SEGI MBA

Assignment on MAXIS
Submitted to

Ms. Ooi

Lecturer

Economics for Managers ECO 6073

Submitted by

Group Members:

1. Waleed Mohammad Jamal - SCM - 016584

2. Md Fantasir Rahman - SCM - 016295
3. Dinara Kerimbekova - SCM - 015066
4. Aizada Aldekova - SCM - 016021
5. Tahmina Aktar Daizy - SCM - 016715
6. Mohamed Faizal - SCM - 017084

Page 1
 Introduction

Maxis Communications Berhad is a leading mobile phone service provider in Malaysia.

Maxis Communications Berhad was established in the early 1990s and commenced mobile
telecommunications operation in August 1995. It was then listed under the first board in
Kuala Lumpur Stock Exchange (KLSE). At present Maxis Communication Berhad is the
biggest telecommunication provider in Malaysia. The company has total subscribers at 13.95
million as of December 2010.

Maxis Communications Berhad, through its subsidiary, Maxis Berhad, engages in the
provision of mobile, fixed line, and international telecommunications services in Malaysia. It
also provides Internet and broadband services; and wireless multimedia related services, as
well as owns, maintains, builds, and operates radio facilities and associated switches. The
company was founded in 1995 and is based in Kuala Lumpur, Malaysia. Maxis
Communications Berhad is a subsidiary of Binariang GSM Sdn Bhd.

It uses the dialling prefix identifier of "012‖, "017" and ―0142‖. In 2002, Maxis purchased
TimeCell, a rival mobile service provider, from Time dotcom Berhad. Prior to the purchase,
Maxis offered phone numbers beginning with 012, and TimeCell 017. Now, subscribers can
choose between the two. Maxis provide a variety of mobile communication products and
services. They offer prepaid call plans, monthly subscription plans, global roaming, MMS,
WAP (over both GSM and GPRS), Residential Fixed Line services, Broadband Internet
plans, and as of early 2005, 3G services to both prepaid and post-paid subscription customers.
Maxis Broadband make consumer can enjoy internet access in outdoor or indoor. It can go
online at speed over 15 times faster than traditional dial up and do more, much more over the
internet.

Page 2
Profile

Maxis Berhad, with its consolidated subsidiaries (together, 'Maxis'), is the leading mobile
communications service provider in Malaysia.

Maxis were granted licences to operate a nationwide GSM900 mobile network, a domestic
fixed network and an international gateway in 1993. It commenced its mobile operations in
August 1995 and launched its fixed line and international gateway operations in early 1996.

Since its establishment, Maxis has been providing a full suite of services on multiple
platforms to fulfil the telecommunications needs of individual consumers, SMEs and large
corporations in Malaysia.

Maxis' mobile service is offered on a post-paid basis under the Maxis brand and via a prepaid
format under the Hotlink brand. The use of these two distinct brands, underpinned by
synergistic values, has enabled Maxis to develop its prepaid business successfully while
maintaining growth in its post-paid segment.

Maxis has also pioneered and led the Malaysian market in delivering innovative mobile
products and services. It was the first to launch 3G services in Malaysia — known as
Maxis3G — in July 2005, and in September 2006, it became among the world's first to use
HSDPA, a high-speed upgrade of its 3G network, to provide wireless broadband services. It
was the first operator to bring the BlackBerry™ and Apple iPhone™ smart phones to
Malaysia. The company in April 2009 unveiled the first commercial NFC-powered service in
Malaysia.

Maxis provide enhanced post-paid packages to corporate and SME customers, based on its
highly successful consumer post-paid plans. These plans are custom-made to meet the needs
of enterprises, especially improved communications within and beyond their compound.

Page 3
Maxis' international gateway services include termination of traffic into Malaysia from
international telecommunications companies, supporting Maxis' own outbound international
direct dial (IDD) traffic, collecting international transit traffic and bandwidth leasing services.
Maxis presently maintain bilateral connections with more than 95 carriers in 38 countries and
have capital investments in a number of submarine cable systems to carry its international
voice and data traffic.

