productivity refer mainly to its qualitative, rather than quantitative and dimensions.

35

2. PRODUCTIVITY MEASUREMENT:
Productivity is the relationship between output of goods and services and the inputs of resources used in the production process, with the relationship usually expressed in ratio form. Productivity measures are sub-divided into partial and total factor or multi-factor productivity measures. The former are defined as the relationship between output and one input, such as labour or capital, while the latter represents the relationship between output and an index of two or more inputs.

Productivity is determined by a number of factors, including the quality and availability of natural resources, industrial structure and inter-sectors shifts, capital accumulation, the rate of technological progress, quality of human resources, the macroeconomic environment, and the microeconomic environment. The production function depicts production performance and productivity is the measure of it. By help of the production function, it is possible to describe simply the mechanism of economic growth. Economic growth is a production increase achieved by an economic community. It is usually expressed as an annual growth percentage depicting (real) growth of the national product. Economic growth is created by two factors: increase in production input and an increase in productivity. Accordingly, an increase in productivity is characterized by a shift of the production function and a consequent change to the output/input relation. The formula of total productivity is

36

Productivity = Output Q/ Input Q

Q = quantity According to this formula, changes in input and output have to be measured inclusive of both quantitative and qualitative changes. In practice, quantitative and qualitative changes take place when relative quantities and relative prices of different input and output factors alter. In order to accentuate qualitative changes in output and input, the formula of total productivity shall be written as follows Productivity = Output Q and Quality/ Input Q and quality

37

3. COMPETITIVENESS VERSUS PRODUCTIVITY:

The concept of productivity is increasingly being recognized as more pertinent than competitiveness. Indeed, some economists argue that the whole notion of a "competitive nation" should be abandoned as a term having much meaning for economic prosperity. The ability to do so depends not on the amorphous notion of "competitiveness" but on the productivity with which a nation's resources (labor and capital) are employed. Thus the only meaningful concept of competitiveness at the national level is national productivity. From the point of view of management functions there should be productivity of decision, planning, organizing, coordinating and controlling. Also, from the management roles concept there should be productivity in ten roles for managers and entrepreneurs which should be adapted to small and medium enterprises. From the point of view of executive function of the small and medium enterprises, productivity should be focusing mainly on production and commercial functions, because other functions may be at minimum level or externalized (such as personnel, financial and accountability, research and development). Productivity Prevision/ Planning

Productivity Control& Pursuit

Organizing for Productivity Productivity Evaluation&

Decision Productivity Coordination Managerial functions connections for productivity

38

4. BRIEF HISTORY OF INDIAN TELECOM SECTOR:

The Indian telecom industry has come a long way in achieving its dream of providing affordable and effective communication services to its customers. In the last decade, India has become a major base for the telecom industry worldwide enabling Indian telecom companies to become truly global players. The Indian telecom sector has gone through many phases of growth and diversification. Starting from telegraphic and telephonic systems in the 19th century, the field of telephonic communication has now expanded to make use of advanced technologies like GSM, CDMA, and WLL to the great 3G Technology in mobile phones. India, supported by its strong economic growth, represents one of the fastest growing consumer markets in the world. The fundamental forces of long term economic growth such as demographics, urbanization, and rising education levels are affecting growth in Indian incomes resulting in increasing spending power, which translates into growing household consumption. The Indian consumer market is set to scale new heights. According to a study by McKinsey Global Institute on the rise of Indias Consumer Market in May 2007, India will climb from its position as the twelfth-largest consumer market today to become the world's fifth-largest consumer market by 2025. Aligning with the growing potential of consumer market in India, the Indian telecom sector has experienced a tremendous growth in the last few years According to a recent study by Gartner, the tot al cellular services revenue in India is projected to grow at a Compound Annual Growth Rate (CAGR) of 18 percent from 20082012 to exceed USD 37 billion, with more than 737 million mobile connections by 2012, growing at a CAGR of 21 percent in the same period. India along with other BRIC (Brazil, Russia, India and China) countries is likely to become home for over 1.7 billion mobile users

39

by 2012. As per a recent study by Gartner , in the next 4 years, cellular market penetration in India would increase 4 to 60.7 percent from 19.8 percent last year.

