industry and market analyses

8/6/2019 Industry and Market Analyses

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Industry and Market Analyses1.1 Industry Description:Telecom industry comprises the firms in business transmission of voice and data

between devices. Voice and data are encoded and decoded into electrical signals after transmission and before

reaching the destination. The signals are then transmitted over a network of copper/fiber-optic cable. The

significance of this industry can be judged from the enormous amount of the revenues it generates. In 2005

the total revenues across the world in this industry to amounted 1.2 trillion 6 [VoIP Magazine, 2005 ]which is

almost 3% of the world GDP. In the US, Voice business amounts to 64.9% of the business while Data and

other services take the rest of the market 5 [Exhibit 2]. However due to recent advances in technology the

share of data has been increasing rapidlyHigh speed internet is rapidly making a way into households and is

poised to become the leading revenue earner for the firms in the industry.Most of the firms in the business

have one or more four distinct lines of business, 1) Voice services 2) Wireless voice/data services and 3)

Internet/ Broadband/Data services and more recently 4) Video services. Until the early 90s the industry was

compromised of monopoly regional operators strictly regulated by the Federal Communication Commission(FCC) and the state public utility commissions. The firms who wanted to enter the business in this industry

needed the licenses from FCC. The monopolistic nature of these corporations meant price controls were

imposed any price rises were decided by the regulatory bodies upon requests by businesses citing increased

expenses.1.2 Forces Driving Change Several changes occurred in the industry in the mid nineties, which altered the

structure of the industry and continue to have an effect on the industry structure today.1.2.1 Government Deregulation: In 1996, Congress approved and President Clinton signed into law The

Telecommunications act of 1996. One of the primary goals of this act was to restructure the

telecommunications industry in order to foster competition by attempting to reduce regulatory barriers for

entry and competition. It outlawed artificial barriers to entry in local exchange markets, in its attempt to

accomplish the maximum possible competition 1 [Nicholas Economides The Telecommunications Act of 1996 and its

Impact]. Act required that incumbent local exchange carriers (ILECs : Firms that own the last mile

connectivity/network) (i) lease parts of their network (unbundled network elements) to competitors at cost; (ii)

provide at a wholesale discount to competitors any service the ILEC provides; and (iii) charge reciprocal rates

in termination of calls to their network and to networks of local competitors. 1 [Nicholas Economides The

Telecommunications Act of 1996 and its Impact]. This opening up of network eventually paved the way for Cable

and VoIP providers to introduce wireline telephony products. The effect of this law on the industry can benoticed from increase in market share of the CLEC (Competitive Local Exchange Carrier) providers from

4.6% in 1999 to 17.1% in 2006 [Exhibit 1]1.2.2 Technological Breakthroughs:The new technological breakthroughs and availability of technologies

for mass deployment in the late 90s like fiber optic cables, Internet Telephony (VoIP) and Wireless brought

significant changes in the industry. The new technologies altered consumer behaviors and provided

significant impetus to innovation and in turn caused several new firms to enter the industry. The cost


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structure of the new entrants was significantly less than the existing firms. This led to increased competition

and fall in margins in across the industry.1.2.3 Decline of Voice Services / Growth in Data Services:The availability of choices and better

alternatives for consumers has diminished the importance of voice services especially for the younger

demographic. Competition drove the price voice prices down, At the same time consumer spending on

broadband grew rapidly driven mostly by the rapid growth of content rich data ,applications like music, video

and gaming.1.3 Porters Five Forces Analysis: The different factors having an impact on the telecom industry can be analyzed

using Porters five forces framework. The result of this analysis, showing the strength of each force is tabulated in Exhibit 3.1.3.1 Threat of Entry: Prior to Mid-nineties, entry into fixed line telecom business was very difficult owing

to several factors, Firstly it was a very capital intensive industry, entry into this industry meant that the firms

needed access to huge amount of capital mainly to cover the fixed costs to lay and maintain a physical

network (exchanges, fiber optic cables etc) to the premises of customers. In addition to that firms needed toget regulatory approval/licenses from the Federal Communications Commission (FCC), which was both

costly, and a tedious affair. Hence the companies in this industry mostly tended to monopolies strictly

regulated by the government subject to price controls and moderate to heavy taxation. Deregulation and the

telecom act of 1996 provided a significant reduction in barriers as the new entrants did not need to own their

networks.The technological changes also provided impetus to the significant reduction of barriers; Internet

