TELECOMMUNICATION

A Brief Analysis

KHETE PRATHAMESH PRAMOD

HEMANT KOTHARI
JAYA CHOUDHURY
MANAN VERMA
MANGROLIYA ANKUR
VITHTHALBHAI
MANIK RAJPUT
MONDAL SHOUBHIK

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Table of Content

Serial
No.

Topics

Introduction

Telecommunication Sector

Current Telecom Sector in India

Degree of Product Differentiation

Competition

Challenges and Recommendation

References

Introduction
Telecommunication is a word derived from French language which means communication at
a distance. This sector refers to companies in the business of facilitating communication
using technology. It comprises companies that make communication possible on a global
scale whether through the phone or Internet. These companies created the infrastructure that
allows data to be sent anywhere in the world. The largest companies in the sector are wireless
operators, satellite companies, cable companies and Internet service providers.

Telecommunication sector
In the last two decades the growth of telecommunication sector worldwide has been huge.
The number of internet users worldwide grew from 400 million in 2000 to 3.2 billion in 2015.

Fig 1.1 Indicator diagram on

extent of data market in
world.

The
scale of
growth has been
led by the developed countries. The plot above shows that the Asia/Pacific region has
emerged as the leader in the Global Telecom Market. North America comes in second,
followed closely by Europe who are in the third position.

Fig 1.2 Global Telecomm

Market

It is interesting to
note that Africa,
Latin America and parts of the middle east are among the lowest contributing regions in the
global telecom sector. (ICT data and statistics devision, 2015)
Service Wise Growth
Over the years, as the penetration and growth of the telecom sector and services provided
have witnessed a continuous global growth.
While the number of mobile-cellular telephone subscribers have grown exponentially over
the last 15 years, certain services such as the fixed-broadband subscriptions have witnessed a
relatively subdued growth. This could be attributed to the increasing demand of mobile
services.
The bulk of the growth in the telecom industry can be attributed to the technological
advancement as well. Mobile-cellular devices, which were once a luxury that could be
afforded only by the wealthy, is now being used to all walks of life, thus increasing the
demand for the telecom services.
The growth of the subscriptions across various key services of the telecommunication sector
have been illustrated in the chart below.
Market capitalization and Scope: The current telecomm market is just small portion of the possible market. If we talk about
developing countries, approximately 4 billion people remain, which is 2/3 of population
living in these countries. The scope for improvement in least developing countries is even
more with approximately 90% of the population still having no access to internet.
The numbers in terms of phone connections show a somewhat better picture but even there
50% are still out of the ambit of telecomm sector.

Other Services:

Fig 1.3 Subscription growth for various telecomm based services

Payment Banks: Swedish mobile phone operators Telia, Tele2 & Telenor jointly started a
service in 2013 called WyWallet, their own payment system which opened the gates for 97%
of Swedish mobile-phone users to pay for goods at participating businesses.

Current Telecom Sector in India

India is the worlds second largest telecommunications market with over 1.0 billion
subscribers giving a room for the need of continuous improvement in this fastest growing
sector. The wireless segment dominates the market with around 97.5 percent of total
telephone subscriptions.
Wireless subscriptions witnessed a CAGR of 24.78 per cent to 1034.25 million. Number of
active wireless subscribers in April, 2016 was 934.08 million. It is also the second largest
country in terms of internet subscribers. India had 267.39 million internet subscriptions.
The following table provides the insight of the current Telecom subscription in India as on
30th April 2016.
Particulars

Wireless

Wireline

Total

(Wireless+
Wireline)

Total Telephone Subscribers

1034.25

25.04

1059.29

Net Addition in April, 2016 (Million)

Monthly Growth Rate
Urban Telephone Subscribers (Million)

0.62
0.06%
586.41

-0.19
-0.75%
20.80

0.43
0.04%
607.21

Net Addition in April, 2016 (Million)

Monthly Growth Rate
Rural Telephone Subscribers (Million)

-2.38
-0.40%
447.84

-0.10
-0.46%
4.23

-2.47
-0.41%
452.08

Net Addition in April, 2016

Monthly Growth Rate
Overall Tele-density*

3.00
0.67%
81.35

-0.09
-2.14%
1.97

2.91
0.65%
83.32

(Million)

(Million)

Urban Tele-density*
Rural Tele-density*
Share of Urban Subscribers
Share of Rural Subscribers
Broadband Subscribers (Million)

