Telecom Industry in India

Introduction

Indian Telecom Industry ranks 3rd among the world. Its the 2nd largest
network in Asia.
Telecom along with Information Technology has provided the platform to
accelerate the Indian economy.
The Contribution of telecom to GDP has sparked its growth level to 3 % as
on 2011 from 0.91 in 2006.
Indian Telecom Sector operates with a customer base of approx 951 million.
It has attracted a Foreign Direct Investment of US$ 1093 million as on 20102011 at present 49% is allowed as FDI and 74 % is permitted through Foreign
Investment Promotion Board - a Government Body.
In the Economic Context Telecom has identified itself from being an Luxury
to Need.
The demand for telecom services only seems to increase as the tariffs
decrease. As the graphs show, the wireless subscribers have increased
dramatically from 150 million in 2007 to 850 in 2012, almost 2/3 of our
population!

o
ronological growth in Telecom
industry

Demand & Supply

Demographics: The Latest TRAI Report

Suggests that there are 621.76 million urban
Subscribers and 343.67 million rural
subscribers
Low tariff environment and relatively low
rural and semi urban penetration levels
Untapped market in rural India of 62.8 %
population envisages bright growth prospects.
Supply:
Intense competition has enabled prompt
supply by the service providers.
More VAS are being provided competitively.

Subscribers
Urba
n

Barriers to Entry

High capital investments, well-established players who

have a nationwide network, license fee, continuously
evolving technology and lowest tariffs in the world are
Barriers to entry:
a) Termination Fee: The Incremental Marginal Costs is directly proportional
to the amount of traffic happening in the network and the service provider
will get additional revenue for inbound call from other network. These
charges are normally set by the regulator.
b) Customer Acquisition Costs : Other than the capital costs to acquire
Spectrum to build out network and overcome initial losses the companies
also require huge money to acquire enough customers to reach equilibrium.
These Costs are generally High and are huge Barriers for new entrants.
c) Low ARPU (avg revenue per cost) due to really low tariff makes profits hard
to make

e-subscribers Wired &o Wireless comparison

1000
900
800
700

million

600
Wireless

500

Wired
400
300
200
100
0
FY01

FY02

FY03

FY04

FY05

FY06

FY07

financial year

FY08

FY09

FY10

FY11

FY12

Teledensity

2012, 78.10

Source: TRAI, Dot Reports

and Hindu Business line

o
Market Share 2013 index

MTNL; 3.2 Loop; 0.36

Uninor; 3.7 Sistema; 1.68 Videocon; 0.24
Aircel; 7.09
Airtel; 21.75
Tata; 7.81

BSNL; 11.33

Idea; 13.9

Market Share in percentage

Reliance; 13.98

Vodafone; 17.47

Quadrant; 0.16

Oligopoly Overview

1.Market Power: In an Oligopoly competition, few firms

produce most of the market output and enjoy
substantial market power
2.Concentration Ratio: The top 5 companies
constitute 70% of the market share The key players in
the Telecom industry are Airtel, Vodafone, Idea,
Reliance and BSNL. The top players make up more
than 70%
of the market, thus indicating that it is an Oligopoly
market structure.
3. Entry Barriers: Huge investments, strict
government regulations and scams
4. Economies of Scale: The rapid growth and size of
the Indian market has enabled great economies of
scale for the key market player

Pricing is a crucial phenomenon for the telecom service

providers as the competition is cut throat and high.
From the onset of telecom service being deregulated in
1991, and the entry of new players into the market, the
pricing has been reducing drastically, YoY.
A number of times, the top players make pricing
changes which affects the industry as a whole, as the
others are forced to follow suit.
Prime example would be when TATA DoCoMo entered the
market, it priced the call rates at 1p/sec, while the rest
were charging Re.1/minute. Immediate market reaction
was to cut down the price to compete with DoCoMo.
Today, the costs are as low as 30p/minute , a price
thats provided by some of the top players like Airtel
and Vodafone.

Re.
1

60
p

Oligopoly - Pricing

300
million

500
million

Oligopoly

This typical Oligopolic nature of

business hinders the industry to rake
above normal profits .
Recent Issue of Tata Docomo and
RCom reducing the prices but still
failed to impact the market share,
which has landed them in debts.
India currently has the lowest ARPU
(ARPU A primary element of
valuation and analysis of wireless
companies, Avg Revenue Per User)
across the world, low enough to raise
questions on the sustainability of the
current business model.

Oligopoly

The operators today are indulging in unrealistic pricing margins to

win new subscribers that its putting a pressure on their profit
margins.
Most operators have taken huge loans to fund their 3G spectrum
obligations. Now they would have to raise more funds to fund the
2G spectrum licenses. With such low margins and high debt to
equity ratios, banks have been sceptical about lending further to
the telecom companies. As a result, most of them are exploring
other options of raising funds including listing of unlisted
subsidiaries.

Winners Curse

Thewinner's curseis a phenomenon that may occur incommon

value auctionwithincomplete information.
The winner may be cursed in two ways :
1) the winning bid exceeds the value of the auctioned asset such
that the winner is worse off in absolute terms
2) the value of the asset is less than the bidder anticipated, so the
bidder may still have a net gain but will be worse off than
anticipated.
Example :
SSTL placed a bid of Rs 3639 Cr but now they are incurring a loss
Rs 845 Cr and a dept of Rs 4187 Cr.
Same is the case with Reliance, its profit has gone down from 182
Cr to 108 Cr.

