Mobile Telecom Industry in India

Keywords: oligopoly in telecom sector, indian telecom industry

The mobile telecom industry in India has seen an astonishing growth in the last decade and a half. It is one of the fastest growing telecom sectors in the world with an annual growth of 12% to 13 % [BCG INDIA]. The sector has been given due importance by the government, as it caters to develop a nation socially and economically. In recent years the industry has undergone some serious changes and has been supported by significant policy reforms. The country’s total mobile subscriber base is over 908 million [Telecom regulatory authority of India]. Its phenomenal growth is propelled by drivers such as newer technology like 3G and 4G, better devices and most importantly change in consumer behaviour. The market share is dominated by a few larger firms. A few smaller firms are also there but larger firms have a major chunk of the total market share. According to the research [Boneless Group, 2012] the market share is as follows : Bharti telecom ‘s AIRTEL leads the market share with 24.4% followed by Vodafone India with 19.5% Reliance 14.9%, Idea 15.3%, BSNL 8.2%, Tata 7.0%, Aircel 5.3% – the remaining share being held by smaller operators such as Uninor, Videocon, MTS, Loop and some more. The above mentioned figures depict that over 80% of the market is held by 7 operators.

With this information, it can be deciphered that the nature of economic structure of mobile telecom industry in India can be described as an OLIGOPOLY. It is supported by further analysis in this work.

Oligopoly can be defined as a market structure with a small number of large players also called as Oligopolists. These large players have a significant share of the total market size. Immense competition is concentrated within these competitors. The other competitors are small and have a minor market share; they are also called niche players of the market. In quantitative terms, oligopoly can be described as a structure which has very less number of highly influential and strong competitors sharing market dominance.

ASSUMPTIONS TO OLIGOPOLY and INDIAN TELECOM IN LIGHT OF OLIGOPLY

Few Sellers – There are few strong and influential firms operating in an oligopoly and are competing against each other. The other few firms operating in the market are not dominant and have an imperceptible share of the market. The smaller firms in the market do not have the power to retaliate to the interdependency of the larger firms. It suggests that firms in oligopoly are interdependent on each other for decision making. Each firm measures, predicts or assumes its potential competitor’s reaction when it chooses any business strategy. These decisions could be regarding setting up / change in prices, output or product lines.

In a nation, where population is more than 1.3 billion, lies a huge market potential. As mentioned in the introduction, the fact that there are just 10-12 active players in the market, 7 of which constitute more than 80% of the markets share, substantiates the few sellers assumption of oligopoly.

Interdependence – It is one the most highlighted feature of oligopoly. Interdependence in terms of decision making processes. This happens because, the number of influential competitors is few, and the change in price or output by any of the firm causes direct effect on the income of its competitor. So demand of the product by the market is not the only criterion that sets up the price of the service. It is also the ruthless non-price competition that affects the setting up of prices.

The firms in the industry are dependent on each other over matters like pricing, policy making, advertising and other issues. As a result of this interdependency the firms have constituted an association called Cellular Operators Association of India (COAI), which protects the common and collaborative interest of its members. Example – One of the reports of COAI dated 21st October, 2011 raises the issue of levying of huge penalties by department of telecom on the telecom operators for minor technical and compliance issues, which was dealt by COAI. The competitors dealt with this case as one organisation. The establishment of this association actualizes the interdependency of the firms.

Entry and exit barriers – The barriers are very high to enter and exit the industry. It is one of the many reasons; firms in oligopoly have greater control within the industry. There can be many barriers to enter this industry, some because of the nature of the industry and some because the incumbent firms act as strong wall. , few barriers are a) High start-up cost b) Patents and copyrights c) Government policies and restrictions d) High advertising costs e) Licensing costs. The strategic actions of incumbent firms try to destroy nascent, discourage and hinder the entry of new firms. Subsequently this aspect of oligopoly gives firms a greater control over the market.

Telecom is a highly technology-centric sector. Access to the technology typically requires a lot of investment. Ownership of telecom license also represents huge entry barrier. Example – Telenor’s investment in India failed due to high investment that was required to acquire a telecom license. They had to bid in an auction to get the license but could not match the price quoted the market leaders of the industry. This example supports the assumption of high barriers to entry.

Homogeneous or differentiated products – There is no set standard in an oligopoly about homogeneity or differentiation of the product/service. It varies from one industry to another. In telecom, the product is homogeneous. As all the companies are dealing in the same product, that is providing network for wireless telecommunication. But there are other examples like leather industry, companies deal in leather products but there product lines are different, like one company makes jackets, the other makes shoes, others deal in belt and bags, but all are part of the leather industry. The service that is offered in telecom is identical or completely homogeneous.

