Porters five force analysis for telecom industry

PORTER’S FIVE FORCES ANALYSIS FOR THE TELECOM INDUSTRY IN INDIA

Prepared ByAkash AgamyaGreat Lakes Institute of Management

Introduction

India has a total of 960.9 Million telecom subscribers, comprising of 929.37 mobile subscribers & 31.53 wire-line subscribers.

The Indian teledensity now stands at 79.28%.

Rank in world in network size 3rd

Teledensity (per hundred populations) 79.28

Telephone connections (In Million)

Fixed 929.37

Mobile 31.53

Total 960.9

Introduction

28%

23%17%

14%

10%

7%

1% 1% 0%

Group Company Wise % Market Share (Subscribers) as of July 2012

Airtel

Vodafone

IDEA

BSNL

Aircel

Uninor

Videocon

MTNL

Loop

All India

Airtel

Vodafone

IDEA

BSNL

Aircel

Uninor

Videocon

MTNL

Loop

0

0

0

0.80% 0.78% 0.39% 0.00% 0.43%

-2.37%

-7.50%

-1.69%

-4.92%

Operator Wise % Growth as of July 2012

Introduction

With the connections now growing at a faster pace in rural areas as compared to urban the rural teledensity will grow from the current value of 40% to 50%.

Porter’s Five Forces

Competitors Analysis - High

Concentration – Market Share and Structure Financial Analysis – Past, Present, Future Global Presence and Marketing Network Future Prospects Overall Analysis

Competitors Analysis

• Concentration – Market Share– More than 15 players in the market.– Airtel, Vodafone, Idea and RCOM itself captures more than 75%


• Market Structure (2012)– Average revenue per user for big players is around Rs. 110 – Rs. 120– Reliance has lesser ARPU because major of its subscribers are low end

customers

Revenue Market share

Consumer Market share

ARPU

AIRTEL 29.1% 19.8% 114.2

Reliance 8.2 % 16.7% 45.2

IDEA 15% 12.3% 114.9

Market leader AIRTELMarket Challenger Reliance, Vodafone, BSNL

Maket Follower TATA, IDEA


Telecom operator Revenue Growth Analysis

AIRTEL Increased mobility revenue(9% CAGR) due to increasing traffic(7.9% CAGR) at stable ARPM; Bharti’s revenue will also be helped by African revenues expected to grow at 30.9% CAGR

RCOM RCOM, which has been struggling with the KPIs and subscriber quality, is expected to grow at4.5% CAGR over FY11 to FY14E driven by a 5.9% CAGR in traffic to 445.4 billion minutes and a stable ARPM of ~ 45 paisa.

IDEA Increased mobility revenue(18.5% CAGR) due to increasing traffic(17.7% CAGR) at stable ARPM

• Concentration – Market Share and Structure

Competitors AnalysisOPERATOR EBITDA margin analysis

AIRTEL For Bharti Airtel, African operations are expected to see a significant margin expansion from 25.0% to 30.9% due to various cost saving initiatives like BPO, IT and network management outsourcing, passiveinfrastructure sharing, etc. undertaken by the company

RELIANCE EBITDA margin for Reliance Communication to improve to 31.9% in FY14 from 29.5% in FY11 on account of reduced network rollout costs.

IDEA For Idea Cellular, EBITDA margins are expected to improve to 24.1% inFY14 from 27.7% in FY11, primarily on the back of higher networkutilization.

Financials – Past, Present, Future


• Global Presence and Marketing Network– Existing telecom companies are coming up with continuous growth strategy

due to high competition.

AIRTEL Mobile and fixed wireless services (GSM) – 23 telecom circles

RCOM Reliance Communications has IP-enabled connectivity infrastructure comprising over 150,000 kilometers of fiber optic cable systems in India, the US, Europe, Middle East, and the Asia Pacific region

IDEA Has a customer base of over 17 million, IDEA Cellular has operations in Delhi, Maharashtra,Goa, Gujarat, Andhra Pradesh, Madhya Pradesh, Chattisgarh, Uttaranchal, Haryana, UP West,Himachal Pradesh and Kerala.


