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Managerial Economics: Analysis of the Indian Telecom Sector Essay

PROJECT REPORT ON MANAGERIAL ECONOMICS ANALYSIS OF TELECOM SECTOR IN INDIA INTRODUCTION India is the fourth largest telecom market in Asia after China, Japan and South Korea. The Indian telecom network is the eighth largest in the world and the second largest among emerging economies. At current levels, telecom intensiveness of Indian economy measured as the ratio of telecom revenues to GDP is 2. 1 percent as compared with over 2. 8 percent in developed economies. Indian telecom sector has undergone a major process of transformation through significant policy reforms.

The reforms began in 1980s with telecom equipment manufacturing being opened for private sector and were later followed by National Telecom Policy (NTP) in 1994 and NTP’1999. The liberalization of the industry has created an impressive forward-momentum in India, resulting in a vigorously competitive and fast growing sector. Moreover, the government had relaxed significantly the foreign investment norms in the sector. According to the Department of Trade, India’s investment policy framework permits foreign direct investment (FDI) in a number of key sectors of the telecom markets.

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The benefit of this liberalization has been the drastic reduction in call charges. Where a 1 minute trunk call cost Rs. 30 earlier now it costs on Rs. 1. Due to the entry of BSNL and MTNL, cellular telephony costs have also come down rapidly. According to the latest data issued by the Cellular Operators Association of India (COAI), the industry association representing all GSM operators, the number of India’s GSM subscribers had touched 136 million as of the end of June 2007-recording an addition of 5. 4 million during June, or a growth of 4. 2% when compared to 130. 1 million at end-May 2007 The Unified Access licensing regime implemented in the year 2003, gave a major boost to this industry as it permitted basic and/or cellular mobile service using any technology. And today, India is one of the fastest growing markets for Global System for Mobile Communications (GSM) with its subscriber base increasing from 53mn in October 2005 to 116mn in June 2007. If India has to fulfill its full potential of becoming a key player in the New Economy and merge as an IT superpower, it requires a strong and competitive telecom sector. Over the last ten years, significant developments have taken place in this sector and many more profound changes are expected to take place in this industry in the coming years. At present, India constitutes one of the world’s largest telecom markets. Although with a fixed telephone network of 29 million lines, India is ranked as one of the top ten-telecom networks in the world, its telephone density of 2. telephone lines per 100 persons compares unfavorably with global standards. The US has a teledensity of 50 telephone lines per 100 persons; Brazil has a tele-density of 10 telephone lines per 100 persons with the global average being 11 per 100. The current low tele-density offers telecom companies substantial growth opportunities in India and gives the country an option of adapting new technologies. The New Telecom Policy of 1999 (NTP 99) has set a target of increasing tele-density to 15 per cent by 2010.

Large investments in telecom sector are in process and additional investments are expected, following opening up of national and international long distance segments, permission of unlimited competition in basic telecom services and issue of fourth cellular licenses. Internationally, the per capita investments in telecom industry have increased in the countries with low teledensity. However, policy uncertainty could adversely affect investment plans of telecom operators. Further, long gestation and break-even period would affect the borrowing capability of telecom operators.

Over the medium term, the telecom operators would have to infuse equity to meet the fund requirement for roll out of projects. Profitability of the incumbent PSUs is expected to decline from the current high levels, while the new players are expected to register negative cash flows in the medium term. The total revenue in the telecom service sector was Rs. 86,720 crore in 2005-06 as against Rs. 71, 674 crore in 2004-2005, registering a growth of 21%. The total investment in Telecom services sector reached Rs. 200,660 crore in 2005-06, up from Rs. 178,831 crore in the previous fiscal.

Telecommunication is the lifeline of the rapidly growing Information Technology industry. Internet subscriber base has risen to 6. 94 million in 2005- 2006. Out of this 1. 35 million were broadband connections. More than a billion people use the internet globally. Under the Bharat Nirman Programme, the Government of India will ensure that 66,822 revenue villages in the country, which have not yet been provided with a Village Public Telephone (VPT), will be connected. However doubts have been raised about what it would mean for the poor in the country.

It is difficult to ascertain fully the employment potential of the telecom sector but the enormity of the opportunities can be gauged from the fact that there were 3. 7 million Public Call Offices in December 2005 up from 2. 3 million in December 2004. The value added services (VAS) market within the mobile industry in India has the potential to grow from $500 million in 2006 to a whopping $10 billion by 2009. OBJECTIVES One of the main reasons to undertake telecom markets has been the unique characteristics of cost and demand structures within the telecom sector.

One important economic reason for regulation is to help achieve the optimum level of production from a societal point of view, i. e. , to ensure production of the desired products and services in the desired quantities and at appropriate prices for all consumers desiring them. The need for regulation depends on the ability of the market to create this situation by itself. The first basic question is whether production should be organized as planned production with possible corrections by the market, or production should be determined by the market with possible corrections from planners or regulators.

THE COST STRUCTURE OF A TELECOM NETWORK The telecom sector is characterized 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 structure’s impact on market conditions, more than the level of investments in telecom is relevant. The type of investments is also important. 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. Investments in telecom networks divide into the following functional elements: * Terminal equipment| * Access Network| * Switching| * Transmission/Long line| * Other (buildings etc. ) | TRENDS IN INVESTMENT COSTS The most important factors of input to investments in telecom networks are electronic equipment, cables and wires. Prices for electronic equipment have decreased rapidly and are expected to continue declining in the future.

This affects in particular the costs of switching but transmission is affected also. Improved cable technology, and in particular the introduction of optical fibers, has reduced costs of cables substantially. Prices for copper wires are relatively stable, but new compression techniques are increasing its capacity. Optical fiber cable provides significantly greater capacity, and price reductions now make it competitive with copper cables for installation of new access networks on Greenfield sites in some locations. However, at present it is not economical to replace installed copper cables.

