Domination Of Wireless Services

Published Date: 02 Nov 2017

Introduction

Telecommunications began with the invention of the telephone in 1876, and then expanded to radio broadcasts, television in the early 1900s and the Internet and cellular phone networks in the new millenium. Early telecommunications transmissions used analog signals, whereas now they are mostly digital connections.

Indian telecommunication sector has emerged as a strong growth engine for the Indian economy in the last decade with the country witnessing tremendous growth in the wireless sector. It has undergone rapid changes over the years- switching from wired lines to wireless, liberalization effort by the government which led to growing share of the private sector in providing telecom services (Figure 1) and several other policy changes that has led to the steep growth in the sector. [i] 

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Figure 1: Growing Percentage Share of Private network [Source: TRAI]

Industry Profile

Indian telecom is more than 168 years old, beginning with the commissioning of the first telegraph line between Kolkata and Diamond Harbour in 1839. The Telecom Regulatory Authority of India (TRAI) was established with effect from 20 February 1997 by an Act of Parliament, called the Telecom Regulatory Authority of India Act, 1997, to regulate telecom services, including fixation/revision of tariffs for telecom services. Currently, there are six Public Sector Undertakings in the Telecom Sector. In addition to BSNL and MTNL, there are several private players such as Bharti Airtel, Reliance Communications, Vodafone, Idea Cellular, Aircel, Tata Indicom, Loop Mobile, Ping Mobile, MTS India, Virgin Mobile India, Uninor, S Tel and Etisalat DB Telecom. They provide GSM, CDMA, WLL (F) and landline telephony facilities.

Growth Statistics of Telecom sector and Domination of Wireless Services

World-wide, the need for telecommunication tools is rapidly raising and India continues to be one of the fastest growing telecom markets in the world. From a mere 22.81 million telephone subscribers in 1999, the number increased to 846.33 million at the end of March, 2011. The total number of telephones stands at 926.55 million at the end of December'11 showing addition of 80.22 million during the period from April to December'11. Wireless telephone connections have risen from 165.09 million in 2007 to 811.60 million in March, 2011 and 893.86 million at the end of December'11. The wired line connections have however, declined from 40.77 million in 2007 to 34.73 million in March, 2011 and 32.69 million in December'11.

The penetration of internet and broadband has also improved with 20.99 million internet subscribers and 13.30 million broadband subscribers across the country. . The sector has grown with a CAGR of 42.7% between Mar-07 and Dec -2011.

The adjoining data shows a comparison of wireless subscriptions with wired ones. The increasing trend towards wireless can be explained by its myriad advantages over wired connections, and this leads us to the conclusion that wired telecommunication services are slowly but surely losing ground, to be summarily replaced by wireless services. Therefore, our analysis of the telecommunication industry henceforth would be mostly concentrated to wireless connection providers.

http://trak.in/wp-content/uploads/2012/05/Mobile-Subscriber-Additions-March-2012.jpg

Figure 2: Indian Mobile Subscriber Additions from Mar-11-Mar-12 [ii] 

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Figure 3(i) and (ii): Comparisons between various subscription Rates

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Figure 4: Wired vs Wireless Connections in India

Services and Segmentation:

Based on the services available in the telecommunication industry, it is possible to segment the industry to understand the generic expectation patterns of the users. [iii] 

Step 1: Identification of possible segmentation variables:

The few players in the telecommunications industry could be segmented on the basis of the stage of life cycle they are in (New Player/ Dominant Player/ Declining Force), on the basis of the types of services they provide (Basic/Value-Added/Customer-Oriented), the customers they cater to (National/International/Regional Provider) and several such other parameters.

Step 2: Reduction of Segmentation Variables:

Of the possible segmentation variables, it is appropriate to choose the types of services as the basic variable for segmentation as it provides 3 distinctly different classes, whose analysis could be done separately. Also, given the modern context where value-added services are bringing in the revenues and basic services are being charged lower tariff, it would be interesting to see the different forces in play in these services segments.

Step 3: Identifying discrete categories within the segment:

Basic Services:

1.       Ability to call and receive local, STD and ISD calls

2.       Caller identification

3.       Call forwarding, call wait and call alert

4.       Voice mail box etc.

Value Added Services:

1.       Selectable Ring Tones and Sing Tones

2.       SMS

3.       GPRS

4.       Video and Audio Streaming Options

5.       Conference Calling etc.

Customer-Oriented Services:

1.       Different Tariff Options

2.       Billing Accuracy, Complaint Redressal and Online Billing Options

3.       24*7 Customer Care etc.

