MICROECONOMIC STUDY OF INDIAN TELECOM INDUSTRY

Topics..Market StructureKinked Demand CurveCase for OligopolyDemand AnalysisSupply AnalysisPorters Five Forces ModelInnovative Strategies Adopted to capture marketCompetition strategies explained through Game TheoryProblems Faced by Telecom IndustryExpected changes in the Telecom sector

Market StructureIndia has 2nd largest number of telecom subscribers- 1002.5 millionIndia has 3rd largest telecom network in the worldMajor industry telephony, internet, broadcastingIndia has worlds 3rd largest internet users 243 million15 operators provide telecom services :State Owned CompanyPrivate Indian Owned CompanyForeign Invested CompanyTotal revenue from telecom sector USD 64.1 billion

Kinked Demand CurveAR1MR1AR2MR2Main aim of the firm is to maintain market share

Rival firms assumed to follow a price cut (making demand relatively in-elasticBut,Firms are assumed not to follow a price increase (making demand relatively elastic)Quantity Price

Case for OligopolyCollusion (Cellular Operators Association of India)Price Leader (None)Abnormal Profit (Regulator TRAI)Barriers to entry (High)Termination Fee (Set by regulator)Customer acquisition costInvestor patienceInterdependence (High)

Main parameters governing demand are-Income capacity of PopulationYouth PopulationMVAS & Data usageDemand Analysis

Demand Trend

Market Players and ScopeHigh degree of Imitation, lowering switching costsSpectrum Availability and service LicensingEconomies of ScaleTechnology

Government Policies:FDI in IndiaHigh Fixed Cost

Supply Analysis

FDI in India

Porters Five-Forces Model

Marketing strategiesVodafone ZooZooIdeas IINAirtel- A.R Rehman, Shahrukh KhanService DifferentiationAirtel MoneyPricing strategyMore than Full talktime- DocomoTariff cardsStrategies adopted

GAME THEORY

Telecom sector is probably the only industry where, despite increasing inflation, tariffs fell unabated Expanding Market -> Increasing Competitiveness -> Unrealistic pricing levels to grab customers ARPU (Average monthly revenue per subscriber has been falling drastically for the biggest players) which could mean either usage has decreased or call rates fell. The former is unlikely in a growing economy and the phenomenon actually resulted from aggressive price cutting measures Subscriber base of top 3 companies had a CAGR increase of 37% from 2009-13. The Premise

The Picture

Quarter Ended DecemberAirtel's ARPU (in )Airtel's subscribersVodafone's ARPU (in )Vodafone's subscribersIdea's ARPU (in )Idea's subscribers2009260.596.11737305227.924.323223725215.412.6896321132010200.587.982973638170.555.97358665172.093.6681360382011153.9810.49672524130.058.423015475127.825.3662517252012136.412.82383818117.4210.74420281114.867.3233447752013136.6713.99592696121.9211.48899553107.28.7235904632014143.5414.41124333138.511.64663934122.499.457361213

The Predicament of the Prisoners

SituationV reduces ratesV doesnt reduceA Reduces RatesA and V retain market shareV loses market shareA doesnt ReduceA loses market shareA and V retain market share

SituationB betrays AB stays silentA Betrays BA and B imprisoned for 2 yearsA goes free and B imprisoned for 3 yearsA stays silentB goes free and A imprisoned for 3 yearsA and B imprisoned for 1 year

No prisoner can trust the other one and the optimal solution for each one would be to betray the other

No company can trust the others. In a bid to save their respective market shares, companies kept cutting their own rates.

Each prisoners ideal choice is to stay silent and spend a year in jail instead of 3 years, that would result, if anyone of them betrays the other.

Would the telecom companies also have achieved better results if they had not indulged in price wars?

NO

The Nash equilibrium (the action point from which no company has an incentive to deviate given the action of the other company) as well as the ideal equilibrium is for both companies to reduce rates as per the monthly revenue figures.The telecom industry didnt necessarily suffer due to price cuts, at least in terms of revenues. However, this strategy would have remained profitable as long as the price elasticity of the industrys demand remains greater than 1. In 2013, a rise in prices (indicated by ARPU) led to an increase in the three companies revenue. Thus, this year marked an end to the telecom industrys price-cutting strategy.

SituationV reduces ratesV doesnt reduceA Reduces Rates( 2068, 1400)(2068, 984)A doesnt Reduce(1590, 1400)(1590, 984)

Market SaturationPrice WarDeclining ARPUProblems faced by the Industry

In debt The net debt to EBITDA ratio is a debt ratio that simply shows how many years it would take for a company to pay back its debt if net debt and EBITDA are held constant.

ProfitabilityConnectionsDemandQuantityQuantityPriceConnectionsRevenues for relatively elastic demandFalling Prices and rising sales volume dont always increase total revenue.Revenues for relatively elastic demandRevenues for relatively in-elastic demand

Expected changes in the Telecom sector

Nine pillars of Digital IndiaBroadband HighwaysUniversal Access to phonesPublic Internet Access ProgramE-governanceE-KrantiInformation for allElectronics manufacturingIT for JobsEarly harvest program

In the backdrop of Digital IndiaBroadband and NOFNSpectrum trading and sharingRural Telephony Connecting the Real IndiaInfrastructure Sharing A Profitable PropositionManaged Service- Outsourcing in Telecom3G and 4GUnconventional data monetization optionsIntense competition due to delayed M&A

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