In the access network the laying of cable and wire constitute as much as 90 percent of the costs. Thus the cost of the cable itself plays a diminishing role. But in the transmission network, where the increasing capacity of optical fibers can be utilized more advantageously, fiber cable will have a substantial impact. DEMAND Demand for telephony has a very low sensitivity to changes in tariffs, but more expensive services such as long distance telephony tend to be more sensitive than local telephony, which is more of a necessity.

Another characteristic for both telephony and many other communication services is the positive externalities created by the service. A completed telephone call requires the participation of a second party, which in most cases also is benefiting from the call (call externality). Another externality arises when a new subscriber is connected to the network. This will benefit all other subscribers which possibly could have a need to communicate with the new subscriber (access-externality). This point is very important for the introduction of new services.

New services need to establish a critical mass of network subscribers before they really can become useful and the market can unfold. Telecom services are offered to two distinct groups of customers with quite different patterns of demand:- * Business Customers| * Residential Customers. | CONDITIONS FOR EFFECTIVE COMPETITION In economic theory, the notion of perfect competition is used to characterize an unregulated market where the forces of competition drive down prices to the level of production costs, and both price and production develop in such a way that the societal welfare is optimized.

Such a market can be established if the following conditions are met; sufficiently large numbers of independent suppliers; sufficiently large numbers of independent consumers; free and easy entry and exit of suppliers; and full visibility of market conditions. It is not at all clear whether the telecom markets are likely to get close to meeting these conditions. If all these conditions are not fulfilled, the market cannot by itself optimize production. In this case it may become necessary to develop regulatory measures, which can “help” the market function more closely to the optimal condition.

However, it may be very difficult for new suppliers to enter the market. The most important barriers to entry which restrict the number of suppliers are: * Economies of scale| * Economies of scope| * Economies of density| * Size and flexibility of investment| ECONOMIES OF SCALE Economies of scale reflect the opportunities for reduced unit costs with increased output. They provide efficiency advantages for large units of production and new entrants will find it difficult to compete with already well established firms with large scale production.

If production of a certain service involves considerable economies of scale, new firms will find it difficult to compete with existing firms that have a well established large scale level of service supply. Furthermore smaller companies will tend to merge into larger units to remain competitive. Therefore, an unregulated market is likely to result in a very limited number of large scale suppliers. ECONOMIES OF SCOPE Economies of scope are defined as cost savings related to supplying a number of different services by the same company.

Economies of scope can be a barrier against smaller companies only supplying a limited range of services. This could be a local operator or an international carrier. Three different types of economies of scope can be distinguished: * Economies of horizontal integration | (e. g. telephony and data)| * Economies of vertical integration within the network| (e. g. local and long distance)| | * Voice and value added network services | (e. g. call forwarding)| | * Economies of vertical integration beyond the network| (e. g. information production and distribution). | |

Economies of scope can also arise in billing and customer relations. Operators supplying a full range of services can offer their customers one stop shopping and one stop billing. This gives an advantage compared to service providers specializing in a few areas. It is a factor influencing global alliances in telecom to meet the demands of global transnational corporations. ECONOMIES OF DENSITY Economies of density are related to the fact that network costs per connection decreases with increasing density of connections. The primary reason for this is shorter access lines and better capacity utilization of the network.

Economies of density imply that it is very difficult for newcomers in an area to compete with a former monopolist, where local networks with a high penetration already have been established. This is of course particularly important in the residential market, where the revenue per customer is much lower than in the business sector. A newcomer may either build its own infrastructure from scratch or buy parts of its capacity from the incumbent operator. In some instances a duplicate network infrastructure can be built on top of other types of infrastructures e. g. local cable-TV or electric power networks.

But even in these cases considerable investments must be made before sufficient economies of density in supplying interactive network services can be achieved. From a regulators point of view the barrier created through economies of density can be overcome either by supporting the building of alternative infrastructures – e. g. right of way access, tariff regulations, taxation of the incumbent operator or other approaches. Or regulatory measures can be enforced in order to ensure competitors fair access to existing network facilities. The first solution may promote short run competition most directly.

But if there are significant economies of density it may be a costly solution as it implies a substantial duplication of network investments. Furthermore it is probable that this competition will be eliminated in the long run as the competitors are driven toward more efficient arrangements for meeting consumer demands. DEMAND-RELATED FACTORS Demand for telecom services evolves from a core demand for a homogenous output – basic telephony – for which pure transmission is the common ingredient in a wide range of services, where transmission often is combined with other service functions.

Increasingly these services are offered by service providers other than the provider of the basic transmission services, usually the incumbent PTO. Other producers may be foreign telecom operators, computer companies or companies from another industry. Cost structures differ for different services, and market structure depends a great deal on the type of service demanded. Cable based transmission intensive services with a low level of processing involve relatively higher sunk costs than processing intensive services, where substantial value is added to the basic transmission.

So far, increased demand for new services has tended to change the overall cost structure in the direction of a reduced share of costs for transmission and an increasing share on processing and value added components. This implies a decreasing role of sunk costs and better conditions for stimulating competition at least in the value-added segment. Advanced services provided for large business customers are less dependent on services from the network operator. If special facilities are needed, special network solutions can be designed on a network of leased lines.

This development may not be feasible for services designed for residential customers. Advanced residential services must rely on transmission facilities as defined by the local network operator. As the existing cost structure implies that basic residential services is the area where there are the greatest barriers to developing effective competition, diffusion of such services may be restricted to a pace determined by the local PTO. Positive externalities related to usage and access imply that consumers depend not only on the network operator but also on the behaviour of other consumers.

Call and access externalities give telecom services the character of a public good. Therefore, a free market may result in production and usage of services below the social optimum. This problem is partly addressed for basic telephony by imposing on the operators a universal service obligation, but the problem may be more acute in relation to new services where obtaining a critical mass large enough to make the service attractive can cause difficulties. This barrier can be overcome by public initiatives, such as the generation of public demand and standardisation.

