GAMES OF STRATEGY IN TELECOM INDUSTRY

Game theory model

Players: The decision makers i.e. the manager of oligopolistic firm Strategies: The choice to change price, develop new product, build a new capacity, undertake a new advertising campaign etc. Payoff: For each strategy adopted by a firm there are

number of strategies available to the rival firm. The

payoff is the outcome or consequence of combination of two strategies by two firm each

Two type of Games

A Zero Sum Game: In which the gain of one player comes at the expense and is exactly equal to the loss of the other player( eg MNP)

Non Zero Sum Game: In which the gain or losses of one firm do not comes at the expense of other firm or provide equal benefit to the other firm

Oligopoly

An Oligopoly means that market shares are pretty well defined and stable and any change in price by one player will lead to an immediate competitive price response. If one player lowers their prices, with the hope of getting more market share then the other players will immediately meet the challenge and a price war will begin. If this price war does not find some sort of equilibrium then we enter a negative price spiral where prices keep on dropping and profitability enters a state of free fall

Price war

A price war is an event whereby two or more companies continually lower prices to undercut each other

Engagement in price war is usually to capture market

share

It has been estimated that the loss caused by the

Price war in Indian Telecom Market

Indian telecom industry witnessed exponential growth especially in the wireless segment in the last few year

Telecom is probably the only industry where despite increasing inflation tariffs have been falling unabated

Contd.,

In June 2009, Indian telecom service provider Tata DoCoMo announced that it would bill at the rate of 1 paisa/second, in September, it unveiled the Diet SMS plan, 1 paisa/character On November 22, it extended the 1 paisa/second plan to roaming services also Tata's competitors have had to follow suit, and the result has been a price war with no apparent end in sight On October 30, market leader Bharti Airtel took the plunge with the 1 paisa tariff In November, it also cut roaming rates to 60 paise/minute for calls within its network and 80 paise/minute for calls to other networks

Contd.,

On November 24, Bharti took its lowered rates overseas: U.S. customers using calling cards to make calls to India would also be billed at 1 paisa/second

Airtel had to respond in such a way because it was forced on them

Contd.,

While the telecom sector's revenues and profits have plunged in the quarter ended September 2009, large private operators such as Airtel, RCom, Vodafone, Idea & Aircel have all managed to increase

their revenue market share during this period

Bharti's revenue market share has increased to 29.3% as of September 2009, compared to 27.6% in June the same year

Vodafone accounted for 15.7% of the total earnings of the sector as against 14.6% in June 2009

Market Share

HHI Herfindahl Index

H=1391.3482
Denotes un concentrated index and chances of monopoly and collusion is very low

Subscriber trends

Nash Equilibrium

Non-cooperative game involving two or more players, in which each player is assumed to know the equilibrium strategies of the other players, and no player has anything to gain by changing only their own strategy unilaterally If each player has chosen a strategy and no player can benefit by changing strategies while the other players keep theirs unchanged, then the current set of strategy choices and the corresponding payoffs constitute a Nash equilibrium.

Nash Equilibrium in telecom Industry

Industry is in Nash equilibrium Price Wars are not so prevalent Every player is giving competitive offers All players offering almost similar schemes

Contd.,

On the losing side were the public sector firms BSNL & MTNL. On December 1, MTNL also fired its own salvo by reducing its rates to half a paisa/second for in network & 1 paisa/second for calls made outside its network

Gradually the brutal tariff war that had forced all operators to slash call rates had also resulted in the sector's sales figures dipping over the last six months

Despite the addition of 80 million customers in the period, the industry clocked about

Rs. 38,755 crore in September 2009, which was lower than the sector's revenues in
the quarter ended December 2008, when it recorded Rs. 39,408 crore despite having 125 million fewer customers then

Contd.,

On 25th July, 2011, Bharti Airtel rose the calling charges by 20% This move of Airtel has been seen as a fundamental step to revive the fortunes of the entire industry