• Future Prospects

AIRTEL Airtel plans to set up 3000 more towers to enhance theirrural coverage and will now focus on rural andsemi-urban areas

RCOM Peak investment phase is over. RCOM continues to be free cash flow positive and this trend to continue in succeeding years. RCOM not only reliant on wireless business and also vying the massive opportunity with DTH and expansion of Enterprise/IDC

IDEA Idea also plans to enter rural and neglected circles as a strategy to gain subscribers. It also plans for smaller base transmission stations that will mean lesser infrastructure requirements and expenses and independent tower operation. Along with its plan to go for a national long distance license, it will also look at international long distance in the near future.


• Overall Analysis– Telecom sector is one of the fastest growing sectors. This is due to strong

competition that has brought down tariffs and simplification of policy environment that has promoted healthy competition amongst various players

– The government has eased the rules regarding inter circle and intra circle mergers. This has led to a slew of mergers and acquisitions in the recent past

– As the sector is moving closer to maturity, further consolidation is a reality and this will lead to the survival of more profitable players in this segment

– Infrastructure equipment cost is down to a fraction of what prevailed just a few years ago operators can plan better expansion plan now

– Increased viability for the operators to expand to semi-urban and rural markets. Hence, competition in this market would increase.

Buyer Power – High

Buyers’ Price Sensitivity (High)

Cost of product relative to total cost (High) Product differentiation (High) Competition between buyers (?)

Relative Bargaining Power(High)

Size and concentration of buyers relative to products (high)

Buyers’ switching cost (low) Buyers’ information (High) Buyers’ ability to backward integrate (low)

Buyers in Telecom industry generally land in two categories: Individual and Enterprise Customers like IT companies, Banks etc. There are ample number of telecom providers in the market with big product variance and cheaper prices which gives buyer many options to select operators and thus have a large bargaining leverage.

Buyer Power Analysis

• Cost of product relative to total cost– Telecom products e.g. Voice calls, 3g etc cost 100% of the total cost of service

and buyers are more sensible to pricing.

• Product differentiation– Airtel, Relience,Idea and all other companies have similar prices for similar

products and less likely for any one to maintain product differentiation and hence buyers have the option to switch over.

[Ref: http://im.tech2.in.com/gallery/2012/may/3gplans_311641209465.jpg]

MRP(Rs.) DATA USAGE VALIDITY MRP(Rs.) DATA USAGE VALIDITY MRP(Rs.) DATA USAGE VALIDITY250 1 GB 30 Days 255 1 GB 30 Days 250 1 GB 30 Days450 2 GB 30 Days 449 2 GB 30 Days 450 2 GB 30 Days

1 Rs./min 300-plan (std) 30 days 1 Rs./min (std) 330-plan 30 days 1 Rs./min (std) 330-plan 30days

Airtel-----------Prepaid

Relience-----------Prepaid

Idea-----------Prepaid


• Competition between buyer– The individual buyers don’t have any competition among themselves but

enterprise customers like IT or banks do have. Enterprise customers generate major part of the revenues for any telecom companies like Relience, Airtel or Idea which means higher buyer power. But this is not significant for the newbie or the one who deals with individual customers

• Size and concentration of buyers relative to products– 960.9 Million of individual telecom subscribers as on May, 2012. Big size and

low concentration of consumption per individual gives lower leverage to buyer power.

– Enterprise customers – Big size and big concentration of consumption accrues high buyer power

– Together we can say its moderate buyer power in terms of size and concentration.


• Buyers’ switching cost– Low switching cost. Low new connection cost. With MNP, switching has

become more easier. TRAI expected that the subscriber has to pay not more than Rs. 200. Some of the operators have estimated the charges can be as low as Rs. 20.