However, it may be difficult beforehand to foresee which services deserve public support. LITERATURE NATIONAL POLICY Till the early 1990s, the government enjoyed full monopoly over telecom services with the Department of Telecommunications (DOT) being the sole provider of telecom services (local and long distance) in the country, except in Delhi and Mumbai, where Mahanagar Telephone Nigam Ltd (MTNL) was the sole access provider. International services were provided exclusively by the Videsh Sanchar Nigam Ltd (VSNL). In 1994 the Government of India issued its National Telecommunications Policy.

The policy was issued in recognition of the “urgent need” to provide universal access to basic telecommunications services by 1997 and offers guidelines for entry of the private sector into basic telecommunications services. To facilitate private-sector participation, licensing procedures were established in the Department of Telecommunications in India, and equity participation for companies registered in India (with 51 or more percent Indian ownership) was anticipated. Private-sector licenses, however, were to be granted only for local (versus long-distance) telecommunications networks.

An autonomous body, the Telecommunications Authority of India, was established to regulate private-sector activity. NEW TELECOM POLICY ’94 The first step towards opening the telecom services sector took place with cellular licenses for the four metros being awarded to private companies in 1994. In the same year, the government formulated the National Telecom Policy of 1994 (NTP 94) with the objective of expanding the telecom infrastructure by encouraging private sector participation in telecom services.

As per NTP 94, one private company per circle was to be allowed entry into basic services while two operators were to be allowed to compete in providing cellular services in each of the circles. Subsequently, cellular services became operational in four metros and 18 state circles and basic services, too, commenced in a few circles. However, high license fee bids, tariff distortions, unattractive interconnection and revenue sharing arrangements between DOT and new private licensees resulted in most service providers finding themselves in financially unviable situations.

NEW TELECOM POLICY ’99 In an attempt to remove the defects of the old policy and provide a new direction to the telecom sector, the government came out with NTP 99. The highlights of NTP 99 are: * Private basic and cellular operators allowed migrating from revenue sharing regime to one time entry fee plus revenue sharing system. | * License period extended from 10 to 20 years. | * DOT’s monopoly over domestic National Long Distance (NLD) services to end in 2000. | * Interconnection between fixed, cellular and other telecom service operators to be allowed freely. * Indian Telegraph Act, 1885, to be replaced by a new legislation| THE TENTH PLAN (2002-2007) During the 10th plan period (2002-2007), the Government targets to add 81. 71 million lines (including fixed and cellular), which translates into the teledensity of 11. 5 per cent in 2007. The Government has envisaged the total investment of Rs 1,606. 7 billion including the telecom investment of Rs 441. 6 billion in rural areas and Rs 462. 9 billion investment by the private operators.

In order to accelerate the growth of private investment in telecom industry, the working group on Information Technology has proposed key measures like establishing interconnection agreements, meeting the requirements of USO fund, utilization of license fee for rural telephony, incentives for roll out in the rural areas, decision on calling party pays regime etc. RECENT POLICY CHANGES:- NEW LICENSES FOR BASIC TELECOM SERVICES In January 2001, guidelines for the entry of new fixed service providers were announced.

Out of the applications by 18 companies, 6 companies were issued LoIs for basic telecom services. By March 2002, 3 companies including Reliance (17 circles), Tata Teleservices (5 circles) and Bharti (4 circles) had signed license agreements by paying the total entry fee of Rs 8. 39 billion. FOURTH CELLULAR LICENSE In October 2001, the Government issued licenses to successful bidders for commencing cellular services. These include, the Bharti Group in 8 circles, Escotel in 4 circles, Hutchison Essar in 3 circles, and Reliance (through Reliable Internet) and Birla-AT&T and Tata in 1 circle each.

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The bidders have paid their entry fees, which aggregated to Rs 16. 33 billion, for the fourth cellular license in the 4 metros and 13 circles. THE ROLE OF TECHNOLOGICAL INNOVATION Technical innovations have contributed to a reduction of barriers to competition in several ways:- Changing structures of network costs: Reductions in transmission costs limit investments needed for delivery of the same services. In particular the unit costs of the interexchange network capacity are being reduced continuously.

Development of broadband services is closely related to reductions in costs of transmission. However, substantial demand for broadband services will multiply the demand for transmission capacity, and the costs of both the access and interexchange network will increase as a result of this major network upgrade. Lifetime of equipment is reduced: With rapid technological innovations old equipment becomes obsolete more quickly. This increases capital costs (a faster rate of depreciation is needed), shortens the planning horizon and increases the risk.

Digitalisation increases economies of scope for provision of facilities, but reduces economies of scope for service provision. If effective interconnection rules are established, digitalisation improves the conditions for service providers without their own physical infrastructure. Satellite and cellular services can provide alternatives for some local exchange network services. The cost structure of air-borne services involve fewer economies of density than wired services. Therefore a degree of infrastructure competition can be introduced at lower costs.