Maxis' significant growth and strong track record of bringing innovation, excellent customer
experience and value to stakeholders has won the company numerous awards over the years.
The latest awards include:

Malaysia's Top Ten Companies: Ranked 1 – Asia's 200 Most Admired Companies, The Wall
Street Journal Asia, 2006

Asian Mobile Operator of the Year – Asian Mobile News Award, 2007

Fourth Most Valuable Brand in Malaysia – Brand Finance, 2008 and 2009

Service Provider of the Year (Malaysia) – Frost & Sullivan, 2008

Mobile Data Service Provider of the Year (Malaysia) – Frost & Sullivan, 2009

Recipient of the Asia Pacific Super Excellent Brand Award – Asia Pacific International
Brands Summit Malaysia, 2009

Maxis' vision is to bring advanced communications services to enrich its customers' lives and
businesses, in a manner that is simple and personalised, by efficiently and creatively
harnessing leading edge technology, and delivering a brand of service experience that is
reliable and enchanting.

Page 4
 Analysis of Market Structure

Market structure classifies some of the key traits of a market, including:

Number of firms
Similarity of the products sold
Ease of entry into and exit from the market.

Comparison of Market Structures

Market No. of
Types of Product Entry Conditions Examples
Structure Sellers
Small crops,
Perfect
Large Homogeneous Very Easy International
Competition
commodity markets
Monopolistic Boutiques,
Large Differentiated Easy
Competition Restaurants, motels
Usually
Car Making,
differentiated but
Oligopoly Few Difficult Tobacco Products,
sometimes
Oil
homogeneous
Monopoly One Unique Extremely difficult Public utilities

MAXIS

TELECOMMUNICATION FIRM.
Few Competitors like DIGI, CELCOM, TUNETALK etc..
Entry into Telecommunication is Difficult.
It requires a large amount of capital.

Perfect Competition

Perfect Competition Market has very large number of small firms, which acts
independently rather co-coordinating decisions centrally.
Perfect Competition is Price takers due to Huge Competition.
Perfect Competition mainly deals with Homogenous Products.
Homogenous mean Goods from one firm cannot be differentiated from other.

Page 5
 Comparing Maxis with Perfect Competition

Perfect Competition Maxis

1. It has very large Number of firms. 1. It has few Competitors in the Market like

DIGI, CELCOM, OKTEL etc..

2. Entry Requirement is very easy. 2. Entry Requirement is Difficult.

3. Very less amount of Capital is enough. 3. It requires large amount of Capital.

On Comparing Maxis with Perfect Competition market structure. Maxis do not come under
Perfect Competition.

Monopolistic Competition

Monopolistic Competition Firm has many Small Sellers.

They involves in differentiated Product.
It is free from Price Competition.
It has Easy Entry as well as Exit.

Comparing Maxis with Monopolistic Competition

Monopolistic Competition Maxis

1. It has many small sellers. 1. It has a few Competitors in the

2. Entry requirement is easy. Market.
3. It‘s free from Price Competition. 2. Entry requirement is difficult.
3. It has competition in price with their
competitor.

On comparing Maxis with Monopolistic Competition market structure. Maxis do not come
under Monopolistic Competition.
Page 6
Monopoly

Monopoly is a Single Seller in the market.

It deals with unique product.
Entry Barriers is very difficult.

Comparing Maxis with Monopoly

Monopoly Maxis

1. It has Single Seller in the 1. It has its Competitors in the market.

market (free from
Competitors).

On comparing Maxis with Monopoly market structure. Maxis do not come under Monopoly.

Oligopoly

It has very few seller (which is dominated by a few large firms)..

It deals with Homogenous as well as Differentiated Product.
Entry Barrier is difficult.

Comparing Maxis with Oligopoly

Oligopoly Maxis

1. It has few Sellers in the market.
2. Entry Barrier is difficult.
3. It requires a large amount of
Capital.
1. Maxis have few Competitors in the
Market.
2. Entry barrier is difficult.
3. It requires the large amount of Capital.