5. ANALYZING TELECOM SECTOR IN INDIA:

Mobile subscribers: 391 million Land lines: 40 million April 2009 added subscribers: 15.64 million Annual net ads (mobile): 113.26 million Monthly average mobile subscribers: 15.41 million Penetration: 37% Projected cellular penetration: 500 million by 2010 (40%) Broad band connections: 6.22 million Indias current main operators fit in to four main categories: State owns operators: BSNL, which covers 20 circles and MTNL which offers mobile services and in the remaining two circles of Mumbai and Delhi it offers GSM services. The original private service providers with a national presence: Bharati airtel and Vodafone Essar Those who took fourth round licenses to create a national presence : reliance communications, Tata tele services, idea cellular, sistema shyam, aircel limited Green field operators issued new licenses in January 2008: Datacomm solutions, Loop telecom, S tel , unitech, swan telecom.

6. KEY TERMS:
ARPU (Average Revenue Per User)-

A measure of the revenue generated per user or unit. Average revenue per unit allows for the analysis of a company's revenue generation and growth at the per-unit level, which can help investors to identify which products are high or low revenue-generators. This measure is most often used in the telecommunications sector to survey the amount of revenue generated per cell-phone user, for example. The values of the measures obtained can be used as a comparison between companies. Companies may also use this information to determine which product lines are lagging.

40

AMPU (Average Margin Per User) -

It is a widely used metric for gauging the success of businesses in the telecommunications industry. Average margin per user (AMPU) measures the margin made by the firm from each customer, typically measured as the revenue minus the costs and divided by the number of users. Although most telecommunications-industry analysts and firms use average revenue per user (ARPU) as a profitability indicator, AMPU is arguably a more reliable metric of a firm's profitability. By breaking down customer sales by margin rather than by revenue, companies that have lower sales volumes but create larger margins can be considered more efficient and arguably more profitable than their high-volume competitors. RPU (Revenue per User)

A ratio used to express the profitability of a company on a per-user basis. RPUs are calculated by taking overall revenue and dividing by total number of users:

This ratio is mainly used by service providers, such as telephone providers. This measure helps companies to uncover deficiencies and plan strategies for growth. RPU also helps the company determine which product or service lines produce the most revenue per customer and, therefore, which customer relationships are the most important.

MOU (minutes of usage)MOU is the total time, measured in minutes that a customer uses his or her mobile phone during a day, month, or year. GSM Global System for Mobile communications is the most popular standard for mobile phones in the world. Its promoter, the GSM Association, estimates that 80% of the global mobile market uses the standard.[1] GSM is used by over 3 billion people across more than 212 countries and territories.[2][3] Its ubiquity makes international roaming very common between mobile phone operators, enabling subscribers to use their phones in many parts of the world. 3GInternational Mobile Telecommunications-2000 (IMT-2000), better known as 3G or 3rd Generation, is a family of standards for mobile telecommunications defined by the International Telecommunication Union,[1] which includes GSM EDGE, UMTS, and CDMA2000 as well as DECT and WiFi. Services include wide-area wireless
41

voice telephone, video calls, and wireless data, all in a mobile environment. Compared to 2G and 2.5G services, 3G allows simultaneous use of speech and data services and higher data rates (up to 14.0 Mbit/s on the downlink and 5.8 Mbit/s on the uplink with HSPA+). Thus, 3G networks enable network operators to offer users a wider range of more advanced services while achieving greater network capacity through improved spectral efficiency. VAS (value added services) A value-added service (VAS) is popular as a telecommunications industry term for noncore services or, in short, all services beyond standard voice calls and fax transmissions. On a conceptual level, value-added services add value to the standard service offering, spurring the subscriber to use their phone more and allowing the operator to drive up their ARPU. For mobile phones, while technologies like SMS, MMS and GPRS are usually considered valueadded services, a distinction may also be made between standard (peer-to-peer) content and premium-charged content.