– Mobile Number Portability requests increased from 50.16 million subscribers at the end of May 2012 to 54.33 million at the end of June 2012. 4.16 million requests for the month of June itself

– Meaning Low switching cost and high buyer power.• Buyers’ information

– Buyers information regarding the availability of other options has become high– Increased social networking, high advertisements through TV, hoardings,

banners and word of mouth, buyers are well informed about the substitute products with better offerings urban as well as rural areas.

– Means high buyer power


• Buyers’ ability to backward integrate – Not much intermediaries between the producer and the consumers. High

Investment required for backward integration.– Less likely to have backward integration and hence low buyer power

Suppliers Power - Low

Price Sensitivity (Low)

Cost of product relative to total cost (Low) Product differentiation (Low) Competition between suppliers(High)

Bargaining Power(Low)

Size and concentration of suppliers relative to products (Low)

Buyers’ switching cost (Low) Buyers’ information (High) Suppliers’ ability to forward integrate

(Low)

Suppliers Power Analysis

• Suppliers for the Telecom Operators

– The suppliers bargaining power has increased influence on the profitability of the company. Increase in the bargaining power of the supplier will lead to a decrease in profits or increase in the price of the end product(Buyer).

– There is a price war happening between the different mobile operators, so even the suppliers are chosen carefully so that they do not drag down the profitability of the company .So the suppliers have less bargaining power in this industry.

1. Mobile Tower Companies2. SIM cards3. Mobile phone handsets


• Mobile Tower companies in India

– There are two types of tower companies in India1. Telecos owned tower companies2. Independently telecom tower companies (ITTC)

Telecos Owned; 72%

ITTC; 28%

Telecos OwnedITTC

Indus Towers Limited (ITL)

Bharat Sanchar Nigam Limited (BSNL)

Reliance Infratel Limited (RITL)

Viom Networks Limited (Viom)

Bharti Infratel Limited (BIL)

GTL Infrastructure Limited (GTL)

American Tower Company Limited (ATC)

Tower Vision India Limited (TVIL)

India Telecom Infra Limited (ITIL)

Aster Infrastructure Limited (Aster)

Others

32.20%

15.20%

15.20%

11.20%

9.70%

9.50%

2.30%

0.90%

0.30%

0.30%

3.20%

Share

Share


List of Mobile Operator and their Tower Services.

– Less Bargaining power because of more number of suppliers– Little or no forward Integration

Operator Tower Service

Bharti BIL/ITL

Reliance RITL

Vodafone ITL

BSNL MTNL, BSNL and Others

Idea ITL

Tata Viom


• Sim Card Manufacturers

– Sim card for the mobile operators are mostly produced in India and some are imported.

– The mobile operators doesn’t always procure the sim card from a single supplier to avoid any delays.

– The Bargaining power of suppliers is less– There is little or no threat of forward integration .


• Mobile Phone handsets– Two types of mobile phones are genereally used. (CDMA & GSM).– The leading CDMA phone manufacturers are Samsung, Blackberry, ZTE,

Motorola , Spice e.t.cTop 4 leading Mobile phone manufacturer(GSM & CDMA) in India

(2011-12)

– Bargaining power of suppliers are less.– Little or no threat of Forward integration.

Company Share

Nokia 39%

Samsung 17.2%

Micromax 6.9%

Black Berry 5.9%

Threat of Substitutes - Moderate

Buyer Propensity To Substitute Relative Prices Performance Of Substitute

Threat of Substitutes

• Buyer Propensity to Substitute– Internet subscriber base increasing in India by 18.06% , compared to 10.60%

for GSM/CDMA services.– Representations from the industry and from within the DoT to open up Net

telephony.– If allowed, this will open up India’s domestic voice market to all operators

which have an unified access services license such as Reliance Infotel and Aircel to offer voice services along with data to its consumers.

– Dot also contemplating allowing operators without a unified access license, which includes broadband and Internet companies such as Google and Skype to offer telephony services for international calling and PC-to-PC domestic calls.

