IIM BANGALORE

CS submission
Telecommunication Industry analysis
2/20/2012

Submitted by : Group 11, Section B Arnab Biswas 1111090 Gaurav Kedia 1111105 Manoj Rai 1111121 Nilesh Rathi 1111136 Tanul Mehta 1111151

Telecommunications Industry in India

Industry Background The telecom sector in India is a booming market now. India is the worlds second largest mobile phone user with a total subscriber base of 894 million as of December 2011, and the third largest internet user with a subscriber base of 121 million as of December 20111. The total market values according to experts are $75.88 billion with a y-o-y growth rate of 26% and generate employment for about 10 million people. The services sector generates revenue of about $62.31 billion (FY 2010-2011) and the equipment sector generates about $25.75 billion. Factsheet2 as of Dec, 2011: Particulars Total net addition (million) % of monthly growth (%) Net addition (million) % of monthly growth (%) Net addition (million) % of monthly growth (%) Urban Tele-density Rural Tele-density Share of Urban subscribers Share of Rural subscribers Wireless 9.47 1.07 4.93 0.85 4.54 1.5 161.01 36.56 65.59% 34.41% Wired -0.28 -0.84 -0.2 -0.8 -0.07 -0.94 6.85 0.92 76.30% 23.70% Total 9.19 1 4.73 0.78 4.47 1.44 167.85 37.84 65.97% 34.03%

Industry in the pre-independence era: The industry was born in 1850 under the British East India Company with the setting up of the first electric telegraph line between Kolkata and Diamond harbour. The Posts and Telegraphs department was created as a part of the Public Works Department (PWD). Subsequent years saw a growth in the telegraph works. 6400 km of telegraph lines were laid out connecting Calcutta, Peshawar, Agra, Bombay, Madras and Bangalore. In 1881 the government gave license to Oriental Telephone Company Ltd. of England to operate telephone exchanges at Calcutta, Bombay, Madras and Ahmedabad with a total of 93 subscribers. The first wireless telegraph was established in 1902 between Sagar Islands and Sandheads. In 1927 the first international radio-telegraph system was introduced in India

1 2

Source: Wikipedia; http://en.wikipedia.org/wiki/Communications_in_India Source: TRAI; http://www.trai.gov.in/WriteReadData/trai/upload/PressReleases/869/PR-Dec-11.pdf

between the UK and the Indian Dominion. In 1933 radio-telephone link was established between India and UK. Industry in the post-independence era: The industry saw a slow but steady growth in telephone as it was still seen by most of the people as a luxury item. The growth figures below stakes the claim
6 5.07 5 4 3 2.15 2 1 0.08 0 1948 1971 1981 1991 Total subscriber base (millions) 0.98

Major milestones in telecom industry post-independence are shown below3: 1953 12 channel carrier system introduced. 1960 First STD line commissioned between Lucknow and Kanpur. 1975 PCM introduced between Bombay and Andheri. 1976 Digital microwave junction introduced. 1979 Optical fibre commissioned in Pune. 1980 First satellite communication earth station established at Sikandrabad (UP). 1983 First analog Stored Program Control exchange for trunk lines est. at Mumbai. 1984 C DOT est. for indigenous development and production of digital exchanges. 1995 First mobile telephone service started on non-commercial basis on 15 August 1995 in Delhi. Internet services were introduced in Delhi, Bombay, Calcutta, Madras and Pune.

Industry Analysis The telecom industry comprises of complex network services like telephones, mobile phones and internet. In this report we have used two methods to analyse the telecom industry environment and understand its dynamics. The two methods are 1) SWOT analysis and 2) Porters 5 forces analysis.

Source: Wikipedia; http://en.wikipedia.org/wiki/Communications_in_India

SWOT analysis In the traditional SWOT analysis the Strengths, Weaknesses, Opportunities and Threats are analysed to arrive at a conclusion whether the industry is profitable/will be profitable in future or not.
Strengths: High Customer Potential: The total population of India is 1205 million (July 2012 estimate)4. The overall teledensity as per factsheet for wireless telecom is 74.15 and 2.71 for wireless telecom.