Telephony provided a way for several firms to enter the market and compete with the incumbents without

the significant upfront fixed costs. One of the notable entrants into the business is Vonage, this firm began

offering its version of IP telephony product since 2003. The entry of new progressively become very easy, in

fact it has become so easy that there are companys like RTC Factory claim to provide services that can let

firms start their own branded fixed line IP telephony voice business within 6-8 weeks in 10 easy steps. 1.3.2 Supplier Power:The Suppliers in this industry are the manufacturers of telephone switching /switch

board equipment, fiber optic cables, network equipment, and billing software makers. The prominent names

in this industry include Cisco, Alcatel-lucent, Nokia, Nortel, Motorola and Tellabs etcAfter the deregulation

of downstream service providers and the technological breakthrough in IP networks, Telecom equipment

makers began to ramp up manufacturing in order to meet the huge anticipated demand, however aftermath

the dot com bubble, demand did not pan out as expected and led to overcapacity and eventually demise of

several firms. The evidence of decline can be gauged from the fact that the telecommunications industryAssociation (TIA) reported that in 2001, a cumulative decline of $30.5 billion in revenues4 [Encyclopedia of

American Industries]. With excess capacity and falling demand, the suppliers have do not have the power and

clout to negotiate with the telecom behemoths. However with the demand in recent years has started to pick

up with fixed line providers deciding to install fiber based networks to provide faster data and video services.1.3.3Power of Buyers: With increased choice of several technologies and means of communication available

and entrance of several new firms buyer power is been increasing. The consumer now has access to several


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means of communication like email, instant messaging which are diminishing the importance voice

services. Residential consumer also benefits with local number portability (A regulation from FCC which

mandates the carriers to move the phone number when the customer switches to a different carrier). This

feature makes switching costs negligible. The business segment however is prone to significant switching

costs as they rely on more customized products which are tailored to their businesses and most times are

locked into long-term contracts.1.3.4 Threat of Substitutes: Several substitute products and services have emerged to fixed line telephones

as a result of technological breakthroughs. Some of these are more convenient and offer far greater value to

the consumer and have diminished the importance of fixed line phones. Substitutes include IP Telephony,

Mobile phones, Satellite, Email, and Instant Messaging etc.Among the several substitutes that have emerged, IP

telephony has emerged as the biggest threat. Applications like Skype have been extremely popular among younger generation users

and are fast emerging as preferred means of communication.Wireless phones are also getting cheaper each year over the

last decade; this has provided consumers with more convenience and mobility, to the extent that the youngerdemographic now considers a fixed line phone redundant.1.3.5 Industry Rivalry: Industry rivalry has become extremely intense with the emergence of new competing

firms leading to price cuts across the industry. Voice offerings are turning into commodities with the business

going to lowest cost provider.1.4 Key Success Factors in Telecommunications Industry1.4.1 Bundling: Consumers value convenience more than anything else. A companys ability to provide

multiple services like wireline / wireless/ high speed internet / video at an attractive price not only provides

value to the consumer but also helps the companys bottom-line due to reduced customer acquisition costs. It

also is widely believed in the telecom industry and supported by the data, that churn reduces drastically for

customers subscribed to a bundle as a result of increased switching costs.1.4.2 Network Quality: One of the key difference between the old generation PSTN (public switched

telephone network) used by telecom companies versus the new generation IP networks used by both the

cable providers and VoIP providers is the ability to receive phone calls on the PSTN networks when the

power is out. There is difference in quality of the voice transmitted, however the gap is closing fast .1.4.3

Economies of scale: Telecom is a huge fixed cost business; most of the costs go into installing and

maintaining the network. The marginal cost of adding a new customer is very small. As a result, Providers

with large subscriber bases enjoy a significant advantage over the smaller ones.

1.4.4 Customer Service: In this industry, although the customer contact with the firm is minimal, it is very

critical and can define customer experience. Customer mostly comes into contact with the employees of the

firm only during installation and service outages, the expectation of the customer is that the service be always

available and the problems be immediately fixed.1.4.5 Brand Name: Brand Name plays an important role for the customer choosing the service. In this

Industry Bell and Cable companies have been able to build brand recognition over time, VoIP


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entrant however have to spend significant amount of money in advertising to be able to counter these strong

brand names.1.4.6 Retail Presence: Wireless phone industry has required retail presence from traditional telecoms mainly

to display and sell wireless devices, this presence has helped them with customer as they were more accessible

to the customers and provided a new medium of distribution for all services, Cable and VoIP firms however

have to depend on electronic retailers.1.4.7 Financial Strength/Resources: With high fixed costs in this industry and frequent network up

gradation and licensing costs, it is essential for the firms in this industry to have a strong balance sheet. The

ability to raise money at cheaper rates compared to the competition provides a significant competitive

advantage1.4.8 Convergence: Convergence is the ability for customers to access any data seamlessly without

restrictions and the networks and the devices to get to that data. In future the success of the telecom

companies is dependent on how effectively they can provide converged services.