On Comparing Maxis with Oligopoly market structure. We came to know that Maxis is
an Oligopoly.

Page 7
 Behaviour of Maxis

The behaviour of Maxis can be identified by considering the number and size distribution of
firms (market share in terms of subscribers and revenue) in the market; the extent to which
products are differentiated; how easy it is for other firms to enter the market; and the extent to
which firms are integrated or diversified. However, as there are only 3 large cellular
communication firms (Maxis, Digi and Celcom), individual market shares are used to
measure market power.

The basic conditions faced by the cellular communication firms are:

Demand conditions

•Price is relatively elastic as seen by huge swings in net additions leadership quarters to
quarters as different cellular communication firms took on price-leadership.

('000) (%)
600 70

500 60

50
400

Celcom 40 Celcom
300 Maxis Maxis
30
Digi Digi
200
20

100
10

0 0
1Q10 2Q10 3Q10 4Q10 1Q11 1Q10 2Q10 3Q10 4Q10 1Q11

Source : MALAYSIA TELECOMMUNICATIONS REPORT Q3 2011

Where the actions and the outcomes of these actions are interdependent among several
agents and this interdependence is mutually recognized.

Page 8
 Neoclassical economics assume perfectly rational agents, perfect information and zero
transaction costs under perfect competition. However, due to limited cognitive capability
and/or imperfect information, bounded rational agents experience limits in formulating
and solving complex problems and in processing (receiving, storing, retrieving,
transmitting) information. Routine standard procedures or heuristic approaches to
decision-making are employed by bounded rational agents.
The sum of the market shares of the n-largest firms.
Maxis subscriber net addition dropped to a dismal 120,000 users in 3Q10 before
regaining to 274,000 users in 4Q10.
The relevant substitutes are provided by fixed-line Telco‘s for local city calls (fixed-line
rate of RM0.04/minute versus cellular rate of RM0.15/minute) and Voice-over-Internet-
Protocol (VoIP) providers for IDD calls. However, these are not of major concerns
currently as the mobile services are cannibalizing/substituting fixed-line services while
the VoIP providers are competing in a value-conscious segment with an inferior product
(i.e. poorer voice quality).

Supply conditions
The cellular technology adopted is the European GSM standards. However, due to
constant technology changes, both Maxis and Celcom have launched 3G services earlier
while Digi had its 2.75G (EDGE) services previously and recently added 3G services in
order to be able to compete with both Maxis and Celcom.
The market structure analysis summary of Maxis is as follows:

Page 9
 Data Observations and/or Measurement Analysis/Comment
No. of 3 Regulated Oligopoly
Firms
Cellular industry subscriber Subscriber/Revenue market
market share (overall) share:

Celcom Digi Maxis Celcom: 33% & 36.0%

60
40 Digi: 25% & 25.3%
20 Maxis: 41% & 42.1%
0
1Q10 2Q10 3Q10 4Q10 1Q11 There is no single dominant firm.
Market However, Maxis is the leading
Share Cellular industry revenue firm in both revenue &
market share (overall) subscriber market share,
followed by Celcom and Digi.
Celcom Digi Maxis
60
40
20
0
1Q10 2Q10 3Q10 4Q10 1Q11

Product differentiation based on calling

plans and pricing structure to appeal to Minimal product differentiation as
Product
different customer segments. Value-added airtime is airtime and VAS contents
Differen-
services (ring-tones, etc.) are quite are widely available across all 3
tiation
homogenously provided by 3rd party firms.
provider.
High entry barriers mainly due
to government regulations
Due to frequent technology
Licensing and regulations changes, incumbents do incur
substantial ongoing capital
Heavy capital investments & minimum
expenditures and face the
Entry efficient of scale required dangers of being ―leapfrogged‖
barriers First-mover advantages: Network & by potential entrants
Lock-in effects Numbers portability not
implemented yet to counter the
lock-in effects of personalized
phone numbers.
Exit Bulk of capital investments are
Huge sunk costs
barriers asset specific to Telco operations.
Source : MALAYSIA TELECOMMUNICATIONS REPORT Q3 2011
Price competition
Using game theoretic model, Telco‘s are assumed to provide a homogenous product and have
sufficient capacity to serve the market demand. It is a non-cooperative game as there weren‘t
any enforceable agreements between them as they compete in the marketplace. It is a

Page 10
repeated one-shot simultaneous game as they were driven by quarterly performance
accountable to shareholders. As such, they would decide on their pricing strategies
independently and aware of rivals‘ prices in the market while forming certain expectations
about rivals‘ pricing strategies. Actions available are Maintain Price and Undercut Price.