Wireless User-base
43% 57% Wireless subscribers Potential users

Wired User-base
3% Wired subscribers 97% Potential users

The teledensity of the rural population for wireless and wired telecom service is only 36.56 and 0.92 which shows that not all households have access to telecom services. This shows a large customer potential. Even the teledensity for fixed wired telephony for urban users is 6.85 whereas the wireless telephony is 161.01. This shows that most people favour mobiles to fixed land lines. But in any case the growth potential is very high in India. High growth rate: India has shown a very high growth rate in the telecom services sector. The following data shows the growth of various aspects of the Telecom industry5.

Telecom growth rate

900 800 700 600 500 400 300 200 100 0 Wired Wireless Internet Broadband Axis Title

2007 40.77 165.09 9.21 2.29

2008 39.41 261.08 11.05 3.81

2009 37.96 391.76 13.65 6.22

2010 36.96 584.32 16.1 8.77

2011 34.73 811.6 19.69 11.9

4 5

Source: CIA World Factbook; https://www.cia.gov/library/publications/the-world-factbook/geos/in.html Source: Capitaline database; http://www.capitaline.com/user/framepage.asp?id=1

The CAGR of Wired, Wireless, Internet and Broadband are -3.115%, 37.51%, 16.41% and 39.04% respectively. Although the wired telecom services have shown a negative growth but the other services like Wireless telecom, Internet and Broadband show high positive growth. Allowed FDI in Telecom market: FDI was permitted in India since 1991 in the telecom sector, beginning with the telecom manufacturing segment (during economic liberalization). FDI includes Investment made by NRIs Overseas Corporate Bodies (OCB) Foreign entities Foreign Institutional Investors (FIIs) American Depository Receipts (ADRs) Global Depository Receipts (GDRs)

Present features of FDI are6 49% FDI in basic, cellular mobile, National Long Distance, Value Added Services and Global Mobile Communications by Satellite. 74% FDI in Internet Service Gateways, Infrastructure providers and Radio Paging service 100% FDI in ISPs (not providing gateways), Infrastructure providers using dark fibre links, Electronic Mail and Voice Mail 100% FDI in manufacturing sector of automatic routing

The companies have to divest 26% equity in favour of the Indian public within 5 years. This allows foreign companies to directly partner with Indian firms in a joint venture which ensures a quick supply of money for the government and profits for the ventures. FDIs in telecom in India7

FDI (Million USD)

3000 2500 2000 1500 1000 500 0 2006-07 2007-08 2008-09 FDI (Million USD) 2009-10 2011-12 487 1261 2558 2554 1901

6 7

Source: Corporate Catalyst India; http://www.cci.in/survey_report.html Source: Capitaline Database; http://www.capitaline.com/user/framepage.asp?id=1

Higher Return on Investment: The fixed cost incurred in the setting up and infrastructure can be distributed over the number of units sold and the usage tariffs. So it is easier to acquire economies of scale by recovering more fixed costs from the number of units sold in volume. So this increases the return on investment. Mobile revenues are growing at the rate of 10.7% per anum. The below statistics proves the fact8.

Mobile revenues in million

Mobile revenues in million 70 60.3 60 50.8 50 40.1 40 30 20 10 0 QE Sep' 05 QE Dec' 05 QE Mar' 06 QE Jun' o6 QE Sep' 06 40.4 40.9 Expon. (Mobile revenues in million)

Liberalization efforts by Government: The rapid growth of the telecom industry has been possible due to the proactive decisions and the liberal policies taken by the government. It provided an easy market access for telecom equipment and a fair regulatory framework for offering telecom services to the Indian consumers at affordable prices which was conducive to growth. Govt. set up a Telecom Equipment and Services Export Promotion Forum and Telecom Testing and Security Certification Centre (TETC) which promoted the growth of telecom equipment manufacturing companies. The Government had taken the following main initiatives for the growth of the Telecom Sector9: All telecom services have been opened up for free competition for unprecedented growth 217 (Information Technology Agreement) ITA-I items are at zero Customs Duty. Specified capital goods and all inputs required to manufacture ITA-I, items are at zero Customs Duty The international Long Distance Services (ILDS) opened with effect from April 2002. Calling Party Pays (CPP) regime was implemented with effect from 1st May. Guidelines for Unified Access Service License regime were issued in November 2003, 27 licenses out of 31 Basic Service Licenses were converted to Unified Access Service Licenses In April 2004, license fee for Unified Access Service Providers (UAS) was reduced by 2%
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Source: Boston Analytics; http://www.bostonanalytics.com/leading_thoughts_research/ba_mvas_in_india_research_report_10_07.pdf 9 Source: Corporate Catalyst India; http://www.cci.in/survey_report.html