1.4.9 Partnerships: Diversity of services this industry makes it difficult for a service provider to be good at

everything, so the crucial thing for a firm in this industry is to be able to forge partnerships to be able to

provide what customers need.1.4.10 Data Speeds/Bandwidth: Explosive growth of internet has created content rich applications which

require enormous amount off bandwidth. The Service provider who has the biggest amount of bandwidth

with the last mile connectivity will have competitive advantage over the rest of the competition

U.S. Telecom IndustryU.S. telecom industry is the most prosperous telecommunication industry in the

world, which covers a wide range of areas and services like telephone, television,

Internet, radio and so many. U.S. telecom industry primarily deals with the

services of transmitting message through mediums like cables, satellites etc.

Principal divisions of U.S. telecom industryU.S. telecom industryspecifically consists of three primary sections namely technical,

regulatory and economic. These three sectors work together to make the U.S. telecomindustry a prosperous one. U.S. telecom industry began with the telegraph industry and

gradually focus towards wireless and online services.

Components and services of U.S. telecommunications industry


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Components and services of U.S. telecommunication industry include wireless

technologies, digital technologies and mobile network services.

Wireless technology is a form of technology for data communication without wires,

which is alternatively called radio transmissions. This technology is more affordable and

easy to use. American engineers started using digital technology from the mid-twentiethcentury and with the use of ISDN(Inter Services Digital Network), information will be

transmitted in a completely digital fashion.

Economic perspective of U.S. telecom industry

Telecommunication industry is the key force of American economy. U.S.

telecommunication industry extends it's activities in almost every sector, from education

to health care or banking and finance. U.S. telecom industry enables an overall of 75%

U.S. labor productivity gains.Prime objectives of U.S. telecommunication industryU.S. telecommunication industry designed to achieve the target of creating more than

212,000 jobs in it's telecommunication industry. Besides creating new job opportunities,

some other objectives of U.S. telecommunication industry include adding customer

value by providing them innovative services like VoIP(Voice over Internet Protocol),

creating an overall of $58 billion capital investment opportunities and generating $113

billion new revenues in it's telecom industry.

Telecom Industry in India, India Telecome Industry

Telecom industry in Indiahas a big market potentiality and is a fast growingsector. Government of India is eager to reconstitute this telecom industry by

enacting effective policies for more investments from foreign companies, which

results in a very competitive and deregulated market in the world.

Policies of telecom industry in India

Government of India implemented the unified access licensing regime, which enables

basic and cellular mobile service to use any modern technology. In 1997, Telecom

Regulatory Authority of India (TRAI) was formed to facilitate the growth of

the telecom sectorin India.


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Major services and market potentiality of Telecom industry in India

Telecommunication sector in India is primarily subdivided into two segments, which are

Fixed Service Provider (FSPs) and Cellular Services. Telecom industry in Indiaconstitutes some essential telecom services like telephone, radio, television and

Internet. Telecom industry in India is specifically emphasizing on latest technologies likeGSM( Global System for Mobile Communications), CDMA(Code Division Multiple

Access), PMRTS(Public Mobile Radio Trunking Services), Fixed Line andWLL(Wireless Local Loop ). India has a prospering market specifically

in GSMmobile service and the number of subscribers is growing very fast.

Economic perspective of telecom industry in India

Telecom industry in India has a major role in Indian economy. The Indian government is

also enforcing some effective telecom policies and regulations for the infrastructural

growth of this industry. Indian telecom market provides a tele-density of 8.5 percent asregistered in the year 2004. A number of leading multinational telecommunication

companies are approaching and showing their interest to invest for the telecom industry

in India. Telecommunication industry of India ranked sixth among all thetelecommunication sectors in the world. In the year 2004, the total number of telephone

subscriptions were US$93.2.

Leading telecommunication service providers of telecom industry inIndia

Bharat Sanchar Nigam Limited, Mahanagar Telephone Nigam Limited (MTNL), VideshSanchar Nigam Limited (VSNL), Bharti Airtel, Tata Teleservices, SIFY Ltd. are the

major telecommunications service

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