Step 4: Analyzing Segment Attractiveness and Identifying Key Success Factors in Each Segment:

Basic Services:

Industry growth in this segment is almost stagnating, as a result of which we witness price wars being raged between the few players in the oligopolic market. Differentiation being low and switching costs now even lowered by mobile number portability, this segment is quickly losing attractiveness. The bargaining power of buyers being very high due to these low switching costs, players are almost always hesitant to raise tariffs. A Young Leader at Bharti Airtel who did not wish to be named quoted: "This segment is increasingly becoming a burden, bearing the brunt of unproductive customers." However, the strategic stakes are high here, considering that these services include the basic ones for which handsets are bought.

The economies of scale are large, since payment for the spectrum remains constant irrespective of customer base, which explains why providers resort to volume sales. Access to technology is easy for the existing players. To increase subscriptions, players often offer free local calls, hoping to gain revenue from STD and ISD calls. ISD calls attract high customs charges from the providers as well.

This section also faces high competition from substitutes like Skype, which comes at a low cost for internet users.

Value-Added Services (VAS):

Revenue build-up from this segment is increasing each year, which more and more VAS differentiating one player from the other, allowing them to charge premiums. The strategic stakes are low, since both the fixed and variable costs incurred to the company due to VAS is low.

It is easier to increase Brand Identity with VAS, as users identify a specific service with a specific provider (e.g.-Virgin Mobile Recharge Scheme). Different providers have different technologies here, some of which are patented, increasing industry attractiveness. Direct substitutes for services like SMS, GPRS are not currently available. Since switching costs are comparatively higher, contribution to overall cost is minimal; buyer’s bargaining power is curbed. This segment was previously free from all government regulations. However, limits on the number of SMSes and such other regulations are slowly coming into effect. Overall, this segment remains the most attractive from the service provider’s point of view.

Customer-Oriented Services (COS):

These services are not aimed at revenue building, but at increasing the ease of communication between the user and the provider. In that sense, these are complementary services which boost up the sales of the previous two segments, and bad performance in this segment often spells doom for profitability from the other segments. COS acts as an important point of differentiation; helping brands build up their brand equity and lower bargaining power of buyers.

Step 5: Analyze Attractions of Broad vs Narrow Scope:

We observe that certain KSFs associated with each segment are similar, whereas others are different and the potential of skill transfer between the segments is also limited. Keeping this in mind, we have done a 5 Forces Analysis of the telecommunication industry which is shown in the next section.

Industry Analysis

1.Barriers to entry :

1.1. Brands:

There are 10 major established players in the industry namely Vodafone-Essar, Airtel, Aircel, Idea Cellular, Tata Teleservices, Reliance Communications,Videocon,Uninor, BSNL, MTNL with cumulatrive market share of 96.98%. [iv] There is no considerable difference between the various basic service offerings by service providers. Thus, high mobility exists among customers in migrating between service providers. Also, the government regulations like MPN (mobile number portability) have provided more flexibility to users. There are certain specific cases where users prefer a provider because of better network coverage, easy accessibility or better Value-Added Services, but this trend is expected to change in coming years.

                   https://lh5.googleusercontent.com/GnYwvSRmcSnvCbIDQDd00bc-jskbVUd4mcZSE3D3_4KYEd2ociKJmm0XLZ1ihO24dihsK1DDYidUlF1o9REiDeCiCO-OM20DpgrCBSwDcWUc1P_Hx0YaJLWh

Figure 5: Source: TRAI

1.2. Economies of Scale:

Existing players enjoy certain degrees of economies of scale that help them offer lower unit pricing to customers. A notable part of the investments are one-time and are referred to as "sunk costs"  i.e operator can only exit this particular market at considerable costs. [v] Investments in telecom networks can be divided for following functional elements:

·  Terminal equipment

·  Access Network

·  Switching

·  Transmission/Long line

·  Other (buildings etc.)

The biggest barrier is the availability for credit financing which is highly dependent on many external factors. However, to minimize this high deployment costs, service providers have started considering infrastructure sharing, which has been discussed in Industry Transformation.

1.3. Spectrum Availability:

Despite technological changes that reduce the demand for spectrum, availability of spectrum continues to be a constraint. In order to allocate spectrum amongst competing service providers, regulatory agencies often use auctions. From the regulatory and policy perspective, spectrum auctions ensure efficient usage by allocating it to those entities that value it most, while also generating revenues for governments. There is also a finite amount of "good" radio spectrum that lends itself to mobile voice and data applications. Moreover, there are always issues of interoperability with changing bandwidth and thus seamless integration of various services becomes a major issue. Thus, spectrum availability poses a huge barrier to entry, increasing the industry attractiveness.