 License fee for infrastructure Provider-II reduced from 15 per cent to 6 per cent of the Adjusted Gross Revenue and spectrum charges between 2 to 4 per cent in June 2004. Entry fee for NLD licenses was reduced to Rs. 2.5 Crore from Rs. 100 Crore. Entry fee for ILD reduced to Rs. 2.5 Crore from Rs. 25 Crore. Lease line charges have been reduced to make the bandwidth available at competitive prices to facilitate growth in IT enabled services . The robust telecom network has also facilitated the expansion of BPO industry that is having 500,000 employees now and adding 400 employees per day. Annual license fee for National Long Distance (NLD), International Long Distance (ILD), Infrastructure Provider-II, VSAT commercial and Internet Service Provider (ISP) with internet telephony (restricted) licenses was reduced to 6% Adjusted Gross Revenue (AGR) with effort from Jan 2006. Licence Fees 6-10 per cent of Adjusted Gross Revenue (AGR) Lower Capital Expenditure: India has a very high density of population in India. So this means that per tower population of India is very high and per tower revenue generated will be high. This will in turn reduce the capital expenditure of the Telecom service provider companies.

Weaknesses Poor telecommunication infrastructure: Due to poor infrastructure quality there are a large number of call drops experienced by the users. Late adoption in new technology: India is one of the last developing countries that will be adopting the 3G and 4G network technology. It is estimated that 132 countries have already adopted 3G technologies and mobile services in some form or the other. 3G was first commercially launched in Japan by NTT DoCoMo in 1998. The following data shows the usage and revenue statistics in top 7 countries as per 200210.

10

Source: UMTS world news; http://www.umtsworld.com/industry/subscribers.htm

Usage and Revenue

500 450 400 350 300 250 200 150 100 50 0 US Canada Japan France UK Italy Germany Minutes of avg. use permonth Revenue per minute ($) 0.05 0 0.15 0.1 0.25 0.2 0.35 0.3

Most Competitive Market: 14 companies provide telecom services to India whereas the global average is only 4 companies per country. Hence the levels of competition are much higher in India than the other countries. This is due to a high growth market and favourable govt. regulations. Strongly regulated by the Government: The Indian telecom market is highly regulated by the Indian government. There are numerous government bodies like TRAI (regulatory), TDSAT (dispute settlement). Changes implemented are slow and cumbersome due to government bureaucracy and due to intervention by political ministries. Huge initial capital requirement: The initial capital for acquiring operating and transmitting frequency is very high, this strives to act as a deterrent for new players. For example: Govt. earned $14.9 billion from 3G spectrum auction and $4.87 billion from wireless broadband spectrum auction11.

Opportunities 3G and 4G Telecom services: Although India is a late starter in this technology but there is enough potential in this new market. With supportive government policies and a high growth existing market, companies can use their established brand name to create a strong foothold in this market. So India, with its telecom success story, represents an attractive and lucrative destination for investment. Scope of higher quality service: The month on month net addition of subscribers increased from 258.37 lakh in November 2011 to 292.40 lakh in December 2011 due to introduction of Mobile
11

Source: Wikipedia; http://en.wikipedia.org/wiki/Indian_Telecom_Spectrum_Auction

Number Portability12 (MPN). In December 34.03 lakh requests were made for MPN. This shows that MPN feature is very popular with users as it lowers their switching cost between different telecom services. So the service providers must provide higher quality service to retain their existing customers. Value added service: The telecom service providers differentiate majorly in the value added service they provide. Value added services are those services that are not part of the basic voice service but are availed by the user separately. But some VAS features have become commoditized and do not provide any differentiation. VAS has become a tool for additional revenue, service differentiation, and customer retention. . A large chunk of users are comfortable with operating their mobile phones, and would progress into demanding more value-add beyond basic voice applications driving the next phase of growth. In India the revenue from MVAS (excluding P2P SMS) amounted to $ 43.8 million in 2004, and was $ 348.8 million in 2009, at a CAGR of over 50%13.