7. ANALYSIS OF INDIAN TELECOM MARKET:

The telecom industry in India boasted of the highest mobile usage in the world, nearing around 500 minutes per subscriber per month, with some of the lowest mobile t ariffs and ARPUs in the world, resulting in reducing the profit margins. The telecom operators are continuously striving to manage the reducing margins. It can be seen from the trends, why telecom companies are typically focusing on the following aspects to manage their operating margins: Increasing tele-density Optimizing operating costs Increasing customer focus and managing the churn rate Infrastructure sharing Diversification of telecom services.

42

In their continuous endeavor to manage the reducing margins, telecom companies have been taking steps to reduce their operating costs and increase their revenues. Business Process Outsourcing, Infrastructure Sharing, IT Outsourcing and Revenue Assurance are some of the significant steps which telecom companies have taken to reduce their operating costs along with diversification of telecom services, increasing the network coverage area, focusing on customer satisfaction to increase the subscriber base, and hence revenues. The Indian telecom market can be characterized by reducing Average Revenue Per Use (ARPU), low tele-density, falling tariff rates and increasing Minutes of Use (MoU). With a subscriber base of over 260 million, the industry operates at an ARPU as low as 264 (INR / Sub / Month) for GSM subscribers and 159 for CDMA subscribers. Also, the MOU for the telecom subscribers has increased from 471 in March 2007 to 493 in March 2008 reporting a percentage growth of 4.67.

43

8. CATEGORY WISE EVALUATION OF TELECOM SERVICES:

The Indian telecom regulatory body TRAI has released a quarterly report on the statistics and performance of service providers in the telecommunications and internet markets. The report for April-May-June i PCOs Vanishing?

The humble STD booth is disappearing from the face of India. The total number of Public Call Offices (PCOs) in the country as on 30th June 2009 was 61,13,423, showing a reduction of 88,018 PCOs from the previous quarter. In the March quarter, the number of PCOs had actually risen from 5.98 million to 6.2 million. Private operators own 66.7% of the market while BSNLs share is 29.9% and MTNLs 3.4%. Village Public Telephones

3,798 VPTs were added in the June quarter, increasing the total to 5,64,337. Rural Versus Urban Bharti Airtel has the maximum rural subscribers with 33.78 million, followed by Vodafone with BSNLs 29.64 million and Reliance with 16.36 million. Rural teledensity reached
44

16.61% and urban teledensity was 95.05% at the end of June-09. BSNL/MTNL, the PSU operators own 86.2% of the market share. Rural wireless subscribers rose to 125.95 Million in June 2009. Landlines After plateauing for two consecutive quarters at 3.27%, teledensity of landlines in the country is down to 3.22% from 3.38% in June 2008. Surprisingly, rural wireline subscription has been declining at a faster rate than urban. Landline additions have been seen only in Delhi, Mumbai, Chennai & UP(W). The two PSUs BSNL/MTNL, which together own the majority market share, lost a total of 0.57 million subscribers in the quarter. Performance has deteriorated in the June quarter as compared to the previous quarter in terms of faults incidences, metering & billing credibility, response time/ percentage of calls answered by the operator, the report notes. In fault incidences per 100 subscribers per month - BSNL, MTNL, Bharti and HFCL did not meet benchmarks while Tata Indicom and Reliance Communications fell behind in metering and billing. Metrics of Wireless Industry GSM

Average Revenue Per User (ARPU) declined by 10% to Rs. 185 in June, primarily due to the prepaid segment, where ARPU fell from Rs. 181 in March to Rs. 162 in June. Postpaid ARPU dropped negligibly to Rs. 539 in June. Minutes of Use (MOU) per subscriber continued to show a declining trend, falling by 6.19% to 454 minutes in June. Outgoing MOUs declined by 5.30% and incoming by 7.04%. Postpaid MOU fell by 1.53% and pre-paid by 5.68%. Outgoing SMS per subscriber decreased from 30 in Mar-09 to 28 in Jun-09. All India blended average outgo per minute was Rs. 0.74 in June-09. GSM is growing at 2.53 times the CDMA telecom industry and as of June, GSM subscribers constituted 77% of the wireless market.