Payoffs are ranked in order of preference (higher number is preferred). The most preferred
outcome by firms is where one undercuts price while its competitors maintains price, leading
to market share gain at the expense of its rivals. When all firms maintain prices, there is no
change in market-share and profitability. When all firms undercut prices, market-share
remains with reduced profitability. The strategic-form representation in a simplified 2-player
model is as follows:
Telco2
Maintain Price Undercut Price
Telco1 Maintain Price 3,3 1,4
Undercut Price 4,1 2,2
Example of Game Theory

Solving for Nash equilibrium, both players have Undercut Price as their dominant strategy
resulting in a Pareto-inefficient Dominant- Strategy-Equilibrium at (2,2). This is a repeated
Prisoners‘ Dilemma game and these interactions are witnessed in the current market through
an escalating price-war resulting in reduced Average-Revenue-Per-User (ARPU).

Example of Starter pack price wars involving Maxis and Digi

Launch Date Maxis Hotlink 017 Digi Beyond Prepaid
Sep 8, 2005 RM20 to RM10
Oct 27, 2005 RM18 to RM9.90
Nov 25, 2005 RM10 to RM8.80
Dec 10, 2005 RM9.90 to RM8.50

Average Revenue per User

Page 11
 60 56 56 56 55
57 52 51
54 54 53 49 49 49 49
56 55 55 52 51
50 54 53 53 50 50 53 49 53
45 50 51
40 Celcom
Maxis
30
Digi

20

10

0
1Q09 1Q10 1Q11

Source : Articles from 2009 to 2011, Press release 2009 to 2011, Maxis reports 2009 to 2011,
Digi Reports 2009 to 2011, Celcom Reports 2009 to 2011.

If this game is repeated infinitely, collusive behaviour through the use of Tit-For-Tat
strategy may result in non-competitive/monopolistic-like pricing which reduces public
welfare. Though Maxis had a higher ARPU previously according to the above data, Maxis
always need to be proactive in monitoring firms‘ behaviour to detect possible tacit collusion
through price-signaling.

Product differentiation
The above game theoretic analysis suggests that if the price-war continues, Maxis and the
other two firms will eventually be forced to price at their marginal costs – similar to a
perfectly competitive firm. Therefore, it is rational to expect Maxis or the similar firms to
soften the intensity of the price competition through product differentiation and customer
segmentation. It is important to note that traditional microeconomic theory treats all
consumers as homogenous. In reality, this is not the case and these firms are thus offering
different calling plans, pricing structures (ON-Net/Off-Net), pre-bundled minutes and
services, etc.

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Due to bounded rationality and heterogeneous consumption, consumers find it difficult to
make head-to head cost-benefits comparisons and thus make the products appear to be
somewhat non-homogenous and not fully substitutable for one another.

These firms are also competing and differentiating through demand stimulation (‗shifting‘ the
demand curve) by organizing SMS contests, sponsoring shows like ‗Malaysian Idol‘ which
encourage SMS voting, etc. where the SMS charges are priced much higher than normal SMS
charges in order to drive higher non-voice revenue and profitability as illustrated by Maxis,
Celcom and Digi‘s 2010 announcements below.

Revenue Comparison of 2009 and 2010

Celcom

Maxis 2010
2009

DiGi

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% 45.00%

Source: DiGi AGM 2011 IRwebsite

One has to take note that the marginal costs are almost negligible relative to the huge
fixed-cost investments required.
ON-Net refers to calls within the same provider‘s network. OFF-Net refers to calls made
from one provider to another provider‘s network.
Decision-making based on imperfect information (uncertainty about future, costly to
acquire perfect information) and/or limited cognitive capability.