Revenue from VAS

400 350 300 250 200 150 100 50 0 Games Music Video/TV Ringtones/Graphics Info services/Contests Revenue million USD

2004 2.5 1.7 0.4 10.8 28.8

2005 10.5 2.9 1.8 36.5 42.1

2006 22.3 4.5 4.6 60 54.6

2007 41.4 5.5 9.9 84.2 66.9

2008 72.1 6.5 16.9 101.5 77

2009 106.6 7.1 27.3 119.2 86.6

Boost to Telecom manufacturing companies: Government has created an environment which is very conducive for growth. Govt. has reduced the licensing fees increased the FDI. The last two years saw many renowned telecom companies setting up their manufacturing base in India. Ericsson has set up GSM Radio Base Station Manufacturing facility in Jaipur. Elcoteq has set up handset manufacturing facilities in Bangalore. Nokia set up its manufacturing plant in Chennai. LG Electronics set up plant of manufacturing GSM mobile phones near Pune. Govt. initiatives: Setting up of Telecom Equipment and Services Export Promotion Forum Telecom Testing and Security Certification Centre (TETC)

With the above initiatives companies like Alcatel and Cisco have shown interest in setting up manufacturing R&D in India. And India is expected to become a manufacturing hub for telecom.
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Source: TRAI report Dec 2011. Source: Boston Analytics report; http://www.bostonanalytics.com/leading_thoughts_research/ba_mvas_in_india_research_report_10_07.pdf

Telecom equipment exports: The Indian telecom industry is expected to reach a size of Rs 344,921 crore by 2012 at a growth rate of over 26 per cent, and generate employment opportunities for about 10 million people during the same period. The sector would create direct employment for 2.8 million people and for 7 million indirectly, according to a Frost and Sullivan report. So this directly influences the manufacturing and R&D sector in a positive way.

Horizontal Integration: Many Indian companies have diversified their product/service offering portfolio by leveraging on the present channels and customer base. We can see a clear example when the cable TV set top box was introduces, a lot of telecom major entered the segment with their own offerings. Entry in to DTH segment: Reliance BIG TV Tata Sky (JV) Airtel Digital TV

Local culture and social opportunities: India regularly sees a spike in the sales of durables during the festive season which is seen by the consumers as a major time for gift giving and receiving. These festive season statistics and stories revalidate the rapid increase in Indian consumer confidence this year. The latest Nielsen Global Consumer Confidence Study, conducted across 26,000 consumers in 53 countries, shows India leading the world with a consumer confidence index of 129 points. Just 18 months ago (January 2009), the Indian index stood much lower, at just 99 points14. The main reasons behind this spike are: The Income effect The wealth effect The pent-up demand effect The peace effect.

As mobile handsets and wireless broadband equipment are considered as durables, the telecom sector also enjoys a boom during the festivities.

Threats Telecom Policies: Telecom policies and over regulation sometimes stifles growth and natural competition. TRAIs 2G license policy had affected private players most notably the Tata Telecom group. Under TRAIs proposed spectrum allocation model, Tata Tele, Telenor and Loop may have to live without startup GSM airwaves in a host of locations for months. The reason: TRAI believes adequate spectrum should first be made available to existing operators with networks and subscribers to help them perform their operations efficiently. According to the mergers and acquisitions guidelines laid down by Trai, the total spectrum held by the combined entity would not go beyond 14.4MHz/10MHz (for GSM/CDMA). It will also have to pay for the spectrum beyond 6.2MHz. Trai also recommended the removal of three-year lock-in period for mergers and
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Source: The Hindu Business Line; http://www.thehindubusinessline.com/todays-paper/article1011216.ece