1.4. Service Licensing:

Licensing also acts as a major barrier to entry as sometimes it becomes very difficult for the new entrants to obtain license. As such, two licensing methods are in vogue:

(i) Unified License for Telecommunication Services permitting Licensee to provide all telecommunication/telegraph services covering various geographical areas using any technology.

(ii) License for Unified Access (Basic and Cellular) Services permitting Licensee to provide Basic and /or Cellular Services using any technology in a defined service area.

1.5. Technology Retaliation :

Wireless technology is based on two competing platforms GSM and CDMA. Accordingly the players have united themselves in lobbying with government against each other .GSM service providers are represented by Cellular Operators Association of India (COAI) and CDMAs by  Association of Unified Telecom Service Providers of India (AUSPI). With each technology possessing inherent advantages as well as disadvantages, it presents a difficult proposition for a new entrant to decide on its offering.

2. Rivalry among competing firms:

2.1 Price wars:

The switching costs being low, the Indian market is highly value-driven and price sensitive, and telecom companies are in continuous pressure to deliver new services while improving customer experience and loyalty. [vi] Â The service providers’ priority is to add maximum number of subscriber per month and retaining the existing user base. The space is highly contestable with the sector being the first to be provided impetus under 1991 LPG policy. The preferred strategy among all competitors is to offer lower prices coupled with more value added services. This has a damaging effect on bottom line for the industry as whole, led to commoditization of the market and makes the industry unattractive for the entrant. [vii] 

2.2. Fixed Cost

The industry suffers from high fixed costs and fast technology obsolescence. The service providers also incur expenses in procuring licenses and laying down network infrastructure. To garner these expenses, it becomes essential to have adequate capacity utilization. It takes tremendous capital to build a cellular network, backhaul, operations center. Operating a cellular carrier requires specific human resources, with specialized skills. It requires a field force to install and maintain the physical assets. It requires a training division. It requires a support group. It requires web experts to build a reliable website. These human resources are in limited supply and expensive. [viii] Thus, increasing subscribers’ base becomes very important. This also furthers the competitive stakes.

2.3. Strategic stakes:

We see players in this market branching out into other industries, and are typically considering big business powerhouses in India (Bharti Airtel, Reliance). These increase strategic stakes for the players.

The tele-density is very less in rural India and this presents an untapped potential for the service providers once the urban market has started maturing. Migration to the new market requires more upfront investments and thus hard cash availability with the providers becomes essential as credit financing is very contingent on economic factors. Moreover, it is always profitable to have the first mover advantage as it provides the opportunity to garner certain premium in pricing for services once this space too becomes competitive.

2.4 High degree of Imitation, lowering switching costs:

There is almost no differentiation among the service providers regarding basic services, and even any innovations in value added services are quickly copied. So. it is very easy for the users to change their service providers and the industry operates with minimal customer loyalty. This makes the industry rivalry most prominent.

3.Bargaining power of buyers:

3.1 Price Sensitivity :

Indian consumers are highly price sensitive and with multiple service offering they are not reluctant to change their service providers.

3.1 Switching Costs :

The market can be divide into household and industrial consumers. Additionally, they can be differentiated as either pre-paid or post-paid users. In case of post-paid users, service providers exercised certain degree of customer loyalty because of high switching costs. Also, the industrial users have customised offerings from service providers that binds them. But, the TRAI’s recommendation on MPN  ( Mobile Number Portability) has taken away this luxury. Thus, it has become all the more important for the companies to charge lower tariffs  along with better services to retain subscribers.  The following test results of a market research conducted in Gujarat telecom circle highlights this point.

Source : A study on consumer behaviour after mobile number portability with reference to Gujarat telecom                            circle ( EISSN 2277-4955 )

3.2 Maturing Urban market :

With urban tele-density well over 100%# the additional growth in revenue by service providers can only be achieved by market capture. This results in more pronounced buyers power.  

4.Bargaining power of suppliers:

The supplier for the telecom industry includes#

a) Network Infrastructure provider

b) Information technology support

c) Passive infrastructure providers

d) Telecom equipments manufacturers

On analysing the industry it is evident that supplies wield intermediate degree of bargaining power over the service providers because of necessity of infrastructural support like network towers, high-tech broadband switching equipment, fiber-optic cables, mobile handset and billing softwares#. But, off late transformation has taken place in acceptance of shared tower infrastructure#

The main suppliers to this industry are silicon chip manufacturers (for processors, memory chips, etc), sub-contractors and employees.