Two leading mobile operators, Vodafone and Idea, are understood to have increased pre-paid tariffs by up to 20 %, in line with the recent Airtels move

Tariff rates in India have started rising in recent times as mobile phone companies ended two years of price wars that had damaged margins for most service providers and which would be in the benefit of the industry and the customers as well

Current Scenario

Contd.,

The Rs. 1,48,792 crore cellular mobile industry, reeling under the pressures of a

crippling debt of Rs. 2,50,000 crore and negative growth, is now demonstrating very
little hope of early revival

The Cellular Operators Association of India (COAI), which represents GSM mobile operators that together service nearly 700 million of the 865 million mobile

subscriptions

While the industry hopes to hit the 1 billion subscription mark by 2014, it continues to be deeply constrained by the negative growth witnessed in 2012

Subscriber growth, after crossing 900 million in 2011-12, had dropped to 865 million, equaling 13% of the global subscription base

At the end of the calendar year 2012, the Indian telecom industry closed with revenues of Rs. 1,48,792 crore or $27 billion, a meagre 2.3% of the estimated global

telecom revenues of Rs. 1.16 trillion

Killer costs

The COAI has argued that the regulatory cost including service tax, license fee, graded spectrum usage charge and revised spectrum variable price equals nearly 40% of the customer tariff

EBITDA margins, which are universally accepted as one of the best reflections of industry viability, have also been declining in the last 5 years. In 2012, the Indian telecom sectors EBITDA margin dropped to its lowest level to 15%, comparing poorly with a 36.1% average for Asias telecom

sector.

The telecom industry had invested an aggregated gross block now at Rs. 6,63,000 crore, but low returns on investments (ROI) are making operators question the value of their capital investments

They attribute these thin margins to global operators exiting the Indian telecom business either entirely or substantially, reducing their geographical presence

Telecom attracted a cumulative FDI of 8% amongst the highest for individual sectors but the industry claims that growing industry financial leverage of Rs. 2,11,000 crore, spent to lay Indian telecom infrastructure, coupled with regulatory and policy challenges, has affected long-term

Company and its foreign investors

Company Reliance Communications Ltd. Bharti Airtel Tata Tele Services Idea Cellular Ltd. Uninor Foreign Partners Bar One SingTel. NTT DoCoMo Telekom Malaysia Telenor

Vodafone India

Vodafone Group PLC

Trends

100% FDI is announced in Telecom Sector from Aug 1, 2013

The telecom industry placed the need for large investment to meet the NTP 2012
targets of Broadband on Demand, which is at risk without a massive overhaul of policy initiatives relating to spectrum, easing the financial burden and the need to review the Preferential Market Access (PMA) policy

India currently has amongst the lowest wireless broadband penetration in the AsiaPacific region, below Malaysia, Philippines and China and nearly equal to Pakistan at 68%

Adoption of data by Indian consumers puts India in poor light with merely 16% of its ARPU (average revenue per user) coming from data. This is less than a fourth of Japan (64%) and much less than Australia (50%), Indonesia (41%), Malaysia (38%), China (35%) and even Thailand (22%)

Even where ARPU is concerned, India ranks low with Indonesia and Pakistan

Contd.,

The South Asian nation currently ranks as the second largest telecom

market by users behind China, but a spate of corruption allegations, a

crowded market, heavy debt and policy flip-flops in recent years have taken the shine off the sector and have also hurt the profitability of companies

The latest policy reform will provide an opportunity for all existing foreign firms to increase their stake to 100% by buying out their Indian partners. Mr. Agrawal, said this could potentially result in investments of $3 billion to $5 billion dollars in this sector

Telecoms Minister Kapil Sibal said on Tuesday that the country would
require at least $10 billion in the next five years to revive growth in telecoms.

Benefits

In this high competition, deciding who will win is very difficult to predict But the major players are getting more advantages All the customer losses for other players led to addition in this companies databases Customer Lifetime value and retention of customers is high Profit has been recorded by Airtel, Vodafone