ME - Telecom Industry Cost

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Cost Structure of a Telecom Company and

Estimate Various Cost Functions For The Same

Presented By

Group 3

Section F

Pranav Upadhyay 10FN-080

Prashant Pandey 10FN-083

Praveer Phatnani 10IT- 022

Rohit Mantri 10DM-126

Saswata Banerjee 10FN-136

Sharad Bajaj 10IB-054

Under the guidance of our respected Professor

Dr. V J Sebastian


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Cost Structure of a Telecom Company and Estimation of Various Cost Functions

IMT Ghaziabad | PGDM 2010-2012 | Section F | Group # 3 Page 2

1. Problem Statement

Analyse the cost structure of a Telecom Company and estimate various cost functions

for the same.

2. Executive SummaryThe project encompasses process of identifying independent variables like the number

of mobile subscribers of the telecom company in order to estimate the total cost that will

be incurred. We will be doing an analysis of Bharti Airtel. The data under consideration is

for the years 2004-05 to 2009-10. We shall use the cost and subscriber base data for

these last six years and analyse the cost structure of the company. We will also use this

data to perform regression and form a cost function to estimate future costs. Thus,

based on the expected increase in the number of mobile subscribers, we can estimate

the costs the company will incur in the year 2010-11.

3. Brief History of the Industry

The Indian Telecommunications network with 203 million connections is the third largest

in the world and the second largest among the emerging economies of Asia. Today, it is

the fastest growing market in the world. The telecommunication sector continued to

register significant success during the year and has emerged as one of the key sectors

responsible for Indias resurgent Indias economic growth.

The sector, which was growing in the range of 20 to 25 per cent up to the year 2002-03,

has moved to a higher growth path of an average rate of 40-45 per cent during the last

two years.

Telecom sector accounts for 1 percent of Indias GDP. Likely to double in 2-3 years

Telecom services contribute 30 percent to Indias total service tax revenue

The Indian telecom sector gives direct employment to more than 4,00,000 people,

compared to about 6,00,000 people in China

Not just the enabler of software, BPO and ITeS companies, it is also the lifeline of a

fast growing E-commerce space

State-of-the-art telecom infrastructure has led to the rise of cities like Mysore,

Mangalore, Jaipur, Ahmedabad, Kochi on the software services map

This has helped spread the benefits of a booming Indian economy to beyond metros

and large cities, and wealth creation is happening in tier-2 cities


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4. Profile of the Company

Bharti Tele-Ventures Ltd, owned by the Bharti Telecom group, was incorporated in the

year 1995. The economic activities of the company consist of mobile, fixed line, long

distance (national and international), VSAT and Internet services and providing of

network solution.

The promoters of the company M/S Bharti Telecom Ltd. hold over 45 percent of the

equity capital and foreign companies hold around 22 percent, while the public holds an

insignificant share. The company is headed by Mr. Sunil Bharti Mittal, as its Chairman

and Managing Director.

The business at Bharti Tele-Ventures is divided into three main business units viz:

mobile services, broadband & telephone services and enterprise services. The mobile

services unit offers GSM mobile services across India while the broadband & telephone

services provide services in most major cities. The Enterprise services unit provides

carriers (long distance services) and services to corporates. All these services are

provided under the Airtel brand.

The company has entered into technical alliance and regional mobile service

agreements with major global companies like Singtel, etc. The company's mobile

network equipment partners include Ericsson and Nokia. In the case of the broadband

and telephone services and enterprise services (carriers), equipment suppliers include

Siemens, Nortel, Corning, among others. The Company also has an information

technology alliance with IBM for its group-wide information technology requirements and

with Nortel for call center technology requirements. The call center operations for the

mobile services have been outsourced to IBM Daksh, Hinduja TMT, Teletech & Mphasis.

The registered office of the company is situated in New Delhi and it operates its GSM

mobile services in 23 telecom circles and provides broadband and telephone services in

90 cities.


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5. Analysis of Cost Structure

The telecom sector is characterised by very large investment costs. The precise

percentage of total costs attributed to investments depends of course on the definition of

investments and of telecom activities (e.g. whether research, marketing or similar

activities are included). Although some sources claim investment, and investment-

related costs to be as much as 90 percent of the costs of production, most estimates

based on financial data, however, vary between 60 and 75 percent.

Thus, by all measures the telecom sector is comparatively capital intensive. For an

assessment of the cost structures impact on market conditions, more than the level of

investments in telecom is relevant the type of investments. A notable part of the

investments are what economists refer to as sunk costs.

These are long term investments which can be used only for specific economic activities.

An example is a fixed access network providing subscribers access to the local

exchange. This investment only has value for the supply of telecom services in this

particular local area. Once the investment is made the operator can only exit this

particular market at considerable costs. Other investments have a shorter time horizon

and/or can more easily be applied for other activities.


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6. Estimation of Cost Function

Using the time series data 2005- 2010 from CMIE database about the total cost

and total subscribers:


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0

20000

40000

60000

80000

100000

120000

0 50 100 150

Cost

Cost

Poly. (Cost)


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TC = 1444.578+685.5346*Q+1.04*Q^2Fixed Cost = 1444.578TVC = 685.5346Q+1.04Q^2

AVC = 685.5346+1.04QMC = 685.5346+2.08Q


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Thus, based on the expected number of subscribers of 173 million, the estimated cost

incurred by Bharti Airtel in the year 2010-11 will be Rs. 151259.917 crore.

7. Conclusion

Thus, we used the cost data of Bharti Airtel along with its number of mobile subscriber to

determine the cost function with 99.36% explanatory power. Using this cost function, we

estimated the cost that will be incurred by Bharti Airtel in the year 2010-11 based on

their expected mobile subscribers for the coming year.

8. References

1. http://www.trai.gov.in/Default.asp

2. http://en.wikipedia.org

3. CMIE database

Documents

ME - Telecom Industry Cost