Although satellite and cellular services cannot be complete substitutes for wired based services they do reduce the monopoly power of local exchange operators somewhat, and provide an alternative for some business and residential services and customers although far less than a majority. FUNCTIONS OF TRAI The major functions of TRAI, inter-alia, include:-Make recommendations either suo-moto or on a request from the Licensor on the following matters:- * Need and timing for introduction of New Service Provider. * Terms and Conditions of license to a Service Provider. | * Revocation of license for non-compliance of Terms and Conditions of license. | * Measures to facilitate competition and promote efficiency in operation of Telecommunication services so as to facilitate growth in such services. | * Technological improvement in the services provided by the Service Providers. | * Type of equipment to be used by the Service Providers after inspection of equipment used in the network. * Measures for the development of Telecommunication Technology and any other matter relatable to Telecommunication Industry in general. | * Efficient management of available spectrum. | | Discharge the following functions:- * Ensure compliance of terms and conditions of license. | * Fix the terms and conditions of inter-connectivity between the service providers. | * Ensure technical compatibility and effective interconnection between different service providers. | * Regulate arrangement amongst service providers of sharing their revenue derived from Telecommunication Services. * Lay-down the standards of quality of service to be provided by the service providers and ensure the quality of service and conduct periodical survey of such service provided by the service providers, so as to protect the interest of the consumers of Telecommunication Service. | * Lay-down and ensure the time period for providing local and long distance circuits of Telecommunication between different service providers. | * Maintain Register of Interconnect Agreements and all of such other matters as may be provided in the Regulations. * Ensure effective compliance of Universal Service Obligations. | FUNCTIONS OF TDSAT * The TDSAT is Empowered to adjudicate any dispute between: * Licensor and a Licensee. * Two or more Service Providers. * A Service Provider and a Group of Consumers. * The Appellate Tribunal shall be guided by the Principles of natural justice and have powers to regulate its own procedure. * The Appellate Tribunal has the same powers as are vested in a Civil Court, while trying a Suit, in respect of following matters:- * Summoning and enforcing the attendance of any person and examining him on oath. * Requiring the discovery and production of documents. | * Receiving evidence on Affidavits. | * Requisitioning any public record or document or a copy of such record or document from any office. | * Issuing commissions for the examination of the witnesses or documents. | * Reviewing its decisions. | * Dismissing an application for default or deciding it, ex-parte. | * Setting aside any order of dismissal of any application for default or any order passed by it, ex-parte. | * Any other matter which may be prescribed| Notwithstanding anything contained in the Code of Civil Procedure, or any other Law, an Appeal shall lie against any Order, not being an Interlocutory Order, of the Appellate Tribunal to the Supreme Court of India on one or more of the grounds specified in Section 100 of that Code. * The Appellate Tribunal consists of a Chair-Person and two Members appointed by the Central Government. * The Selection of Chair-Person and Members of the Appellate Tribunal is made by the Central Government in consultation with the Chief Justice of India. DATA & METHODOLOGY TELECOMMUNICATION SERVICES

Telecommunication services include Basic service, Cellular service, and Internet Service Provider (ISP) and Very Small Aperture Terminal (VSAT) services. Government of India (GoI) plans to introduce a unified license for all telecommunication services in India, and has already allowed full mobility to wireless in local loop (WLL) operators as a first step. Telecom services are growing at an approximate rate of around 7 percent per year in terms of revenue and 13 % in terms of subscriber base in last five years. Amongst telecom services, cellular services are the fastest growing, with CAGR of 40 percent over the past four years.

During the past three years, in terms of subscriber base telecommunications services have been growing at a CAGR of nearly 22%, owing largely to the rapid increase in cellular service subscribers. All these services are explained in detail: * Basic Services | * Cellular Services | * Internet Service Provider| BASIC SERVICES FIXED SERVICE PROVIDER (FSPS) Fixed line services consist of basic services, national or domestic long distance and international long distance services. The domestic market (i. e. excluding international revenues), has been growing more than per cent annually during the past three years.

The state operators (BSNL and MTNL), account for almost 90 per cent of revenues from basic services. Private sector services are presently available in 18 circles, and collectively account for less than 5 per cent of subscriptions. However, private services focus on the business/corporate sector, and offer reliable, high- end services, such as leased lines, ISDN, closed user group and videoconferencing. As a result, average-revenues-per-user (ARPU) of private operators are more than twice those of the state-owned service providers. The main revenue contributing value added services were NLD and ILD.

The reduction in NLD and ISD tariffs punctured the potential of the key revenue streams. Internet telephony for ISD worsened the potential. Added to it was the phenomenal growth rate in cellular services. GROWTH DRIVERS The Government has allowed unlimited competition in the basic sector. Considering the inherent advantage of scale that the incumbent state operators have, the private companies are setting their networks very selectively and targeting corporate clients with value added services. The government has introduced unified license for fixed and mobile service providers.

This allows all phone companies to become mobile operators by offering cellular and landline/WLL-M services under a single authorization, ending service-specific licensing. Indian fixed line network is likely to expand as the current low level of telephone penetration is very low coupled with the unmet demand for connections. The rate of growth in services revenues is however, likely to be lower in comparison with the pace of increase in the number of fixed lines. CELLULAR SERVICES OVERVIEW There are 25 private companies providing Cellular Services in 19 Telecom Circles and 4 Metro cities, covering 1500 towns across the country.

Presently, there are five private service operators in each area, and an incumbent state operator. Almost 80% of the cellular subscriber base belongs to the pre-paid segment. Several GSM cellular service companies are climbing the EDGE bandwagon. Hutch has already started and Bharti has made test calls on the EDGE platform and the company is in talks with Siemens for EDGE-enabling some of its circles. The DoT has allowed cellular companies to buy rivals within the same operating circle provided their combined market share did not exceed 67 per cent.

Previously, they were only allowed to buy companies outside their circle. REGULATORY STRUCTURE The lack of clarity in the regulatory structure has made it difficult to predict the prospects for this industry. This uncertainty has best been typified by the issuance of a fourth license and the controversies with reference to limited mobility players. The Cellular Services was thrown open for third & fourth Service providers in 2002. The number of service providers increased to 68 in the year 2002-03 from 42. GROWTH DRIVERS

Opening up of international and domestic long distance telephony services are growth drivers in the industry. Cellular operators now get substantial revenue from these services, and compensate them for reduction in tariffs on airtime, which along with rental was the main source of revenue. The reduction in tariffs for airtime, national long distance, international long distance, and handset prices has driven demand. INTERNET SERVICE PROVIDER Internet has become very easily accessible with cyber cafes /kiosks increasing their density, not only in the metro towns but also in semi-urban towns.