CDMA All India blended ARPU for postpaid increased to Rs. 396 while that of prepaid fell to Rs. 69 in June-09. The total MOU per subscriber is now 342 minutes. Outgoing MOU dropped by 2.7% to 160 minutes; incoming MOU by 5.2% to 182 minutes. SMS usage increased to 11 in June-09.
45

All India blended average outgo per minute for CDMA slid to Rs. 0.56 in June-09.

Revenues from Telcos Fell There was a 3.3% reduction in gross revenues reported by telcos to Rs 39,108.33 crores in the June quarter; adjusted gross revenue rose marginally. More Calls Dropped, Poorer Response Times To Consumers & Resolution The performance of the wireless service providers has improved in some portions, just met the benchmarks in others. Compared to the previous quarter, it has degraded when it comes to: Call set-up success rate (within operators own network) - Bharti is having trouble in Karnataka, Bihar and North East Call drop rate -Vodafone in Madhya Pradesh Response time to the customer for assistance, especially the calls answered (voice to voice) by the operator - almost all of them: BSNL, MTNL,Tata Teleservices (Indicom), Idea Cellular, RTL, RCOM, Bharti, Vodafone, Spice (Idea), Aircel and Sistema Shyam (MTS) are not up to the bar. Complaints per 100 bills issued - Aircel and Idea Cellular receive many complaints Percentage of complaints resolved within 4 weeks - Aircel is unable to resolve complaints within the given timeframe in Andhra Pradesh

9. SIGNIFICANCE OF ARPU :

Decline in ARPU likely to accelerate in coming quarters as competition intensifies and subscriber additions happen mostly in semi-urban and rural areas

The Indian mobile services market is highly competitive with six to eight players operating in each of the 23 telecom circles. The competitive intensity has intensified further over the last few months following the launch of GSM services by RCom and Tata DoCoMo, CDMA services by Sistema Shyam; and the continuing pan-Indian rollout by Aircel, Idea and Vodafone. These players have introduced attractive schemes like per second billing (moving away from the industry norm of per minute billing) and aggressive tariff plans for local and STD calls to capture market share. The incumbents, facing a decline in subscriber additions, have also had to follow suit and reduce tariffs, which in turn has led to a decline in ARPU. This apart, the profitability of mobile service providers has also been impacted by the

46

increasing share of low ARPU subscribers (from semi-urban and rural areas) in their total mobile subscriber base.

47

10.ENHANCING PRODUCTIVITY:
Telecom being a technology driven Industry, it is essential for telcos to mature and enhance their Information Technology function from being just an enabler to a full blown IT service organisation that is instrumental in providing the required advantage to a telco in meeting the margin enhancement goals. This calls for telcos to design and implement frameworks that address aspects like strategy, design, transition, operations and improvement of IT services. For ensuring the effectiveness of the initiatives that telecom companies are taking to manage their reducing margins, it is important to ensure the effectiveness of the IT Services supporting these initiatives. Telecom companies need to scale up the capability and maturity level of their IT Services from a business support function to a strategic function enabling the business to move up the telecom value chain.. An effective IT Service Management is seen as the need of the hour to manage the reducing margins which is one of the primary concerns that telecom companies are dealing with across the globe. While the increased competition in the Indian telecom industry will drive telecom operators to focus on various ways and means to seize the reducing margins, customers and partners will be closing watching how telecom companies improve their business process efficiencies

48

Figure- Service Management Reducing Operating Cost

An effective IT Service Management revolves around the core practices of Service Lifecycle Management which include: Service Strategy focuses on the identification of market opportunities for which services could be developed in order to meet a requirement on the part of internal or external customers Service Design focuses on the activities that take place in order to develop the strategy into a design document which addresses all aspects of the proposed service, as well as the processes intended to support it Service Transition focuses on the implementation of the output of the ser vice design activities and the creation of a production service or modification of an existing service Service Operations focuses on the activities required to operate the ser vices and maintain their functionality as defined in the Service Level Agreements with the customers and Continuous Service Improvement focuses on the ability to deliver continual improvement to the quality of the services that the IT organisation delivers to the business