147.90

5.25

153.14

51.19
56.70%
43.30%
134.04

0.48
83.10%
16.90%
17.05

51.67
57.32%
42.68%
151.09

Table 1.1 Current subscription figures for telecomm services in India

The number of telephone subscribers in India increased from 1,058.86 million at the end of
Mar-16 to 1,059.29 million at the end of Apr-16, thereby showing a monthly growth rate of
0.04%.
The overall Tele-density in India declined slightly from 83.36 at the end of Mar-16 to 83.32 at
the end of Apr-16.
Total wireless subscriber base increased from 1,033.63 million at the end of Mar-16 to
1,034.25 million at the end of Apr-16, thereby registering a monthly growth rate of 0.06%.
Top five service providers constituted 83.86% market share of the total broadband
subscribers at the end of Apr-16. These service providers were Bharti Airtel (39.13
million), Vodafone (28.11 million), Idea Cellular (23.23 million), BSNL (20.48
million) and Reliance Communications Group (15.74 million).
In the month of Apr-16, a total of 4.91 million requests were received for MNP. With this, the
cumulative MNP requests increased from 209.13 million at the end of Mar-16 to 214.04
million at the end of Apr-16, since the implementation of MNP.
Major Players: The Indian telecom sector has both public and private players. As on 30th April, 2016, the
private access service providers held 91.20% market share of the wireless subscribers

whereas BSNL and MTNL, the two PSU access service providers, had a market share of only
8.80%.
Fig 1.4 Market share in
India for wireless network
company wise.

In case of wireline subscribers, BSNL and MTNL held 72.06% of the wireline market share.

Fig 1.5 Market share in

wireline section in India
company wise

All infrastructure industries have high fixed costs. However, telecom is the only
infrastructure industry that has zero variable costs for many of its outputs.
The spectrum prices have increased considerably and as a result expansion requires huge
capital investments. Though the subscribers are increasing year after year, due to bottleneck
competition, the tariff rates in India are the minimal in the world. The call rates have dropped
from INR 16.80 in 1995 to 0.30 in 2012. Operators have been announcing new promotional
schemes including reduction in tariffs for voice calls, slashing roaming charges and many
more lucrative offers. Due to the fierce price wars, the profit margin and return on capital has
been declining over the years. Providers are trying to maintain the profits margins by
economies of scale and by providing value added services. Customers due to competitive
pricing have become elastic and easily switch to the provider who offers their services at

the minimal tariff rates. The absence of major differentiation in the services has led to a low
brand loyalty among the users. Number Portability has further magnified price wars in the
industry. A peculiar aspect of pricing in the telecom industry is that as the marginal cost (MC)
is almost zero, operators cannot charge customers based on MC. A number of factors such as
the price of the substitutes, total fixed costs, competitors pricing strategy, etc. need to be
taken into account by the operator before setting the tariffs.

Degree of Product differentiation

The product available in telecomm industry are changing at a very fast rate. This fast rate is
matched by the responsiveness of the companies (private players specifically). At any point
of time there is not much difference between the products of different companies. These
forces the companies to fight it out at other funds for market capitalization.
Pricing: In telecommunications, people are provided services on the basis of pre-payment or postpayment. Companies adopt several pricing strategies to gain a considerable market share
among various competitors and are as follows:

Fig 1.6 Pricing Strategy Matrix

Penetration Pricing: The price charged for products and services is set artificially low in
order to gain market share. Once this is achieved, the price is increased
Price Skimming: Price skimming sees a company charge a higher price because it has a
substantial competitive advantage. However, the advantage tends not to be sustainable. The
high price attracts new competitors into the market, and the price inevitably falls due to
increased supply

Psychological Pricing: This approach is used when the marketer wants the consumer to
respond on an emotional, rather than rational basis. For Example: Mobile recharge charges
Rs49, Rs99 instead of Rs50 or Rs100
Product Line Pricing: Where there is a range of products or services, the pricing reflects the
benefits of parts of the range. For Example: BSNL sim card family combo packs
Captive Product Pricing: Where products have complements, companies will charge a
premium price since the consumer has no choice. For Example: CDMA Handsets, Set top
boxes.
Promotional Pricing: Pricing to promote a product is a very common application. There are
many examples of promotional pricing including approaches such as BOGOF (Buy One Get
One Free), money off vouchers and discounts. For Example: BSNL Pyari Jodi Plan

Competition
Like any other field, there are multiple threats in this field as well. The analysis of the same is
follows: -

Fig 1.7 Porters Five Forces Analysis

Threat of
New
Entrants
(Low)

Bargainin
g Power
of
Customer
s (High)

Competitiv
e
Rivalry
(HIgh)

Threat of
Substitut
e
products
(Low)

Bargainin
g power
of
Suppliers
(High)

Customer Rivalry

Customers low switching cost and price sensitivity are increasing competition among

players
High exit barriers are also intensifying competition

There are around 6 to 7 players in each region, leading to intense competition

Threat to New Entrants

Strict government regulations

Extremely high Infrastructure setup cost
Difficulty in achieving economies of scale

Substitute of Products:

Hardly any threat of substitute products as there is no substitute available in the

market.