There is no restriction on the number of internet companies and more than 185 companies are operational. Internet telephony has been allowed officially from 1 April 2002. The growing demand of corporates for applications such as Electronic Commerce, internet leased lines, ISDN, VPN etc is driving the growth of the internet services market. However, the industry continues to face a number of bottlenecks in terms of regulatory treatment of ISPs, high bandwidth prices, low PC penetration, high cost of telephone access etc TELECOMMUNICATION EQUIPMENT

The domestic industry is worth Rs 303,000 million and has made little progress in comparison to the development of Telecom services in the country. The industry is faced with two major challenges: India is being steadily opened up to the global market, as trade restrictions are done away with, resulting in crashing of import duties across the board and easy movement of goods from overseas. GROWTH DRIVERS Growth in the telecom equipment market is expected to be driven by an increasing demand for telecom services. Key players like BSNL, Bharti, Reliance, TATA, BPL and Hutchison will drive equipment market growth.

Transmission equipment, cable and terminal equipment are expected to drive the market in the years to come. Also switching systems will remain a big market, with a size of around Rs 50 billion. ANALYSIS DEMAND & SUPPLY ANALYSIS:- DEMAND: Demand is the quantity of services that consumers are not only willing to purchase but also have the capacity to buy at the given price per unit of time. After deregulation in 2000 there has been a drastic change in telecom industry and so in demand of services. India became the second largest hub in the world after China.

Industry is growing at a very fast rate. There has been a complete change in the consumer base. These are some of the factor that leads to surge in demand:- * Prices of services: There has been a great impact of price in the demand for telecom services. * Prices of complimentary goods: With the rapid pace of increase in customers list prices of handsets have fallen drastically. * Increase in income: With the rapid pace of development of the economy, disposable income of the consumer has surged. This also helps demand to increase. * Youth population: With the youth i. e. tudent & young generation people have completely assessed it as their need. * Technological advancement: With new services surges in order to attract new customer, there has been a high demand in market for these kinds of advance services. * Rural Penetration: In search for customer companies penetrated rural market and this increase the no of new user in companies bag * No substitute: telecom sector is such a sector where there is hardly any substitute available to consumer. Only internet phoning comes closer as a competitor, but still it’s in embryonic stage in India.

In the above diagram, DD was the initial demand curve it represents the demand of services at different rates. Now with all the above factors the demand curve shifted to new place D`D`. Now on the curve D’D’ the quantity of service demanded is higher than on curve DD at all possible prices. This is because quantity of service the consumer are willing and able to buy has increased Also curve DD is less elastic and elasticity has changed over period of time as can be seen the curve D’D’ is more inelastic. Also this concept of elasticity is talked ahead in the paper. SUPPLY

Supply is the quantity that producers are willing to sell at a given price per unit of time. Other than the demand demography there was also a huge change observed in the supply side. The structure of supply was improved. Now let’s have a look on factors that affected the supply of services: * Price of factor of production: There has been an decrease in price of raw materials, say technological inputs, etc. | | * Technology: Technologies provide a major role in this industry. Quality of service moreover depends on the technology and that has improved significantly and increased the overall market. | * Licensing: With the liberalization of regulations which previously involves a huge cost input, it greatly impacts on the tariffs of service provider. Example- previously for an Intra-circle license fee of 20 crore existed but now it has been shorten to 9 crore. | | * Price of related goods: Prices of handsets have fall drastically. This also has a great impact on the supply chain. | In the above diagram, S1 was the initial demand curve it represents the supply of at different rates. Now with all the above factors the supply curve shifted to new place as shown by S2.

Now on the curve S2 the quantity of services supplied is higher than on curve S1 at all possible prices. This is because quantity of service the producer needs to supply increased over the time so as to cater more and more emerging markets. The above listed factors such as (Technology, Price of mobile phones, increase in no. of service providers, etc) caused the increase in supply. Also in the diagram initial supply curve S1 was less Elastic, as price didn’t play a big role in the supply change. But various factors contributed and made the supply curve more elastic as shown by curve S2.

Also the huge increase in consumer base help shift to curve rightwards. Ultimately industry was able to provide more at lesser price. EQILIBRIUM OF SUPPLY AND DEMAND As we have seen that the supply and demand of any good primarily depends on the price of that good. Now lets us see how equilibrium price and equilibrium quantity is determined by demand and supply. And during the process we will see show this equilibrium price and equilibrium quantity has changed over a period of time due to simultaneous shift in demand and supply curve.

Initially we had the demand curve (D1) and supply curve (S1) as shown in figure. This curves represented the supply and demand of service at different prices. Now for this curves we had E is our equilibrium where demand and supply curve cuts each other. Further we had equilibrium price as OP and equilibrium demand as OQ. Now due various factors such as (Technological advances, availability, increased incomes, etc) supply and demand curve are shifted from there original location to new place as shown. The new equilibrium point is decided by intersection of new supply curve (S2) and demand curve (D2).

This curves intersect at point E’ which is new equilibrium point and at this point we have a new equilibrium price as OP’ and new equilibrium demand as OQ’. Here it can be clearly seen that due to shift in equilibrium point price and quantity both changes. (Prices decreased and Quantity increased). ELASTICITY An important concept in understanding supply and demand theory is elasticity. Elasticity refers to how supply and demand changes in response to various stimuli. One way of defining elasticity is the percentage change in one variable divided by the percentage change in another variable.

To study their effect on demand we have Types of elasticity related to Demand * Price elasticity of demand| * Income elasticity of demand| * Cross elasticity of demand. | Price Elasticity Of Demand While discussing the concept of demand we need to discuss the concept of Price Elasticity of Demand. Price elasticity of demand measures the degree of consumer responsiveness to a change in price of product. Now price elasticity of consumer can be simply understood as, how the consumer will react to change in price of services offers by the service provider.