49

Outsourcing
Outsourcing provides significant leverage to companies that are burdened with activities that may or may not be their core business. Potential benefits from strategic outsourcing are reduction and control of operating and hardware costs, reduced time to market, acceleration of benefits from re-engineering, access to human capital and skill sets that may not be available locally, access to good practices, a knowledge base and sharing of risk. In order to deal with the increasing competition, telecom operators are leaving the technology-related aspects of their business to external consult ants and are focusing upon providing new services to their customers. The potential of IT outsourcing in telecom was highlighted when Bharti Tele-Ventures signed a 10- year deal with IBM worth approximately USD 750 million. While outsourcing activities are catching on across many sectors in the country, the telecom segment, perhaps, comes across as the most lucrative of the lot. Some of the well-known outsourced service arrangement models in the telecom industry have been discussed here.

Infrastructure Sharing Partnership among Competitors

Infrastructure Sharing is facilitating rapid rollouts of services, wider coverage and increasing affordability leading to market expansion. This is also facilitating operators for faster coverage of rural area and roll-out of services in a faster and we should incentivise infrastructure. Some of the direct potential benefits of infrastructure sharing are:

Improvement in the quality of service through better coverage Improvement in the aesthetics of the landscape Reduction of the costs involved in infrastructure creation
50

 Faster roll-out of service and Affordable tariffs for subscribers But at the same time, some of the typical challenges associated with the management of shared infrastructure are: Capacity Management Relationship Management between tenants Sharing of operating costs Managing service levels Managing regulatory and legal obligations Capacity planning of the infrastructure and Infrastructure development to support proposed Value Added Services

Value-added service likely to develop into a significant revenue stream:

Mobile Value-Added Ser vices (VAS) are those services that are not part of the basic voice offer and are availed of separately by the end user. They are used as a tool for differentiation and allow the mobile operators to develop another stream of revenue. Mobile VAS currently accounts for just 9 percent of the telecom companies revenue in India and has tremendous potential for growth with the mobile subscriber base growing at a scorching pace. Operators are facing cutthroat competition and with the call rates in India being one of the cheapest in the world, the margins are very low. Therefore they are looking at VAS as the next wave for growth As ARPUs decline and voice services get commoditised, the challenge for mobile service providers would be to retain customers, develop alternative revenue streams, and create a basis for brand/service differentiation. In the light of the changing dynamics of the
51

Indian mobile services market (mainly because of increasing competition), value-added service (VAS) presents an opportunity to mobile service providers to augment their revenues and margins, as is corroborated by the experience of telecom players in the developed markets. Currently, the contribution of VAS to the total mobile revenues of Indian telecom operators is just 9-10%, which is significantly lower than the same of operators in the developed markets. The potential for VAS revenues appears all the more significant at the present juncture, given that India is set to introduce 3G, a standard that allows operators to offer users a wider range of more advances services. Various aspects of efficiency have been considered in this context. They include,

Technical efficiency: involves getting the maximum (sustainable) productivity from the technology in use. Empirical evidence suggests that the productivity of any technology improves through good management policies and through exposure of the operator to a competitive stimulus, particularly the downward pressure on prices that prevails under competition.

Allocative efficiency: requires the use of inputs in such a combination that costs are minimized for producing any specific level of output. Allocative efficiency is of particular importance for products such as telecom services, which are used as final consumption goods as well as intermediate inputs for other products.

Dynamic efficiency: involves the telecom operator being responsive to growth and change in demand, installation of appropriate capacity, enhancing productivity over time, focusing on innovation through the introduction of new services and network modernization. A price mechanism consistent with dynamic efficiency would also promote technological progress and would ensure that investment is directed towards

52

the most efficient activities or to those activities which are considered "most valuable".