Through product differentiation, each differentiated product is addressing its relevant market
instead of addressing a large homogenous market, thus allowing Telco‘s to raise price above

Page 13
marginal cost (and reduce consumer‘s surplus) without losing its entire market share. Thus,
product differentiation can soften price competition and create a degree of market power. We
find from the above data that Maxis currently have the highest market power and leading
company with the highest revenue.

However, these type of firms balance between the reductions in welfare caused by product
differentiation pricing above marginal costs versus the increased in welfare by allowing
disparate consumers‘ preferences to be closely met. Each firm also ensure proper ethical
behaviour on the part of the Telco‘s to ensure that public welfare is protected in SMS
contests, SMS voting, etc. to prevent undesirable negative consumption externalities such as
encouraging the habit of ‗gambling‘, excessive spending, etc.

Advertising
Maxis often use advertising to create brand and/or product differentiation in order to soften
the price competition. To the extent that persuasive advertising create customer loyalty
through perceived differentiation over essentially identical products, they create market
power in the sense that consumers may be willing to pay more for preferred brands, thus
allowing these type of firms to raise prices above marginal costs.

Following the previous assumptions with payoffs ranked in order of preference (higher
number is preferred), the most preferred outcome by firms is where one advertises while its
competitors don‘t, leading to market share and profitability gain at the expense of its rivals.
When all firms don‘t advertise, there is no change in market-share and profitability. When all
firms advertise, market-share remains with reduced profitability. Maxis uses similar strategy
by advertising less gaining market share and more profit at expense of its rivals which we can
see below:
Advertising Expense of 2005 by Malaysian cellular communications industry
Communications Sector: RM Communications Sector: RM Total
Mobile Line Services (million) Mobile Interactive (million) RM
Services (million)
Celcom 52.3 Celcom 6.6 58.9
DiGi 37.7 DiGi 5.1 42.8
Maxis 47.8 Maxis 1.9 49.7
Source : www.mcmc.gov.my, Reports by Maxis, Celcom and Digi 2005

Page 14
Customer Satisfaction

SKMM Consumer Survey 2007

3.66 3.65
3.64
3.64 3.63

3.62

3.6
2006
3.58 3.57
2007
3.56 3.55 3.55

3.54

3.52

3.5
Maxis Celcom DiGi

Source : SKMM Consumer Survey 2007 at www.mcmc.gov.my

The Customer-Satisfaction-Index (CSI) for the three firms are almost similar. We find that
Maxis‘ performance is satisfactory in the market and can be considered as a leading oligopoly
firm among the three.

Page 15
 Conclusion
Maxis is one of the Malaysian oligopoly cellular communications industry with high entry
barriers, mainly due to government licensing restrictions; and high exit barriers due to huge
capital investments (sunk costs). However, frequent technology changes could potentially
allow ―leapfrogging‖ by competitors or potential entrants. The market share is with intense
price-competition as the market gets more saturated. Non-price competition is also intense,
mainly through advertising. However, as price-competition escalates, other cellular
communication industries are pricing closer to marginal costs as evidenced by the steady
drop in ARPU over the past few years. Consumer satisfaction is high for Maxis though
consumers are seeking for even lower communications charges and greater geographic
coverage.

Maxis is currently doing a good job and should continue to push ahead with its plan to allow
greater customer choice. Maxis should also monitor for deceptive advertising, SMS contests
& voting, etc. and also possible tacit collusive behaviour through price-signaling. It is also
recommended that Maxis conducts benchmarking against regional and international cellular
communication industries on key areas like profitability and/or returns on equity to determine
fair-returns, service quality, technical efficiency, etc. to determine the success of its policies
in future.

_______

Page 16
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Maxis Quarterly 2009 Report
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DiGi 2009 Report
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Celcom Annual Report 2010
Maxis Annual Report 2010
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REPORT Q3 2011

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