Download - Competitive Structure and Pricing in Telecom
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Competitive Structure And Pricing in Telecom
Industry
Ankit Sachdeva
Heena Pahuja
Kaarthvya Chodey
Ram Narayan
Shivam Sethi
Vishnu Chaithanya 1
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Roadmap
Evolution and Present Scenario Demand Analysis Competitive structure Barriers to Entry Non Price Competition Pricing Strategy Price Discrimination Future Outlook
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Evolution of Telecom Sector
Before the entry of the private players, the telecom services were provided by three public entities viz. DoT, MTNL and VSNL
Liberalisation process in the telecom services market began in 1992, when the Indian government permitted private players to provide value added services like paging , fixed telephone services.
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Telecom Industry in India
Telecom sector contributes nearly 3% to Indias GDP and has seen a tremendous growth in the last decade before relatively slower growth in last three fiscals
It has emerged as the worlds second largest network and has the third largest number of internet users in the world after China & the US
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Demand Analysis
The majority of the Indian population is in the age group of 15-54 in India.
The majority of users who use mobile phones belong to this category in India.
Hence, it is a huge market for telecom service providers. According to a study conducted by Cyber Media Research
Group the Indian Telecom sector will grow by about 20 percent CAGR in the next 3 years.
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Market Penetration
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Market Share of the Telecom Sector
As on June 30, 2014 (Source: TRAI)
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Major Market Players
S. No Company Market Share(%)
1 Bharti Airtel 22.87
2 Vodafone 18.57
3 Idea 15.19
4 Reliance 11.90
TOTAL 68.53
As per the Four-Firm Concentration Ratio analysis, it can be observed that the Indian Telecom Industry follows an oligopolistic structure.
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Herfindahl-Hirschman Index (HHI)
Company Market Share (Si) Si2
Bharti Airtel 22.87 523.04
Vodafone 18.57 344.84
Idea Cellular 15.19 230.74
Reliance 11.90 141.61
BSNL 9.78 95.65
Aircel 7.99 63.84
Tata 6.87 47.20
Telewings 4.30 18.49
Sistema 1.00 1.00
Videocon 0.61 0.37
MTNL 0.37 0.14
Loop 0.31 0.10
Quadrant 0.25 0.06
TOTAL 1467.07
HHI in terms of market share reaffirms our inference about the oligopolistic nature of the sector.
Concentration Levels
Level Concentration
Ratio Herfindahl
Index
High 80% to 100% 1,800 to 10,000
Medium 50% to 80% 1,000 to 1,800
Low 0% to 50% 0 to 1,000
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HHI based on Spectrum
HHI based on spectrum share further confirms the existence of Oligopoly.
Data Source: Crisil Research 10
Company Spectrum Share (Si) Si2
Bharti Airtel 17.19 295.53
Vodafone 9.16 83.85
BSNL 25.89 670.49
HFCL 0.24 0.06
Idea Cellular 8.96 80.21
Loop Mobile 0.35 0.12
MTNL 2.85 8.15 Reliance Communications Ltd 9.48 89.81
S Tel ** 0.53 0.28
Sistema Shyam Teleservices 1.39 1.92
Tata Teleservices Ltd 7.10 50.38
Telewings (uninor) 1.53 2.33
Videocon Telecom 1.06 1.11
Aircel Ltd 11.51 132.42
Reliance Jio 2.77 7.69
TOTAL 1424.37
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COMPETITIVE STRUCTURE
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Oligopoly and Indian Telecom
Few players and Interdependence amongst them Small operators follow the large ones The industry is the price setter rather than price taker Homogeneous or differentiated products Non price competition
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Why Interdependence?
Most highlighted feature of oligopoly Dependent on each other over
Pricing Policy making Advertising
Apart from demand for service, non price competition effects setting up of prices
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Network Externalities
Customers joining a communications network obtain benefit from making and receiving calls.
Their value of being part of the network derives from being able to communicate with other people.
It therefore increases with the number of people connected to the network.
Hence, a customers decision to join a network affects both their own welfare and that of other people. This effect is known as a network externality.
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Role of Network Externalities
Important role in explaining network expansion Significant correlation between the absolute size of
telecommunications network and its growth rate
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Homogeneous or Differentiated Product?
Oligopoly Homogeneous
Differentiated Telecom:
Companies offer similar service - network for wireless communication, internet services, etc.
Does Competitive outcome in telecom industry occur with Price?
Is telecom industry a Bertrand Competition market?