Due to heavy competition among chip manufacturers, their bargaining power is low. But there is medium switching cost for telecom vendors since changing their hardware would lead to additional cost in modifying their architecture. #Also, the switching to different set of hardware support involves modification in design architecture at service providers end and this entails some costs.In 1990, equipment manufactures have organised themselves into Telecom Equipment Manufacturers' Association of India (TEMA) this highlights the fact that consolidation is in some way provides negotiation capabilities to otherwise meek vendors.The suppliers side also face the all time pressing issue of dearth of talented and skilled manpower,this to come degree curtails the capabilities to innovate and strengthen the bargaining power for suppliers.

5.Threat of substitutes:

Wireless telecom carriers, in most cases, are the substitute product in the current era. They are substitutes for fixed-line services, and as such are benefitting from fixed-mobile substitution.The potential major substitutes for telecom industry are as follows:

VOIP (Skype, Messenger etc.)

Online Chat

Email

Satellite phones

All of these technologies have a huge potential. Additionally,products and services from non-traditional telecom industries such as Cable TV and satellite operators are laying  their own direct lines into homes, offering broadband internet services, and satellite links that has the potential to substitute high-speed networking. Railways and energy utility companies are utilizing their vast infrastructural installations to support  high-capacity telecom network alongside such as the rail-tracks

,pipeline networks, electricity transmission lines. Many ISP’s (internet Service Providers) are offering "internet telephony" at low prices. This conflicts directly with the core business of voice transfer by the service providers. Many service providers are skillfully managing  transition of their revenues from voice to data services. However, this space too is getting flooded with internet messengers such as Skype, google voice and chat. Unlicensed frequency options (ex: Wi-Fi, UWB) also compete alongside. But, the issue of security,reliability and flexibility associated with mobile telephony still makes them a preferred choice.Satellite options are incur higher operating costs and technology is not well promoted by government in view of security considerations.Also, the technology is still to make way into common parlance..###

Porter’s Diamond analysis that offers competitive advantage to firms operating in India

Stable Economic Outlook

The gradual and  regulated opening of  economy has induced more competition in various sectors of economy.This has spurred efficiency and responsibility among competing firms.As per latest estimates of IMF, India is third largest economy in terms of PPP( Purchasing Power Parity). India's strong fundamentals has helped it to steer clear of  global economic downturns on various occasions. Rising share of services as percentage of GDP has made the economy more attractive for external investments.

Large Market Potential

India has one of the largest consumer markets in the world. Due to a sustained growth for the past few years has raised the per-capita income levels thereby ensuring more discretionary spending.Even the rural India is not left untouched and their demand for services is expected to present huge opportunity for all service sectors.

Large Talent Pool

India educational institutions churn out highly skilled intellectuals This provides unparalleled advantages to the companies operating in India. As a result, many multinational companies have established their  operation hubsand are supporting R&D facilities.

Low Labour Cost

Lower labour costs makes India an attractive destination for multinational firm to cut down their production costs..

#.

4. Competition    ( Reddy)

Competition:

In the last two years, telecommunication markets have witnessed significant falls in the value of shares and market capitalisation, within the broader context of a global economic slowdown. From a competition angle, difficult market condition has resulted in a reduction in the number of market players in some countries along with the overall decline in market entry and investment in the sector. Despite the setbacks faced by telecommunications markets, the established trend has nonetheless been towards greater competition in telecommunications market.

Throughout the late 1990’s and continuing to the present day, the number of countries introducing competition in basic telecommunications and wireless services has increased steadily.

· Developments in Telecommunications - India

The advent of competition in telecommunications in India started with the declaration of the National Telecom Policy (1994). In that document, more a set of pious declarations rather than a policy paper, a suggestion was made that private sector participation should be allowed. This was not so much as to foster competition but to mobilize the resources of the private operators without which the targets set by policy regarding teledensity would remain just a dream. The policy envisaged a situation where the state owned DOT would remain the dominant operator and private operators would augment the DOT’s efforts in increasing coverage. The introduction of competition began in earnest with the licensing of mobile operators and this heralded the flowering of competition.

And new telecom policy 1999, addendum to NTP 1999, Broad band policy 2004, addendum to Broad band policy 2004 and national telecom policy 2012 – brought more technological improvement and providing world class telecommunications facilities at affordable rates.