A notable aspect of dynamic efficiency relates to bypass. This arises when the customer chooses an alternative supplier of the service (i.e. bypasses the initial supplier). This occurs in a competitive situation when the price charged by any supplier is higher than the cost of providing the service plus a reasonable commercial return.

Mobile Number Portability (MNP) An opportunity in disguise?

With a recent TRAI mandate on the implementation of MNP, Indian mobile users may soon have the option to switch their ser vice providers without changing their mobile numbers. The introduction of MNP is likely to catalyze the existing competition in telecom sector in India and hence would compel the service providers to further improve their quality of service in order to retain existing customers and att ain new subscribers. Thus, MNP would trigger a new and ferocious battle for customers in the wireless world that may be fought not only through retail outlets, call centers, and customer service, but also through back-office operations and technology. A strong strategic and demand management is required to develop and maintain the existing infrastructure to meet the growing demand of service quality and diversity. Telecom companies are apprehensive about how better service can be delivered and are wondering about the size of investment required to put systems in place to cut down the resulting churn in their subscriber bases, due to the introduction of MNP. Some have argued that the costs involved in introducing MNP could lead to a significant increase in call tariffs. The rationale for mandating the implementation of MNP is to promote competition among wireless carriers, as well as to provide customers with greater choice and freedom in selecting carriers while maintaining their current wireless identity the telephone number. Critically, it also helps conserve the shrinking pool of telephone numbers available to wireless carriers. The implications of number portability are serious. The Indian wireless industry is already facing severe competition and that the introduction of MNP would divert resources from essential core business activities such as improving network quality and reach, improving customer service, and initiating new products and services. To manage competition telecom companies need to have a strong operational and strategic balance to cope with the situation
53

Safeguarding Income Streams to Enhance Efficiency

Achieving operational efficiency is one of the other fronts where telecom companies observe tremendous potential to manage their reducing margins. Margin enhancement, revenue assurance and cost management are becoming more important than ever before.

Mergers and Acquisitions Acquiring Competition

The Indian telecom market is one of the fastest growing telecom markets in the world. With the stagnation of telecom market in the west, the Indian telecom market has magnetized foreign investors in the last one decade leading to a multitude of Mergers and Acquisitions (M&A) in the Indian telecom Industry. M&As have been a regular feature of Indian telecom Sector. The spurt in the M&A activity is also on account of convergence of telecom with other media and entertainment industries. The M&A are being seen in the market as part of a much needed consolidation in the fragmented industry, which would continue to see smaller regional mobile operators swallowed up by the big players in a push to cut cost and boost their market share. There are large number of technological and integration issues arising out of these mergers and acquisitions posing another operational challenge for the telecom operators. These include the identification of quality of the infrastructure assets, support, maintenance and upgrade of infrastructure, integration of billing systems, customer care systems and grievance systems

Services-Importance:
In the context of service, relationship marketing has been defined as attracting, maintaining and in multi-service organisations enhancing customer relationships . Here attracting customers is considered to be an intermediary step in the relationship building process with the ultimate objective of increasing loyalty of profitable customers. This is because of the applicability of the 80-20 rule. According to Market Line Associates, the top 20% of typical bank customers produce as much as 150% of overall profit, while the bottom 20% of customers drain about 50% from the bank's bottom line and the revenues from the rest just meeting their expenses. The following five strategies for practicing relationship marketing i. Developing a core service around which to build a customer relationship,
54

ii. Customizing the relationship to the individual customer, iii Augmenting the core service with extra benefits, iv. Pricing services to encourage customer loyalty, v. Marketing to employees so that they will perform well for customers. Developments in information technology, data warehousing and data mining have made it possible for firms to maintain a 1to1 relationship with their customers. Firms can now manage every single contact with the customer from account management personnel, call centers, interactive voice response systems, on-line dial-up applications, and websites to build lasting relationships. These interactions can be used to glean information and insights about customer needs and their buying behavior to design and develop services, which help create value for the customers as well as the firms.