Non price competition – The competition in oligopoly is not restricted to price, but other aspects that a consumer looks at. This is also a standout feature of oligopoly. Non-price competition in telecom would include competition over a) better coverage of network b) celebrity endorsements c) branding d) aggressive advertising techniques e) better customer service f) diversifying into related product line. Non price competition occurs because of the fear of price wars eventually affecting the revenue of a particular firm and also the industry as a whole. In oligopoly non price competition is taken as a grave area of competition rather than price cutting technique to increase revenues. The core behind non price competition is the difficulty faced by competitors to counter techniques like aggressive advertising, personal selling, or improvement in the product or service. The only risk associated with non-price competition is the acceptance of changed product by the existing consumers. But, on the flipside the consumers do get a better product at the same price. It leads to innovative behaviour amongst the competitors.

Example – Market leader Airtel has always endorsed superstars of Indian cinema with its brand to attract masses. Superstars like Sharukh Khan and Amitabh Bachchan are associated with the brand for a long time. Whereas Vodafone has never endorsed celebrities to the brand and has rather created animated characters called Zoozoos for its strong advertising campaign which created a ‘buzz’ in the market. Both the companies have indulged in non-price competition of advertising just to lure consumers and target a larger market share.

Ability to set price – Unlike perfect competition, the dominant firms in oligopoly have the advantage to set the price of the product. The nature of oligopoly is such, that industry is the price setter rather than price taker. The only condition to it is that all the firms have to be more or less consistent with the price. [ B Perloff, J]

PERFECT COMPETITION

Perfect competition, as the name itself suggests, is the most competitive form of economic structure. Pure Perfect competition hardly exists. 1. According to an article [oxford journal] perfect competition means a state of affairs in which the demand for the output of an individual seller is perfectly elastic. In other words we can say that at any hike in price of the product demanded will result in loss of a particular firm as the consumer will shift to the other supplier as he gets the same product at a lesser price.

ASSUMPTIONS TO PEFECT COMPETITION

Many buyers and sellers – Under this market structure, there are large number of buyers and sellers of the product. Each seller is too small to influence the price of the commodity through a change in its price; each firm is a price taker. As the firms are relatively smaller, each produces an insignificant portion of the total market supply thus having no control over the market prices of the product.

Homogeneous product – The product sold in the market is an identical (homogeneous) product. Same product is being produced to be sold in the market by each firm. The product can be perceived as a perfect substitute. This feature creates a perfectly elastic demand for the product.

No entry or exit barriers- Unlike the assumption of oligopoly, perfect competition does not have any barriers to enter or exit the industry. Market is open to any firm who chooses to be a seller of the product. In this structure there are no super normal profits in the long run, they can be enjoyed by firms only in the short run. Easy access by the new competitors in the industry affects the super profit equilibrium in the long run.

Perfect information – It is assumed that every buyer and every seller in the market knows everything about the product. If any firm charges higher price than the market price of the product, the consumers will move away towards the product of other firms. The sellers have all the information and have equal access to the resources such as technology used by the other firm.

EXCLUSIVE ASSUMPTIONS TO OLIGOPOLY

Collusion – Collusion is a secret agreement between entities for a profitable purpose. Describing in economic terms it is, when firms operating in an industry cooperate on some issues for mutual monetary or non-monetary benefits. It is often seen in the market form of oligopoly. The decision of a few firms to collude significantly impacts the market. Although collusion is illegal in many economies, it is still practiced. The one practiced is called implicit collusion i.e. when firms make same pricing decisions but do not consult each other. Sometimes the market leader takes a price change decision and other firms tend to follow. In Indian telecom sector, collusion was seen between companies to fix the spectrum price to be auctioned by the government. Billions of dollars were lost due to this practice and several senior executives of the firms were arrested for the charge.

Game theory – ‘Economists are interested in bargaining not merely because many transactions are negotiated (as opposed to being entirely determined by market forces) but also because, conceptually, bargaining is precisely the opposite of the idealized “perfect competition” among infinitely many traders, in terms of which economists often think about markets. Bargaining situations concern as few as two individuals, who may try to reach agreement on any of a range of transactions which leave them both at least as well off as they could be if they reached no agreement.’ [Roth, Alvin E., editor [1985] Game-Theoretic Models of Bargaining, Cambridge.]