acquisitions. It also suggested paying of one-time fee for spectrum beyond 6.2MHz, which is likely to impact existing operators such as Bharti Airtel, Vodafone Essar and BSNL Declining APRU: The global Average Revenue Per User (ARPU) is $21.30 while the Indian ARPU stands at $8 (2005-06) which came down from $9 last year15. The ARPU will go down further because still the revenue is lagging the rapid growth of subscribers. Moreover unlike other countries the use of value added services is not popular among the mobile users in the country. On the other hand due to low teledensity the service providers are currently concentrating on increasing their respective networks owing to the decline in equipment prices and rapid acceptance among the consumers for mobile phones. This is further reinforced by aggressive marketing strategies from low coupon recharges for prepaid subscribers along with low hand set prices. Further, to this along with increase in usage and enhanced contribution of value added services the ARPU may witness stabilization in the near future. Partiality on the part of the Government: Government in order to ensure fair play had favoured the Public Sectors first. It opened the auction of 3G spectrum for the PSUs then allowed for the Private players. So there is an element of favouritism on the part of the government towards the PSUs which may negatively impact the confidence of the private players.

Porters 5 Forces analysis

Threat from new entrants Supply side economies of scale: Decline in Average Revenue Per User (ARPU): The growth of revenue is not as fast paced as the growth in the subscriber base. With the low tariff and reducing cost of cellular handsets, increase in consumer base was towards low end. This has resulted in reduction of ARPU by 17%. The ARPU for the March 2004 quarter (Q4) is Rs 432, a fall of Rs 91 when compared with June 2003 quarter (Q1) numbers. As per the COAI report, the number of subscribers with a monthly ARPU of less than Rs 500 has gone up from 28% in 2002 to 46% in 2003. This will be a deterrent for new players to come into the market. Infrastructure Tenancy Cost: Infrastructure tenancy is high due presence of high technology players in the hardware supplier domain. Change generally involves change in network architecture and change in hardware used. The communication hardware is pretty costly and sometimes involves satellite technology.

15

Source: Capitaline database; http://www.capitaline.com/user/framepage.asp?id=1

80 60 40 20 2.51 0 -2.68 Aircel -20 -40 -60 Loop Mobile

Change in ARPU (%)

66.18

2.24 -0.29 Vodafone -0.63 Idea cellular Essar Bharti Airtel

4.93 S Tel Pvt. Ltd.

17.28 Uninor Videocon Etisalat Telecom -41.96

Change in ARPU (%)

Demand side benefits: The demand side benefits are high owing to high population density. This has been shown before that the revenue per tower is high in India. Customer switching costs: Customers face very less switching cost due to lack of value added services and features like mobile number portability. This acts as a deterrent for new players. Capital Requirement: The capital requirement is very and it involves licensing cost, hardware procurement and setting up of network architecture. These are one-time costs. Other costs involve advertising. The total gross block of the industry at 2011 is 433047.8816. Incumbent advantages: Govt. policies do favour incumbents. Govt. has reduced the licensing costs and made the licensing process very easy. There is also easy access to hardware and equipment. Uneven access to distribution channels: The existing players have created a very good relationship with their distribution channel. So channels are locked to their service providers. Restrictive Government policy: The government bureaucracy and involvement of various ministries cause a dent in the confidence of new players with medium and low reputation. Though is it much less for reputed players who wish to enter.

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Source: Capitaline database

Distribution accessible 4 Weak brands 3 Undifferentiated product 2 1 0 Suppliers accessible