The government was interested in private operators helping out in the fixed services segment, particularly in local calling. If private operators were to enter the fixed-line local calling business they would have to compete with the state owned DOT. So a telecom regulator was required to oversee competition. Thus was born the Telecom Regulatory Authority of India (TRAI) by the TRAI Act, 1997. It was clear from the beginning that the regulator was going to have minimal powers and even these were soon to be contested. In the beginning the DOT proposed that the regulator be a part of the DOT. This was resisted but the only real powers that the TRAI was given were to regulate prices. Even this was contested when the TRAI came out with its first tariff order raising rentals and prices of local calls and reducing prices of long distance and international calls. The DOT, using a clause in the TRAI Act that allowed the government to overwrite the orders of the TRAI in policy matters, claimed that telecom prices were a matter of policy and thus could not be determined by the TRAI. Thus from the beginning the TRAI faced a hostile DOT.

In the meanwhile the government had licensed mobile telephony operators in twenty circles and the four metros.

In the policy arena the government proposed a Communications Convergence Bill (2000), the government has also come out with the Competition Act (2001), At present the Competition Commission of India (CCI) is in an advocacy role. In the latest move by the government it has set up a Competition Appellate Tribunal (CAT) to which people can appeal any decision by the Commission.

· Regulation and Competition

Competition and the Courts

For the development of the sector speedy dispute resolution is of utmost importance. The prospect of getting investment and entry plans mired in courts increases the risk associated with projects and raises the cost of capital. Alternative dispute resolution could be a way of reducing the delays associated with disputes. In some countries legal wrangles have proved to have a strong anti-competitive effect as incumbent operators have delayed entry and onerous regulation through court cases. It would also be useful for the judiciary to adopt economic principles to reach decisions. Perhaps, this is an area the competition commission could devote some energy.

·      Policy and Competition

The extent of competition that can be achieved is dependent on institutional factors, particularly in a country like India, where the government’s reach can be substantial. The policies adopted by the government and its attitude towards competitive forces shape the actual level of competition.

NTP 99 had a strong pro-competitive message as it substantially eased entry restrictions and strengthened the regulator by clearly setting out its powers. Soon after VSNL, the state owned international long distance monopoly operator was privatised and its monopoly ended. The government also came out with a bill, the Communications Convergence Act 2000, to set up a unified regulator for all communications services, with even more powers for the regulator. This bill,

however, has not been passed by the parliament and its current status is unknown. In the meanwhile broadcasting services have been brought under the purview of the TRAI.

Mobile Number Portability

As per the data reported by the service providers, by the end of August 2012 about 64.92 million subscribers have submitted their requests to different service providers for porting their mobile number.

In MNP Zone-I (Northern & Western India) maximum number of requests have been received in Rajasthan (6.17 million) followed by Gujarat (5.66 million) whereas in MNP Zone-II (Southern & Eastern) maximum number of requests have been received in Karnataka (8.12 million) followed by Andhra Pradesh Service area (6.15 million).

In the month of August 2012, total number of subscribers who have submitted their request for MNP is 5.61 million

Key Success Factors and Financial Indicators:

ARPU: Average Revenue per User, calculated by dividing the total revenue by the number of subscribers. Given the total volume of VAS that contributes to revenue, this is a better measure than AMPU, or average minutes per user

https://lh3.googleusercontent.com/W7DXjt-W-5tEfidKmnIRQAMigOOJ2iPGpDtcJ-lCS_BQ0JCIqbngDKJa4JG3PeOU5K_i-OsalyluMFqD9Apge3EcC077NWjFWH3gnX6atktqBQ9XG46ZiyQO

Source: Telecommunication, Market opportunities by IBEF

Customer Base: Analysis of annual reports of the major telecom companies revealed that almost all take great pride in commanding a huge subscriber base, and revenues are directly dependent on them.

Penetration Levels: In this saturating market, telecom companies look out for possible expansion in any region using the penetration levels. Very low penetration levels are existent in rural areas, basically due to lack of infrastructure. Telecom companies target medium level penetration zones where added infrastructure cost would be low, and return on assets high. Low penetration level in Africa was one major factor which motivated Bharti Airtel to set up operations there.

Data Rate Units: With data becoming the major segment of revenue earner, companies strive to provide data rate in the range of Kilo Bytes and Mega Bytes to enhance user browsing experiences. Thus, Mbps is becoming one of the most important success factor in years to come.

Churn Rate: The rate at which customers leave for a competitor. Largely due to fierce competition, the telecom industry boasts - or, rather, suffers - the highest customer churn rate of any industry. Strong brand name marketing and service quality tends to mitigate churn#.