The Reliance Case

Reliance Communication is still trying to emerge from a phase of a gruelling

price war, which had led to rock bottom call rates, though regularity
uncertainties surrounding the pricing of spectrum and merger and acquisition
rules persist.
The competition has eased off late after the Supreme Court last year cancelled
some 122 licences granted in and after 2008, leading to increases in voice
tariffs.
Reliance Communications itself was badly hit by the competition, which hurt
revenue and profitability.
Its net profit was dragged further by huge debt taken mainly to buy expensive
3G bandwidth and efforts to divest stake in the company or some of its units
haven't borne fruits so far.
RCom is said to be concentrating on its other means such as Broadband Talks
though are ongoing to offload stakes in Reliance Globalcom BV, its wholesale
telecommunications unit, and in its unit running direct-to-home operations,
Reliance Digital TV

o
elecom Regulatory factors
Telecom industry has been subjected to multiple regulations. The
following are the most important.
1. TRAI Telecom Regulatory Authority of India 1997 was established by
an act of Parliament (by the same name) to regulate telecom services,
including fixation of tariffs. In 24th January, 2000 another body was
established - Telecommunications Dispute Settlement and Appellate
Tribunal(TDSAT) to take over the adjudicatory and disputes functions
from TRAI. TRAIs functions include Consumer protection, ensure
Quality of Service, affordable Tariff, Regulate interconnections,
Directions, Orders and Recommendations
2. Unified Access Service Licensing Regime: It marked the end of
licensing regime in the Indian Telecom industry. It eliminated the need
for different licenses for different services. Players were now allowed to
offer both mobile and fixed-line services under a single license after
paying an additional entry fee.

o
elecom Regulatory factors
3. Access Deficit Charges (ADC): ADC makes it mandatory for a service
provider at the Callers end to share a percent of the revenue earned with
the service provider at the receivers end in long-distance telephony. This is
the reason why Incoming is charged for roaming.
4. Universal service Obligation (USO): The USO policy was laid to widen the reach of
telephony services in rural India. This system was put in place to bridge the wide
gap between urban and rural teledensity. All telecom operators are bound to
contribute 5 percent of their revenues to this fund.
5. Foreign direct Investment: India in the past 15 years has received 10,000 Cr of FDI
and 26 % of the sum have been invested on the cellular segment. Telecom is the
3rd largest sector to attract FDI in India in the post-liberalisation era. FDI ceilings
have been raised from 49 % to 74% in telecom services sector. For telecom
equipment manufacturing and provision of IT enabled services, 100% FDI is
permitted.

o
Opportunities In The Future

Rural Telephony
3G Services

Connecting The Real India

-

Potential Growth Driver

Mobile Value Added Services(VAS) - An Opportunity To

Increase The ARPU
Infrastructure Sharing
Managed Services

- A Profitable Proposition
- Outsourcing In Telecom

o
hallenges for the Industry
Market Saturation : With the national Average Density
reaching 76 % . The Chance for further Expansion of market
looks bleak. The telecom Companies have reached the point of
Saturation.
Price War : The Call Rates in the Industry has steeped Down
from being in 16.80 rs per Minute in 1985 to 0.30 paise in
2012. So the Telecom Companies are living amidst the Perfect
Oligoplistic Competition with Least Market Power.
Declining ARPU: Average Revenue Per Minute is falling every
year with Major players Loosing more than 20 % of revenue ,
with Subsequent Fall in EPS . The Growth Seems to be almost
muted in the Following Years

Future

Number Portability: With Number Portability Schemes still Running in

the Pipeline . This Feature if made a simple process has a good
probability of maximizing revenues for the telecom sector in the near
Futnure.
Infrastructure Sharing: The upgrade of Infrastructure becomes
mandatory owing to Increased Customer Base. Infrastructure Sharing
seems to be one of the profitable options for the players involved in the
market. It would lead to good decline in the Initial Set up Costs for new
and existing Service providers. This Infrastructure Sharing Will also
enable the Companies to expand their rural market thereby avoiding
market Saturation.
Outsourcing of Managed Services: Managed Services Provider is an
alternative to outsourcing, it involves partially or Wholly outsourcing the
infrastructure management Services , given the Increased customer
Base Managed Service Providers would enable the telecom Companies to
concentrate on Innovation rather than managing Existing Customers.

Conclusion

With promising growth rate increasing every year ,ever

increasing customer base, excellent talent Workforce,
Decreasing Tariffs and Dynamic Handset Market at lower costs
there are good prospects for growth in Indian telecom Sector.
But the recent scams, lowered ARPU, Reaching a saturation in
Urban Markets the challenges ahead are not Less as well .
Companies with good Infrastructure management, increased
rural penetration and quality service will stand ahead in the
current market scenario .
There are possibilities for a change in the market Structure with
the players forming Cartels Among themselves. Today it is the
age of Intra-Company Mergers, tomorrow it can be for InterCompany mergers.