Series 1
Incumbents acquiscence Little IP involved

Series 1 Govt regulation

Scale unimportant Market growth

High fixed cost Low switching cost

Buyers bargaining power Lack of differentiation among service providers: The service provided is mostly voice based in case to wired and wireless communications. Though we have seen a growing investment towards Value Added Services (VAS) in case of mobile communications and internet services but the trend is very less in India. Cut throat competition: The private player density in India is very high owing to a high growth market. So there is an intense competition in this zero sum game and players often integrate horizontally and exert considerable financial muscle to control the distribution channel. Price sensitivity of consumer: The consumer buying trend is more towards low cost mobile and internet services. The reasoning behind is that most people make do with just the basic service. Focus on VAS is quite less. So consumers are highly price sensitive and switch brands easily. Low switching costs: Due to lack of differentiation in the services provided buyers face very low switching costs between multiple service providers. This is particularly the case in Mobile GSM market where one can change easily by changing the SIM module. Mobile Number Portability: The introduction of this feature has increased the ease of switching brands to a considerable extent. This has severely increased the competition. Mobile Number Portability requests increased from 258.37 lakh subscribers at the end of November 2011 to 292.40 lakh subscribers at the end of December 2011. In the month of December, 2011 alone 34.03 lakh requests have been made for MNP17.

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Source: TRAI report Dec 2011

Buyers bargaining power

Undifferentiated product Backward Integration 5 4 3 Tendency to switch 2 1 0 Product dispensibility Financial Muscle Series 1 Buyer Size Buyer Independence

Price sensitivity Oligopsony threat

Low cost switching

Suppliers bargaining power Large number of suppliers: The suppliers for this industry are the companies that provide communication equipment, handsets, tower technology, and communication infrastructure. Network infrastructure providers are Ericsson, Siemens Networks, Cisco, and Huawei. Information technology providers are IBM (Daksh), TCS and Wipro. Tower technology providers are Bharti Infratel and Indus towers. Call Centres are IBM Daksh, Mphasis, Hinduja TMT, Aegis BPO, Nortel and Genpact. Shared tower infrastructure: Towers are used on lease basis and due to independent carrier frequency a single tower can host multiple networks. So the suppliers can exert some pressure and gain a lot from multiple telecom players. Limited pool of skilled workforce: The employees in the lower rung of the industry are large in number but there is a shortage of skilled resources in communications and R&D sector. There is also a limited resource pool in the management level. Supplier switching cost: Switching suppliers involve medium costs as there is additional cost incurred in acquiring communication hardware and modifying network architecture. Overall influence on industry: The supplier industry exerts medium influence on the industry. The R&D and technology though exert some influence due to product innovation which reduces operating costs for the telecom players.

Supplier bargaining power

Differentiated Input 5 Switching costs 4 3 2 Supplier size 1 0 Importance of quality/cost Series 1 Forward Integration

Player independence

No substitute

Player dispensability

Oligopoly threat

Rivalry among competitors High exit barriers: The exit barriers are very high for the industry players. Because of the low salvage value of hardware and network equipment. The hardware obsolescence is high due to high rate of innovation. The players do not control any of the network hardware and is leased. So exit barriers are high. High fixed costs: It has been shown before that the fixed costs are very high for the players. High density of competitors in a region: Competition density is very high in the region. It has been shown before that the global average of players in a country is 4 but in India it is 14. Presence of large players: There are large players who have horizontally integrated and offer a diverse portfolio of services. Less time to innovate: The time to innovate a service and reach the market is very less. This is due to high degree of switching among buyers. High degree of imitation: Any innovation is quickly imitated by other players as mostly the big players have more or less the same capability. Price wars: There is severe price war due to high degree of customer switching.

Rivalry
Competitor Size 5 Zero sum game Undifferentiated product 4 3 2 1 0 Storage costs Lack of diversity Rivalry Hard to exit Easy to expand

Similarity of players Number of players

Low switching cost High fixed cost

Threat of substitutes Presence of substitutes: The main substitute voice based communication is internet technology, Online chat, VOIP (Skype) and satellite phones. Some of the substitutes are used regularly by the consumers. But mobile services are considered indispensable in India and internet technology has not penetrated in the rural areas. High price performance trade-off: The trade-off is very high because all of the above involve the cost of procuring extensive hardware and computers. Issues of mobility and penetration of substitutes: Mobile telecom offers the indispensable service of communication on the move which is not offered by the substitutes.

Threat of substitutes
Beneficial alternative 3 2.5 2 1.5 1 0.5 0 Low switching costs Cheap alternative

Threat of

Overall scenario

Supplier bargaining power

Buyer power 4 3.5 3 2.5 2 1.5 1 0.5 0

Degree of rivalry Porters 5 forces

Threat of substitutes

Threat of new entrants