Threat of Substitutes

• Relative Prices – Internet Telephony eating into the revenue of GSM/CDMA telephony.– Flat/ fixed rate revenues from internet services - cannibalization of revenues

from GSM/CDMA services.

• Performance of Substitute– Voice quality is an issue with internet telephony.– Internet voice services also currently limited due to regulatory road blocks.

Threat Of Entry - Low

• Threat of entry• Access to optical fibre network• Declining ARPU• Government and legal barriers• Retaliation by established producers

Threat Of Entry

• Capital Requirements– The cost of active equipment is estimated to be 40 percent of the telecom

operator's total capex, while the balance is accounted for by passive infrastructure.

– Bharti has invested close to Rs. 230 billion to create the cellular infrastructure with 45,000 towers across the country. Typically, a ground based tower costs Rs. 25-30 lakh. A roof-based tower can be built for Rs.13-14 lakh.

– Cost of maintaining one tower (active + passive) is estimated at Rs. 60,000-65,000 per month.

– If tower is rented then monthly rent of Rs. 40,000-45,000 for active network.– The monthly outflow of a TSP would be close to Rs. 80,000-85,000 per tower

per month. – However, the recent announcement made by BSNL about leasing its towers will

help both the older and newer players to penetrate into new markets.– This factor makes the telecom industry moderately attractive for the new players

and investors

Threat Of Entry

• Declining ARPU– The market is maturing and new classes of consumers are mostly rural and

their ARPU is well below $5 (probably $3-3.5). So, managing bottom-lines at such low levels of revenue per user will prove to be a challenge for new entrant

• Access To Optical Fibre Network

– The largest optical fibre has been built by the incumbent operator BSNL who is also the long distance operator.

– The private sector players such as Bharti and Reliance have also constructed optical fibre cable network connecting mainly cities and towns but their presence is very limited in the rural areas and difficult terrains.

– It is fairly difficult and cost- ineffective for new entrants to lay down optical fibre connecting remote places as well.

Threat Of Entry

• Retaliation By Established Players– Also known as Incumbent Wrath signifies the leverage the players in the

market commands. The incumbents grow because of an established network presence, a brand that consumers are aware of and sheer economies of scale.

– Mobile termination charge which one operator pays to the other when the customer of the former uses the roaming charges of the latter. This is 30 paise a minute charge as of today. This is charged to the consumer as the cost of roaming. With an all India footprint (or 80% coverage), the incumbents effectively do not have to pay termination charges.

– The incumbents have either been pocketing the termination charges or passing them to consumers “no roaming charge” kind of schemes. This factor makes the industry unattractive for the new entrants and investors.

– The existing Telecom players might begin to bundle broadband, voice, wireless, video and other emerging technologies together, as well as a variety of value added content, in an effort to remain competitive, offer seamless services and attract more customers, at a cheaper price (incumbent wrath)

Threat Of Entry

• Government And Legal Barriers

– �Private operators will have to enter into an arrangement with fixed-service providers within a circle for traffic between long-distance and short-distance charging centres.

– �Seven years time frame set for rollout of network, spread over four phases. Any shortfall in network coverage would result in encashment and forfeiture of bank guarantee of that phase.

– Private operators to pay one-time entry fee of Rs.25 million plus a Financial Bank Guarantee (FBG) of Rs.200 million. The revenue sharing agreement would be to the extent of 6%.

– Private operators allowed to set up landing facilities that access submarine cables and use excess bandwidth available.

– No industrial license required for setting up manufacturing units for telecom equipment.

– 100% Foreign Direct Investment (FDI) is allowed through automatic route for manufacturing of telecom equipments.

– Moderate threat entry based on Government Policies.

Final Verdict -

LOW HIGH

INDUSTRY RIVALRY

BUYER POWER

THREAT OF SUBSTITUTES

SUPPLIER POWER

THREAT OF ENTRY

THREAT OF SUBSTITUTE

Career

Porters five force analysis for telecom industry