The possible reactions can be * Unaffected | * Reduce the usage of services. | * Change to other service provider| * (Worst case) Stop using mobile. | | To look up the situation in telecom market we will compare the Price elasticity of telecom market in past and present. We will be looking how the elasticity has changed for the consumers in the last few years and the factors contributing to this change. Also the reactions depend upon the kind of consumer so we distribute consumers in * Existing consumers | * Potential customers| | Existing Consumers:-

Existing consumers are those consumers who are already using the services offered by various service providers. Demand of services for existing consumer is mainly affected by * Quality of services | * Price (to a little extent)| * Substitutes (Other service providers)| * Add on services | We will try and see how the price of services offered affected the demand of services. To understand the price elasticity we will compare elasticity of demand for two periods. Past situation: Mobiles when introduced used to be luxury goods and so sensitive to price changes.

Even 3-4 years back even a small change in price of services had a impact on the consumer. Either consumer stopped using services, or reduced the usage or shift to other options. In this way the market was quite Elastic and sensitive to price changes. See Graph Present situation: Mobile phone is more or less a necessary good and the change in price doesn’t have a major impact on the demand of services by the existing consumer. The change in price by some amount will not make consumer to shift from existing connection to new connection, or to stop using mobiles.

Consumer is today somewhat loyal to service provider due to their services and this helps in making them more inelastic. So the consumer is more or less price Inelastic this can be seen from the graph. Potential customer New or potential consumers are those consumers who in near future will avail services offered by various service providers or can shift from other service provider. Demand of services for new consumer is mainly affected by * Price | * Availability| * Substitutes | * Basic Services| * Add-on services| | For most of the consumer’s mobile connection is a one time expense.

It takes lot of thinking while purchasing it. Now the pricing strategy of service provider affects the potential consumer. Past situation: Few years back elasticity was very high. i. e. even a small change in rates of services made consumer to think before investing and in some cases consumer dropped idea of buying connection or thought of buying connection when price will fall. So consumer was highly price elastic as shown below. Present situation: Even in present situation mobile phone though is a necessary good and the change in price of services has a major impact on the demand of services by the new consumer.

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The change in price by some amount will make consumer to shift to other service provider, or to reconsider idea of using mobiles. So the consumer is more or less price relatively elastic this can be seen from the above graph. CONSUMER BEHAVIOR Consumer theory is a theory of economics which relates preferences, indifference curves and budget constraints to consumer demand curves. It is theory which deals with reconciliation of dreams and our budgets. Consumer theory can be used in order to estimate the optimal goods bundle for an individual buyer. India is completely a different kind of market.

People of India are more conservative as compared to other western countries. Taste and preferences of people were more rigid and flexibility of consumer to adapt to changes was less. But with the high rate of development, taste & preferences of people have started changing. With increase in consumer income & the influence of western high life style the way of thinking has started changing. In case of telecom people were more skewed to voice than that of the services provided to users. People’s perception regarding phoning was only limited to use voice services.

But gradually there has been a change in the behavior of consumers. People are also interested on new services provided to them. Services such as MMS, internet, broadband services, etc. form a major role for a consumer to select a particular service provider. This shift in the mind frame of people can be depicted through concept of indifference curve. INDIFFERENCE CURVE Indifference curve is locus of points that shows different combinations of two products that yield exactly the same level of satisfaction. The two products in case of telecom services are Voice and Data.

Now in graph we have curve U1 as indifference curve. On this curve the consumer is satisfied if he gets voice and data in range of A-A’. Either he can be at point E or E’. But outside the range A-A’ he will not be satisfied as he has some minimum voice requirements. In range A-A’ voice and data can be substitute for each other to some extent i. e. bad Voice quality can be compensated by Data service (SMS). Income Effect In this concept of indifference curve, we have an income effect. As long as the prices remain constant, changing the income will create a parallel shift of the budget constraint.

Increasing the income will shift the budget constraint right since more of both can be bought, and decreasing income will shift it left In the above diagram, initially we have U1 as the indifference curve where the consumer attains his equilibrium at point A, where he consumes a certain level of voice & data. But with increase in disposable income initial budget line of consumer shifts from DV to D’V’. In response to this shift in budget line the indifference curve shifts to U2. From this we should conclude that along with budget line consumer affordability has increases and there is a shift in indifference curve.

Change in preferences Initially when the mobile phones were introduced their main objective was to offer voice services. But with advancements in technology and requirements of better and other communication modes the demand by consumers Data services increased. There was a shift in preference on services used by consumer. Consumer transformed himself from a voice centric user to a balanced user (using both voice and data simultaneously). In recent past the use of mobiles was restricted to Voice calls, messages, low speed data connectivity, etc. This is shown by indifference curve U1.

As shown in the graph on this curve U1 the consumer wants to operate in region A-A’ because he can only be satisfied if he gets some minimum voice services. i. e. if voice services fall below certain level the consumer is not satisfied. On this curve U1 is point E which gives the exact amount of voice and data services utilized by a consumer. Now in the present situation the consumer requires more data services in addition to voice services which he utilizes. So his overall utility has increased this means he has shifted from lower indifference curve to higher urve U2. On this new curve the consumer wants to operate between points B-B’. On curve U2 is point E’ which gives the new quantity of data and voice used by consumer. So here we conclude that due to increased requirement of data services, and affordability of these services consumer has moved from point E to point E’. Also we can see, primarily only the voice services that overshadows data related services, but ultimately indifference curve shifts to a higher level, which led to an increase in consumption of both data & voice services.