55

All India GSM Cellular Subscriber Base-Circle Wise

62.47 62.47 37.44 37.12

70 60 50

Millions

All Metros 28.12 "A" Circle 18.8 "B" Circle "C" Circle

40 13.96 20.47 19.25 30 10.25 13.5 11.58 2.03 6.99 8.04 6.05 0.89 20 10 0 Dec '03 Dec '04 Dec '05 20.07 4.81

Dec '06

10.77 Dec '07

One important development in the cellular industry in India would be the introduction of Mobile Number Portability by the end of March 2009. This MNP introduction is likely to coincide with the GSM rollouts of operators that have already been allocated spectrum in January 2008. Moreover, Aircel, Vodafone-Essar and Idea Cellular are looking to expand their footprint in new circles and even RCOM is launching GSM services in its CDMA-only circles. All-India GSM Cellular Subscriber Base

56

180 160 140 120 105.42

Millions

100 37.37 80 21.99 60 40 20 0 Dec '03 Dec '04 Dec '05 Dec '06 Dec '07 58.5

GSM Industry Indicators for 2007

500 400 300 200 100 0 172

462

171.8 67

Subscriber Base (mn)

Yearly Subscribers' Addition (mn)

Growth Rate (%)

63

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

Minutes of Usage (Sep07)

ARPU (Rs per month(Sep-07))

275

57

analysts feel that mobile voice is overwhelmingly the engine of growth followed by Next Generation Network (NGN), broadband and data.

MARKET PLAYERS:

Market Share (%)

1% 3% 2% 1% 11% 15% 23% 25% Bharti Airtel Reliance Communications Vodafone Essar BSNL IDEA Cellular Aircel Spice Communications MTNL BPL

19%

58

No. 1.

Service Providers BHARTI AIRTEL

Total sub figures 58037920

2.

RELIANCE 52540000 COMMUNICATI ONS

3.

VODAFONE ESSAR

44126243

4.

BSNL

34251334

Market Trends share (%) 25.40 Integrated Telco, with presence in all sectors - Cellular, Basic, National Long Distance (NLD) & International Long Distance (ILD). Currently offering only GSM based cellular services. No CDMA based cellular services being offered. 22.99 Operating GSM wireless services in 7 circles and subsequently acquired Madhya Pradesh circle from RPG. Reliance is currently focusing on rollout of CDMA based wireless services. 19.31 Pure play GSM mobility player offering cellular services in 16 circles. Has been working on a model of being associated with the high ARPU subscribers 14.99 Incumbent operator, virtual monopoly in the basic services. Very strong NLD operator; and, has been able to quickly ramp up GSM subscribers due to nationwide network reach. Pan country presence in both basic (except Mumbai and Delhi) and cellular services.

5.

IDEA

24001573

10.50

6. 7.

AIRCEL SPICE

6805066 4210669

2.98 1.84

8. 9.

MTNL BPL

3241851 1294762

1.42 0.57

A 3 way GSM mobility joint venture between Tatas, Birlas and AT&T Wireless offering cellular services in 11 circles. Operates only in Metro(Chennai) and Circle A(Tamil Nadu) Pure play GSM based mobility player offering services in 2 circles Punjab and Karnataka. Integrated incumbent operator also offering GSM based mobility in Delhi and Mumbai. Pure play cellular operator along with Spice and Aircel.

59

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.

60

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 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

40% 35% 30% 25% 20% 15% 10% 5% 0% 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E

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 valueadded services (VAS).

61

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.

As per the latest data compiled by the Cellular Operators Association of India (COAI), the industry association representing all GSM operators, the GSM subscriber base has touched 188.72 mn as of March, 2008. The growth witnessed was lead by Bharti Airtel, which took its subscriber base to 58.03 mn. The PSU BSNL/MTNL has not undertaken any major

62

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.

As the Indian market is growing at an accelerated rate, the economy is witnessing new players entering the market, with more trying to get a leg in. The market has turned from a monopolistic market held by BSNL and MTNL, to a market close to perfect competition where the customer is King and prices and other factors are decided by competitive forces acting in the market. Even though the growth of the Telecom industry is exponential, the growing number of players, their size and consolidation among existing players show that they can in fact satisfy the ever-growing demand of Indian consumers, providing not just competitive prices, but more value for money and value-added services to the customer.