In simple terms, game theory can be described as the theory in which firms competing against each other choose action or strategies that affect each participant. In the case of Indian telecom, the dominant players like Airtel, Vodafone, Reliance or Idea may settle for a reasonable share of the market, in lieu of their existing market share. It analyses the interdependent behaviour of the firms in an oligopoly. It indicates the how the choices between operating firms affect the outcome of a game.

Game theory is concerned with the choice of best or optimal strategy in conflict situations. Strategic behaviour refers to the plan of action or behaviour of an oligoplist after taking into consideration all possible reactions of its competitors, as they compete for profit or other advantages.

Kinked demand curve – This is the most distinct feature of the oligopoly. The kinked demand curve advocates two things about a firm’s demand curve. Each firm’s demand curve is kinked at the prevailing price.

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. This would cause the consumers to shift to the suppliers providing the same service for a lesser price.

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 firm’s total revenue will decrease and output will just increase marginally.

Another feature kinked demand curve holds with itself is the ‘price stickiness’. The price that is charged by the firms in oligopoly covers the cost of its production and also gives them excess profit at times. The change in price comes with the collaborative decision of the oligopolists. But the firms fear the loss of their market share when price is hiked and not gaining much when price is reduced, this makes them stick to the prevailing price and hence the price becomes ‘sticky’.

REVIEW OF THE DEMAND AND SUPPLY

This part provides a picture of the prevailing demand and supply situation in the Indian mobile telecom sector.

MAJOR FACTORS AFFECTING TELECOM

COSTS THAT EFFECT THE INDUSTRY

High infrastructural costs – To enter service areas, service provider incur huge set up and infrastructural costs. These infrastructural costs to develop the service involve risks such as logistical risks, longer time duration to launch the service, setting up of new towers and dearth of highly skilled personnel to develop such infrastructures.

Allotment of spectrum by the Government – One of the major concerns of the industry is the availability of the spectrum that is used for the supply of the service. It is provided by the government and has been a controversial issue in recent times for this sector in India. Being a limited resource, it gives a possibility of unhealthy bidding by the service providers resulting in unviable financial approach to the price thus hampering the growth of highly competitive sector.

Regulation charges – Immense competition in the industry and high regulatory charges imposed by the government result in low tariffs by the providers. This indeed, makes it very difficult for the operating firms to impede smooth implementation of the projects. The chart below gives the information about the regulatory charges firms have to pay to the government.

Regulatory charges

Service tax

License fees

Spectrum charges

Percentage of revenue

12.36

6 – 10

2 – 6

FUTURE OF INDIAN TELECOM – CONCLUSION

Indian mobile telecom industry dominated by few very large players has reached the saturation in the urban market. There is huge potential for growth in the rural market that gives a reason to companies to compete for a better market share overall. The government is supporting the firms to reach the unconnected areas. This reach to the rural will not only benefit the firms but also the government and society as a whole as it gives better connectivity and will reap socio-economic benefits.

Opportunities

Newer technology – New technology is a great growth driver for any industry. Adoption of 3G and 4G technology will be instrumental in growth of the telecom sector; it facilitates growth through high speed data services. Newer technology will also help in broadband penetration throughout the country. The launch of 3G already has and further 4G will develop the industry in terms of VAS (Value Added Services), video calling, gaming, high speed internet and data services.

Development of WiMAX technology – WiMAX has come up as one of the face changing revolutions in telecommunication. It provides super speed data services through high bandwidth. The first movers to adopt this technology will definitely be the pioneers of the industry in coming times.

Value added services (VAS) – MVAS has been a phenomenal revenue generator for the service providers. The emergence of mobile commerce in recent years has given MVAS a great importance; it has acted as great growth driver for the telecom sector. It includes services like m-banking, m-retailing m-health and many more. Development of MVAS will in turn create a demand for advanced handsets that are capable of accessing MVAS services.

SUGGESTIONS FOR FUTURE ACTION – RECOMMENDATIONS

The Indian mobile subscriber base has seen an exponential growth in the past. The following factors are expected to propel the further growth of this sector

• Improved telecom infrastructure
• Declining tariffs
• Skilled and improved personnel
• Rising disposable income of consumers
• Growing demand for mobile handsets with improved features
• Favourable demographics

The structure of Indian telecom being an oligopoly, the firms are likely to face a competitive environment in the future. The main causes for this environment being highly competitive firms, continuous pressure on margins and stringent regulatory policies. Companies with first mover advantage in technology, better penetration of the rural market, better operational efficiency and good quality of services will most likely be ahead of their competitors.