India will have 650 million subscribers by 2012The Government has set a target of providing 200 million rural telephony connections, which will increase rural tele-density to 25 per cent from the current level of 1. 7 per cent. Pointing out that the telecom sector has been the biggest success stories of market-oriented reforms, the Economic Survey has projected that telephone subscribers base will more than treble to 650 million users by 2012. It envisaged that Internet and broadband subscribers will increase to 40 million and 20 million respectively by 2010. Telephony subscriber base up

The subscriber base for telephony services continued its growth during March 2007 with 3. 93 million subscribers being added during the month. A total of 66. 51 million subscribers were added during 2006-07 as compared to 41. 91 million in 2005-06, registering an increase of 58 per cent, a TRAI release said. This is the highest ever increase in subscribers during a financial year after the opening up of the telecom sector for competition, it said. Wireless service subscriber base increased by 3. 53 million in March 2007 as compared with 6. 21 million in February. In the wireline segment, a total of 0. 0 million subscribers were added during March 2007 as compared to a decline of 0. 02 million in February 2007. Indian to have 1 million Net TV subscribers by 2011 India is expected to be the fifth largest Internet Protocol Television (IPTV) market in the Asia-Pacific region (excluding Japan) with nearly a million subscribers by 2011. However, low quality bandwidth and poor penetration of broadband could result in slow uptake of the service in India, according to a new forecast from IDC. At present, India is nowhere on the IPTV map with just over 9,000 subscribers.

IDC expects over 49,000 IPTV subscribers in India by the end of 2007 with the number expected to grow to reach 966,000 subscribers by 2011. China is expected to have more than 14 million IPTV users by that time. BSNL aims for 500-million subscriber by 2010 BSNL is aiming to touch more than 500-million subscriber base for mobile and fixed-line connections by 2010. Union Minister of State for  Communications & Information Technology Dr Shakeel Ahmad  said the BSNL has already touched a subscriber base of 210-million including 165-million mobile customers. We have set an ambitious target of taking it to 500-million  mark by 2010. Of the 500-million customers, we plan to add 200 million mobile customers across the country,” he claimed. However, Dr Ahmad took pains to clarify that despite a rapid growth in the number of  cellphone subscribers in India, importance of fixed-line connections has been increasing as those having landlines will be getting several facilities including IPTV, FLPP, location alarms and a host of other services. India issues 159 telecom licenses 59 licenses have been issued for providing access services in the country and generally there are 5-8 providers in each service area. Since any Indian company can apply for unified access license, this is increasing the demand for spectrum in a substantial manner. Currently, there is no cap on the number of service providers in a service area. There are 23 telecom circles in the country. GSM subscriber base touches 12. 55 cr The GSM-based cellular industry has added over 41 lakh subscribers in April with Bharti Airtel capturing 30. 7 per cent of the market share. With this, the all-India GSM subscriber base has touched 12. 55 crore at the end of April 2007 compared to 12. 14 crore at the end of March 2007, reflecting a growth rate of 3. 40 per cent, the Cellular Operators Association of India (COAI) said in a statement. In April, the cellular subscriber base of Bharti touched 3. 88 crore with additions of 17. 51 lakh users, followed by BSNL at 2. 77 crore with a market share of 22. 10 per cent and additions of 3. 26 lakh subscribers. Hutch-Essar has 2. 7 crore subscribers, taking its market share to 22. 06 per cent and Idea with a market share of 11. 60 per cent has 1. 45 crore subscribers in April. Hutch-Essar added 12. 61 lakh subscribers in the month of April, while Idea added 5. 52 lakh mobile users in the same month. MTNL’s GSM subscriber base in Delhi and Mumbai touched 24. 83 lakh, while Spice Telecom has over 28 lakh subscribers. Aircel’s user base in April stood at 59. 27 lakh, followed by Reliance Telecom’s 43. 47 lakh subscribers. India to reach 600m mobile connections by 2011

Mobile phone connections in India will reach 600 million in five years time as handsets and tariffs become more affordable for the urban population, according to a new study published today by the Centre for Telecoms Research (CTR), London The report expects urban populations of India to reach high levels of mobile phone saturation in five years time, to the extent where many phone users will have two or more handset connections. A large portion of this growth will arise from pre-paid connections, driven by the increasing affordability of handsets and tariffs amongst India’s lower middle classes. The phenomenal growth in the Indian mobile phone market has largely been driven by urban consumption. We expect this to continue with urban geographies achieving saturation levels similar to current Western European markets in the next five years. Mobile connections in rural geographies will be constrained by coverage of network infrastructure and affordability of handsets which will limit consumption to no more than 150 million by 2011,” said Raj Modi, Research Director at Centre for Telecoms Research. CONCLUSION

A few decades ago the market for telecom services was a homogenous market supplying essentially the same service – telephony – to all types of customers. Today the market is becoming much more diversified with an increasing range of services offered by incumbent PTOs, providers of cable-television, data communication companies etc. Most of these new companies have not invested in their own physical infrastructure but rely on network capacity leased from other operators. The most significant barriers to competition are related to the cable and wire-based local facilities network.

It seems unlikely that effective competition in this area can be established. In other areas, barriers to entry are less dominant and competition can more easily be established. Long distance and cellular telephony are both areas where competition can more easily be established, and where competition has been successfully introduced. FUTURE TRENDS IN THE TELECOM INDUSTRY Process of change is a continuous phenomenon and these changes are imperative in response to the local and global circumstances. The developing nation like ours encapsulates these developments/changes in the passage of time.

India, like many other countries of the world, has adopted a gradual approach to telecom sector reform through selective privatization and has managed competition in different segments of the telecom market. It can be summed up that growth in the number of new telephone subscribers has far exceeded the growth in the global economy in the last two decades. The future trends can be analyzed in many ways that includes: * Focus on rural sector| * Telecom and IT| * Competition of existing players| * Technology trends| FOCUS ON RURAL SECTOR There have been a lot of reforms in telecom sector in India and Indian markets are still growing.

The participation of private sector has been constantly increasing and it can be predicted that, the focus in the coming few years would be on the rural sector as the saturation in the urban markets would shift the concentration of markets. TELECOM AND IT India is a participant in this global process. Being a developing nation it has a tremendous appetite to absorb new technology. At the higher end of the market, India will imitate the most sophisticated telecom technology of the world but it will take time for the market for new technologies to consolidate. Market maturing’ is a continuous process in India, the main problem that companies are facing today and will continue face is to retain its customer base. IT in general will be a very important tool to influence the consumer. IT is widely used for Data-mining and Customer relationship management. COMPETITION OF EXISTING PLAYERS As compared to the past, one notable change has been the opening up of the developing economies and because of this the catching up process of the developing nations with the developed ones has become faster.