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Bertrand Competition
Companies compete each other over prices rather than quantity
Assumptions of the model: Goods/Services are homogeneous Firms set prices simultaneously & independently Constant marginal cost for each firm Market price is same as marginal cost
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Barriers to entry of new firms
Existing firms coming together to restrict the entry of new firms
Entry barriers:- High start-up cost Government policies and restrictions High advertising costs Licensing costs
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Non-Price Competition
The competition in an oligopoly is not just restricted to price, but other aspects that impact a consumers buying decision
Non-price competition in telecom includes: better network coverage celebrity endorsements branding aggressive advertising techniques better customer service diversifying into related product line
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Non-Price Competition
Occurs because of the fear of price wars and aggressive advertising Eventually affects the revenue of a particular firm and also of the
industry as a whole.
Taken as a more critical area of competition rather than price cutting technique to increase revenues
The only risk associated with non-price competition is the acceptance of changed product by the existing consumers.
On the other hand consumers get a better product at the same price which leads to innovative behaviour amongst competitors
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Non-Price Competition Airtel has always endorsed popular figures with its brand to attract
masses
Vodafone has never endorsed celebrities to the brand and has created animated characters called ZooZoos
Idea tries to give out a social message through its campaigns.
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PRICING STRATEGY
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Telecom Cost Characteristics
High proportion of fixed costs Network is essentially 100% fixed costs relative to usage
Variable costs: No variable cost for usage(outside peak hour), and only a small variable cost for a new access line
Marginal costs: MC close to zero, hence operators cannot charge on basis of MC
Demand considerations generally make the flat-price tariff unsuitable as a single-price option
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Evolution of Pricing
Introduction Phase (1995-2000) Growth Phase (2001 - 2005) Maturity Phase (2005 - 2009) Price Wars (2009 2012) Tariff hikes since 2013
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Is price/sec tariff good for consumers?
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Kinked Demand Curve
If any firm raises the price over and above the existing price, the competitors will not follow this change and the firm will lose the market share.
If any firm lowers its price below the prevailing market price, the competitors will also try and match the price to retain the market share. Hence the firms total revenue will decrease and output will just increase marginally.
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Kinked Demand Curve
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Price Discrimination
Charging different prices to different customers First degree higher prices during peak hours, reduced
night calling rates
Second degree high cost for initial consumption e.g. first 3 messages/day, higher price for smaller data pack
Third degree Corporate plans with lower tariff for all services
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Price Parallelism
Widely prevalent in the industry Price-fixing between competitors that occurs without any
actual agreement
Leader raises price, then others follow suit Greater profits from higher prices so long as none
attempts to undercut the others
Insufficient evidence for anti-trust authorities to penalize for collusion
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Tacit Collusion
With no formal agreement, major players collude to raise prices
Bid rigging during spectrum auction Recently, Airtel, Vodafone and Idea have been involved in
tariff hike by almost 20%
Illegal sharing of 3G bandwidth in circles where they do not have licenses
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On-net vs. Off-net Pricing
On-net calls: Where the recipient is a customer of the same network as the customer who placed the call
Off-net calls: Caller-Receiver are on different networks Usually, on-net calls are cheaper compared to off-net
ones
This is mainly because of Termination Charges
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Termination Charges
Call termination refers to the routing of calls from one operator to another
Termination charges are charged for call termination by various operators.
3 models of charging exist:- 1. Calling Party Pays (CPP) Currently existing in India 2. Bill and Keep(BAK) aka peering 3. Receiving Party Pays (RPP) rarely used
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CONTESTABILITY FACTORS
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Tower Sharing
Cell towers are expensive to maintain and operate.
Tower Sharing helps to: 1. Cut down on maintenance costs Reducing operating
expenditure
2. Expansion into rural markets - Reducing capital expenditure 3. Reduction in entry barriers for new entrants E.g. Indus Towers, Jointly owned by Airtel, Vodafone and Idea
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Spectrum Sharing
TRAI has laid out a proposal to allow spectrum sharing Under review by DoT on the various guidelines and regulations
proposed
Sharing allowed only if the spectrum were bought in an auction Both companies should hold licenses in the same band where
sharing is proposed
Increase in the utilization charge rates of both companies sharing the spectrum
Despite stringent regulations, this is a positive development for operators
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Mobile Number Portability
MNP enables consumers to retain their existing mobile phone numbers when switching providers.
Its a demand-side service and has a significant impact on the market.
The reduction in barriers to switching is of particular benefit to challenger operators against dominant incumbents.
When MNP is implemented, it sets the stage for a highly competitive market.
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FUTURE OUTLOOK
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Expansion to rural areas
Urban areas have been covered by most of the service providers.
large number of rural areas and far fledged villages of India still need to be connected.
The rural segment offers the highest growth potential for the Indian telecom sector (68.32 % population)
National Telecom Policy (NTP) has targeted 100% tele-density and 600 million broadband connections by 2020
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Opportunities
New technologies like 3G and 4G Mobile value added services like mobile banking, mobile
retailing etc.
Development of WiMAX technology Huge untapped rural subscriber base Growing number of smartphone users Shift from voice to data as primary growth driver
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THANK YOU
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