WHEN THE PRICES DECLINE:

With a capacity constraint, the decline in price would take place without any change in the level of existing demand. On the other hand, if there is no capacity constraint, then the fall in price would take place along the demand curve. In this case, the short-term effect on revenue would depend on the elasticity of demand.

However, if the price decline increases demand to such an extent that the capacity constraint becomes binding again, then the elasticity of demand becomes irrelevant in calculating the change in revenue. This is shown in the diagram below. The starting point is price P1, and two different demand curves are considered, with different elasticities of demand. At price P2, the supply constraint becomes binding for demand curve D1D1, and at price P3 it

63

becomes binding for demand curve D2D2. At prices lower than P3, the comparison of the old and the new levels of revenue does not depend on the elasticities of the demand curves.

64

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:

Perfect competition, with a very low concentration ratio, Monopolistic competition, below 40% for the four-firm measurement, Oligopoly, above 40% for the four-firm measurement, (Example automobile manufacturers) Monopoly, with a near-100% four-firm measurement.

Number 1.

Name of the company BHARTI AIRTEL

% Market share 25.4

2. 3. 4.

RELIANCE COMMUNICATION VODAFONE ESSAR BSNL

22.99 19.31 14.99 Total = 82.69%

The top

four

companies

65

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.

66

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 1 0 0-0.5 0.5-0.75 0.75-1.0

IMPLICATION Absolute monopoly Absolute competition Monopolistic Oligopoly Monopoly

Number 1. 2. 3. 4. 5. 6. 7. 8. 9.

Name of the company BHARTI AIRTEL BSNL VODAFONE ESSAR RELIANCE COM. BPL SPICE AIRCEL IDEA MTNL

Market share(Si) 0.254 0.1499 0.1931 0.2299 0.0057 0.0184 0.0298 0.105 0.0142

Si^2 0.064516 0.02247 0.037288 0.052854 0.00003249 0.000339 0.000888 0.011025 0.000202 Total = 0.18961336

Since H Index is 0.19, it shows that the industry has moderate competition i.e. it is a monopolistic economy. There are three to four players which are dominant in the industry, thus confirming the concentration ratio. Here, from our H Index we can conclude that Bharti
67

Airtel, Vodafone Essar, Reliance Communication and to some extent, BSNL are the major players which constitutes around 83 percent of the total market share. The remaining five players constitute just 17 percent of the total market share. Out of these five, IDEA has 10 percent share of the Indian telecom market. Therefore, we can clearly conclude that the Indian telecom industry is dominated by the 4-5 major players mentioned above.

68

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 Tatas 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.

69

The telecom sector is attracting significant domestic and global investment. The capital investment made by the telecom service industry during 2006-07 was around $8.5 billion, out of which $550 million was foreign direct investment. The margins and profits of almost all the telecom companies have been increasing. In fact there are cases where a significant portion of profit of international telecom companies have been from their operations in India. India is well prepared for the introduction of NGN (Next-Generation Networking). Being a late starter in the telecom scenario, India has the advantage of using the latest technology and so it is in a better position when compared to many other countries as far as introduction of NGN is concerned. Besides, the TRAI has identified introduction of NGN as a priority area. As of today, the trend seems favourable toward the continued growth of the telecom industry. The target of 500 million telephone connections by the year 2010 is very much achievable. Even with 300 million telephone connections, the tele-density of the country is only about 26 percent. It has been noted that mobile telephony is growing at an annual rate of over 90 percent. Also, on an average over eight million subscribers are being added every month. Besides the basic telephone service, there is a huge potential for different Value Added Services (VAS). In fact, the real potential for telecom service growth is still lying untapped.

70

BIBLIOGRAPHY
www.trai.gov.in

www.coai.com

www.dot.gov.in

Google search engine

PriceWaterHOuse Coopers

Motilal Oswal Securities Ltd.

71