Read more: Quality of Service, which is an important parameter that service providers monitor using signal strength indicators to maintain their standards of service

Financials of the top telecom companies yield a sharply declining profit margin over the last 5 years. Airtel’s profit margins have dropped from 22.05% and 23.68% in 2007 and 08 to 10.16% and 5.96% in 2011 and 2012. Another significant finding was that intangible assets in the form of goodwill, bandwidth licenses and software fees formed a major part of the assets. The price-to-book ratio for the industry was found to be around 3.25[i], which hinted at the fact that although the industry profitability was low, the market captured the high intangible brand values of the big players in the industry.

https://lh6.googleusercontent.com/3rIsTjMnn2lASKwZZgYTxTeBoOYL3g07qCbi7HK8wmUoW06xU9_0U21bLY9QnyNBq2JDoJQ557ZVeD3qxPOruwqU9XJm5D59LTUxx4lM9TMaE0qu9DJ1BrvH

[i] Understanding Intangible Assets: Souvik Kumar Saha, Amandeep Singh, Vaibhav Bindroo, Swati Mehra, Imsurenla Longkumer

6. Industry Transformation  

India is regarded as the one of the fastest growing telecom markets in the world with current revenue estimates around Rs. 1400 Billion and is expected to cross Rs. 2000+ Billion mark by 2014; along with a subscriber base of 894 million as of December 2011. All this has brought forth strong competition, declining tariffs, complexities in policy environment, scams and such other uncertainties which has grossly transformed the key success factors associated with the industry.

https://lh4.googleusercontent.com/-Bok196dk6330nMPjak-F0HF-blqB9q7PfVnfud51NSJje4m4FJs9AzjZb8U3RRkiRchY1OjlLcAYJ9IWB7SHRnOVoUE8n-7qbUQrRSF5JuNKSZ-PVd-Dv-Z

Increasing Subscriber Base, but Lower ARPU:https://lh3.googleusercontent.com/eMRGDrhi0W_r_sFofTuMOqB01i6Fxd3KWDW5SgRSS7mOXv4G72zaN1_QAZRyfowx7Mnh7suowEX3EqA8gtVrRje04YpScyojdiKk-aTlU4f0lAh6LDdSScrn

ARPU, or Average Revenue per User, calculated by dividing the total revenue by the number of subscribers, is dropping to abysmally low levels of late (INR 240). Lower handset prices (as low as INR 999) and a gadget-crazy youth population is leading the rise in subscriber levels with deeper penetration and multiple SIMs per user. However, switching and licensing costs being low, and companies enjoying economies of scale from volume scales has prompted lower tariff rates and numerous tariff plans. Companies are now trying to raise ARPU by charging more for data services.

3G and 4G:

The spread of 3G services and widespread launch of 4G technology in coming years will fuel a wholesome transformation with networks becoming more reliable and data and video streaming faster and cheaper. Some companies have taken first-mover advantage here, prematurely buying off 3G and 4G spectrums. The lowered cost of infrastructure is accelerating this market expansion.

Indian Players Venturing in Foreign Market and Foreign Players in Indian Market:

Liberalization and globalization has opened up avenues for intermingling of Indian and foreign markets. This has resulted in Indian companies like Reliance Communications operating next-generation IP enabled infrastructure in the Middle East and Asia Pacific regions[i], while foreign giants like NTT Docomo, Hutchison Essar and Emirates Telecommunication Corporations have partnered India operations.

Mobile Commerce and Gaming:

Mobile commerce and mobile gaming, the latest fad in the telecom market, has led to the increased use of mobile phones for banking, marketing, gaming, browsing, ticketing, inquiries, and other commercial services. The increased use of such services is beneficial by the providers and users alike as it offers high utility and value for money on one hand, and helps in differentiating the provider.

Mobile Number Portability (MNP)

MNP has eradicated the need to change mobile numbers when changing the service provider, thus effectively bringing down switching costs to nil and strengthening buyers’ bargaining power. This has also opened up the avenue of cannibalizing the competitors’ customer base with improved services and lucrative offers. Thus, along with dual-SIM phones has also reduced barriers to entry, since even a new entrant can now hope to get a share in a saturating market by pricing aggressively and offering better services.