Developing countries with liberal policies have much better opportunity to grow than before, this has given rise to wide spread competition. The global trend is towards growing privatization and competition. India, with her commitment to reforms is already a part of this process. Keeping in mind the global working, as more and more players participate in the process of expansion it leads to disintegration of market, technologies etc but after the disintegration the roles reverses. TECHNOLOGY TRENDS There has been phenomenal growth in mobile subscribers in the world in the last 5 years.

Broadly speaking, technologies of mobile telecommunications and Internet are going to set the contours of further technological progress in the current decade and the next. The most recent initiative aims at convergence of voice and data received from multiple sources, both web based and real time video streams, in mobile handheld devices. Global positioning systems, mobile handsets and calling cards have made virtual presence possible almost everywhere and anywhere overcoming the barriers of distance, topography and remoteness.

At the uppermost end of the convergent technology spectrum have already emerged Third Generation (3G) mobile devices with the capability of access to mobile data and voice. India, after much of development have only witnessed sets of 2G-2. 5G technology and it would require investment, efforts and up gradation of hardware and software for high bandwidth multimedia services etc. , for India to get into 3G devices. By next 2 years, one would expect 3G to be within reach of wider section of Indian population. SUGGESTIONS

Telecom could contribute significantly to the societal transformation particularly in the rural areas by enabling our people to communicate and reap benefits. Till recently, benefits of telecom revolution touched mainly the cities and towns. Now it is time for the telecom growth to penetrate into the rural sector to democratize access and bring happiness and prosperity, overcoming all geographical barriers. Societal transformation and economic growth are closely interlinked. Information society with innovation as focus, transform into knowledge society. This, in turn gives positive impacts in agricultural society and industrial society.

The core of empowerment for prosperity of one billion people is the connectivity and partnership between governmental and multiple institutions in the public and private domains. The fast growing telecom economy and infrastructure have to be the primary contributors towards this. While telecom technologies have revolutionized all aspects of society: industry, business, banking, government, judiciary, defense, education, health, agriculture, they have also introduced certain concerns. In the last one and a half centuries of the growth of telecom sector, and the last one century of the growth of wireless technologies, new problems have emerged.

Some talk about digital divide and brain drain. We should see the situation positively. Can we convert these problems to digital bridges or digital highways and brain gains? Already some such aspects are visible in the BPOs and even in call centres. Another area needing some assessment and debate relates to invasion of privacy. As we all know, telecom technologies are capable of locating the position of the cell phone, its utilization pattern, and the particulars of the contacts, leaving the individual open to avoidable exposure and exploitation by motivated agencies.

Ethics for utilization of telecom tools and technologies also need to be evolved so that individual privacy is not intruded upon. Although some restrictions are in place for unsolicited telephone calls, there is a need for more effective control mechanism. India is lagging far behind with very few households being digitally connected, though four of the top ten broadband economies of the world were in Asia.

It appears that that South Korea, Hong Kong, Taiwan and Singapore, which now have the distinction of achieving highest broadband household digital connectivity index of 80 to 60 per cent, have excelled and grown faster than the rest of the world because of significant utilization of local languages in the generation of software and content on the internet. Herein there is a significant message. The large-scale utilization of local languages will enable people to create content with ease and authenticity which, when hared, will have a positive effect in the growth of economy through the benefits of telecom revolution and related Internet and multimedia tools. The Indian E-Governance and E-Commerce initiatives should become the drivers for the rural population to seek information in their local language and thus give a push to telecom penetration in the rural areas. The world over, in the past few decades research and development has been focusing on increasing the bandwidth carried by copper and fiber optic cables and wireless medium without having to change the old cables and infrastructure.

The Copper cables that carried a few kilobits when they were first introduced today can carry megabits of information as a consequence of the digital revolution. The fiber optic cables that carried a few megabits initially today can carry several terabits of information with the introduction of Dense Wavelength Division Multiplexing (DWDM). Similar are the trends in wireless communication. Because of this exponential and disruptive growth in the bandwidth, we have reached a stage where bandwidth has become abundant and one can claim that distance has died. The world has not only become flat but has shrunk.

THE CHALLENGES First challenge is of the Infrastructure, and for this country’s vibrancy in manufacture, research and development should be fully used to make India truly self sufficient in telecom. The number of cell phones and access devices, routers, switches and modems that this country would need that too in a continuously replenish able fashion is incentive enough to start a strong manufacturing program in telecom. We should project a goal of 70-30 by which more than 70 per cent of the telecom hardware and software should be manufactured in India by 2010.

Value-added services provided a great opportunity in telecom is in innovating value added services that run on the telecom infrastructure. With the inherent strength of the nation in software, this should be easy to do provided we concentrate our energies in this direction. This is also a fertile ground for incubating many small starts up companies and this will be a second silicon valley – just the same way the Internet spurred the revolution, today the wireless and the telecom can stir another. This will be a unique experience of India.

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Managerial Economics: Analysis of the Indian Telecom Sector Essay
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PROJECT REPORT ON MANAGERIAL ECONOMICS ANALYSIS OF TELECOM SECTOR IN INDIA INTRODUCTION India is the fourth largest telecom market in Asia after China, Japan and South Korea. The Indian telecom network is the eighth largest in the world and the second largest among emerging economies. At current levels, telecom intensiveness of Indian economy measured as the ratio of telecom revenues to GDP is 2. 1 percent as compared with over 2. 8 percent in developed economies. Indian telecom sector has under
2018-10-23 11:07:39
Managerial Economics: Analysis of the Indian Telecom Sector Essay
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