Technological Advancements:

Technological breakthroughs in the field of telecommunication like Next-Generation Networks, Mobile Handoffs, Passive Infrastructure Sharing, OFDMA etc. that are yet to hit the Indian market, will bring forth a wave of changes in the next 5 years, which will altogether change the KSFs in the telecom industry. Passive infrastructure sharing, for example, will eliminate huge initial fixed costs for setting up networks and buying spectrums by providing cheap sharing provisions. This approach  promises several advantages:

• Significant reduction in initial set up costs

• Increased environmental aesthetics

• Lower operating costs for service providers

• Improved service quality

• Increased affordability for customers

• Faster roll out of services in rural and remote areas

A step forward in infrastructure sharing is TRAI’s proposal  to include those rural and remote areas in its purview that are not covered by wireless signals with assistance from the Universal Service Obligation Fund (USOF). The regulator has also recommended sharing both passive and active infrastructure though the current licensing agreement does not allow sharing of active infrastructure register considerable savings by sharing infrastructure#

[i] "Reliance Communications and Polycom Forge Partnership to Jointly Drive Market Opportunities in India", March 22, 2010, Newswire Today

8. Financial Performance (Reddy )

Financial Performance:

EBITDA, EPS, P/E Ratio, Churn Rate, FDIs are the major indicators for the financial position of any telecom company. Many companies have little earnings or no earnings to speak of, P/E became a better valuation objective.

EBITDA provides a way for investors to evaluate the profit performance and operating results of telecom companies with large capital expenses.

Telecom operators frequently have to ring up substantial debt to finance capital expenditure. Net Debt/EBITDA provides a useful comparative measure. Again, the lower the ratio, the more comfortably the operator can handle its debt obligations.

INDUSTRY - VALUATION RATIOS

P/E Ratio (TTM)

18.36

P/E High - Last 5 Yrs.

22.12

P/E Low - Last 5 Yrs.

12.98

Beta

0.59

Price to Sales (TTM)

1.28

Price to Book (MRQ)

1.48

Price to Tangible Book (MRQ)

4.29

Price to Cash Flow (TTM)

7.53

Price to Free Cash Flow (TTM)

5.22

INDUSTRY - GROWTH RATES

Sales (MRQ) vs Qtr. 1 Yr. Ago

60.28

Sales (TTM) vs TTM 1 Yr. Ago

21.06

Sales - 5 Yr. Growth Rate

9.41

EPS (MRQ) vs Qtr. 1 Yr. Ago

563.46

EPS - 5 Yr. Growth Rate

1.51

Capital Spending - 5 Yr. Growth Rate

2.36

INDUSTRY - PROFITABILITY RATIOS

Gross Margin (TTM)

62.92

Gross Margin - 5 Yr. Avg.

59.57

EBITD - 5 Yr. Avg

34.56

Operating Margin (TTM)

22.77

Operating Margin - 5 Yr. Avg.

17.06

Pre-Tax Margin (TTM)

21.37

Pre-Tax Margin - 5 Yr. Avg.

16.31

Net Profit Margin (TTM)

16.72

Net Profit Margin - 5 Yr. Avg.

11.12

Effective Tax Rate (TTM)

29.89

Effective Tax Rate - 5 Yr. Avg.

30.61

Churn reduction in the telecom industry:

All industries suffer from voluntary churn -- the loss of customers to some other company. The survival of any business is based on its ability to retain customers. This is particularly true for phone, cable TV, satellite TV and wireless companies.

Wireless companies today measure voluntary churn by a monthly figure, such as 1.9 percent or 2.1 percent. This is the average number of customers who quit their service per month. Annual churn rates for telecommunications companies average between 10 percent and 67 percent.

·         Among Indian companies bharti airtel was highest at Rs 59600 Cr.

·         In 2010-11 as compared to 2009-10, 22 companies showed growth in revenue, BSNL is one among the companies that did not show growth in revenues.

·         All the companies had positive EBITDA for all the three years.

·         Bharti Airtel, Vodafone India, BSNL showed decline in EBITDA margin consecutively 2 years ended 2010-11.

·         Among Indian companies Bharti airtel showed highest PBT for 2010-11

·         Only BSNL and Vodafone India showed negative PBT

·         Three highest declines in PBT are Reliance communications, BSNL, Vodafone India.

Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) is one of the important sources to meet the requirement of huge funds for rapid network expansion. The FDI policy provides an investor-friendly environment for the growth of the telecom sector. Telecom has emerged as the third major sector attracting FDI inflows after services and computer software sector. At present, 74% to 100% FDI is permitted for various telecom services. This investment has helped telecom sector to grow. The growth of FDI in Telecom Sector since 2007 is as under:

Foeign Direct Investment (in million US $)

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

FDI

478

1261

2558

2539

1665

1997

Competition

The Hirschman-Herfindahl Index (HHI) for telecom industry in India stands at 1421.29 thereby indicating a highly contestable  industry.Moreover, the concentration of top four firms at 66% also confirms this hypothesis.# The major players operating in the market are (market share greater than 1%) :# #

1..  Bharti Airtel

Ownership: Privately-held by Sunil Bharti Mittal

Date of Establishment: 7th July 1995

Market Share: 19.50 percent

Tagline# : Express yourself

STP : Elite class, Aspirational and lifestyle brand; Premium category

It is the largest telecom service provider in India and provides 2G, 3G and 4G services. It has a subscriber base of about 200 million in India. In an annual survey by brand Finance, it secured sixth position. It operates under four business segments

a)Mobile Services

b)Tele-media Services

c)Enterprise Services and

d) Digital TV Services. It offers following products and services

Bharti Airtel’s product and services portfolio includes mobile services, home phones, broadband, calling cards, DTH, IPTV, MPLS Services, satellite services, data transport solutions and conferencing services.

2. Reliance Communications                                                                        

Ownership: Privately-held by Reliance Group                            

Date of Establishment: 2004

Market Share: 16.70 percent

Tagline# : Karlo Duniya mutthi mein

STP : Lower and lower middle

RCOM operates under national as well as international long-distance calls. It serves a customer base of nearly 150 million. It offers services to both households and corporate customers. It has always been the low cost service provider and can be credited for making wireless handsets affordable to middle class sections of the society.

3. Vodafone

Ownership: Privately-held by Vodafone group

Date of Establishment: 1994

Market Share: 16.40 percent

Tagline# : Everybody’s Welcome

STP : Upper class and above, student plans, lifestyle

Brief Description: Vodafone is a GSM based wireless service provider and offers both prepaid and postpaid coverage throughout India. It has more visibility and offering in metropolitan cities.

4. Idea Cellular

Ownership: Privately-held by Aditya Birla group and others.

Date of Establishment: 1995

Market Share: 11.90 percent

Tagline# : An idea can change you life

STP : Middle and upper middle class , outstation migrants

It operates under two business segments

a) mobile services

b) national and international long distance services.

The services are offered on GSM based technology.

5. BSNL

Ownership: Publically-held by Government of India

Date of Establishment: Incorporated on 15th September 2000

Market Share: 10.80 percent

Tagline#:Connecting india; BSNL hai to bharosa hai

STP : Middle class from urban and rural india, Most reliable and low priced service

It is a publically held service provider. It operates the largest number of fixed-line services and also internet services at high speed data transfer rates. It has a subscriber base of around 95 million. Following services are provided by the operator:

a) Universal Telecom Serives

b) Cellular Mobile Telephone Services

c) WLL-CDMA Telephone services

d) Internet, Intelligent Network

e) 3G

f) IPTV

g) VVoIP, WiMax.

6.TATA Teleservices

Ownership: Privately-held by the TATA Group

Date of Establishment: January 2005

Market Share: 9.20 percent

Tagline ( Tata Docomo) # : Do the New; Because Life changes in seconds

STP : Students; senior citizens, Pay only as per use by the Simplicity  of plans

It operates under following business segments

a) wholesale voice,

b) enterprise services

c) carrier data

It’s offering includes transmission, Internet Provider, hosted data center, communication solutions and business transformation services for both domestic and multinational organisations. It also has invested subsatantially in submarine cable networks. It has flowing brands : Tata docomo, Virgin Mobile and T24 Mobile. It is into both pre-paid and post-paid category. It is the first operator in India to launch 3G services.

7. Aircel

Ownership: Privately-held by Maxis Communications and Sindya Securities & Investments.

Date of Establishment: 1999

Market Share: 6.90 percent

Tagline#: Your World of possibilities

STP : Middle class and low income group, Faster internetwork access, stay connected

It has a subscriber base of approx. 51.83 million and provides both GSM and CDMA enabled services. It has future plans of expansions by providing National and International Long distance call services.

8. Uninor

Ownership: Privately-held by Unitech Group and Telenor Group

Date of Establishment: 3rd December 2009

Market Share: 4.2 percent

Tagline#: Ab mera Number hai; Experience Change

STP : Youth from middle class, Aim to be the best

It is a relatively new entrant in indian market with its positioning as voice and data provider through its GSM enabled technology to Indian youths. It has envisaged to capture 8% of the Indian telecom market in coming years.

Generic  Strategies