Bargaining Power of Suppliers:

High bargaining power of suppliers as there are just a few suppliers in the sector
High cost of switching suppliers
Bargaining Power of Customers

Bargaining Power of Customers:

Low switching cost and mobile number portability give customers high bargaining

power
Customers are price sensitive

Non price competition: Non-price competition in telecom includes competition over

(a) better coverage of network
(b) celebrity endorsements
(c) branding
(d) aggressive advertising techniques
(e) better customer service
(f) diversifying into related product line.
Non price competition occurs because of the fear of price wars eventually affecting the
revenue of a particular firm and also the industry as a whole.
In oligopoly non price competition is taken as a grave area of competition. The core behind
non price competition is the difficulty faced by competitors to counter techniques like
aggressive advertising, personal selling, or improvement in the service.
The risk associated with non-price competition is the acceptance of changed product by the
existing consumers. But, on the flipside the consumers do get a better product at the same
price. It leads to innovative behaviour.

Example - Airtel has always endorsed Bollywood superstars to attract masses. Superstars like
Sharukh Khan and Amitabh Bachchan are associated with the brand for a long time.
Whereas, Vodafone has never endorsed celebrities to the brand and has rather created
animated characters called Zoozoos for its strong advertising campaign which created a 'buzz'
in the market.
Both the companies have indulged in non-price competition of advertising just to lure
consumers and target a larger market share.
Price Competition: Owing to the huge competition among the players, price wars are quite evident. 15 years ago
subscribers were made to pay for an incoming call; today they have the liberty to pay for per
second of their usage, with TATA DOCOMO bringing the market disruption by their concept
of per second billing.
The Indian mobile services market is more or less equally divided between GSM and CDMA
customers with the former capturing around 53% of the subscriber base. Currently there are
players who are fighting tooth and nail to increase even one single percentage point in their
market share. While Bharti Airtel dominates the GSM arena, Anil Ambani led ADAGs
Reliance communications has been leading the CDMA services space in mobile telephony
but the good sign for the sector is that revenues of all the incumbents have increased leading
to an increase in their revenues. In GSM, Bharti Airtel is given a tough competition by
Vodafone and Tata Teleservices which operates Tata Indicom and in CDMA, it is
considerably behind Reliance communications in terms of market share. With Mobile number
portability coming into the scene, the war will be fiercer in this space and there will be a huge
swapping of subscribers among the existing players.
High Exit Barriers:
In any industry, if the exit barrier is high it increases the difficulty of any organization to
leave the industry sector. The telecom industry suffers from high exit barriers, mainly due to
its specialized equipment. Networks and billing systems cannot really be used for much else,
and their swift obsolescence makes liquidation pretty difficult.
Based on the above analysis The telecom industry displays most of the characteristics of a monopolistic
market like existence of large number of firms, relatively close substitutes etc

Challenges & Suggestions

Telecom businesses in India are going through an evolution phase from Third Generation
mobile networks (3G) to Fourth generation (4G), but at the same time it is experiencing one
of the most difficult times in their history as the revenues are dwindling. This is common with
almost all the communication service providers (CSP) across the India as well as globe. The
challenges faced by an operator range from how to service the most basic communication
needs to how to deliver complex services all in a highly competitive market driven by
regulatory challenges and issues.
While the 2016 Budget is a promising effort to steer the sector, the country's digital
transformation agenda will require catalytic efforts and for strengthening the business
climate.
Financial Challenges: The Indian telecom industry is currently facing a challenging
financial environment. The sectors total debt was higher than the Gross Revenues. In
addition, multiple taxes and levies have added to the woes of operators. These taxes account
for about 30% of the revenues. The financial issues are further worsened by spectrum related
issues such as very high pricing, unavailability of optimum quantum of spectrum and lack of
a spectrum roadmap are factors that continue to affect the sector adversely.
The debt equity ratio for the sector is given below:
Debt - Equity Ratio
Public Sector

Private Sector

2
1.6
Debt- Equity Ratio

1.2

0.98
0.8 0.69

0.4
0 0.11

Fig. 1.8 Debt- Equity Ratio

1.38

Total
1.81

1.74

1.25

1.26

0.26

0.29

0.93
0.17

On the direct tax front, the Finance

Minister has sought to clear the ambiguity around the tax treatment of payments made
by the Telcos towards spectrum fees. A proposal has been made to provide for
amortization of the fee payment over the period of life of spectrum. This
announcement may not be welcome by telecom companies since it results in
ambiguity and litigation risk in respect of spectrum fee paid for prior years, whereby
the operators have largely taken the position that spectrum is an intangible asset liable
for tax depreciation. As can be seen from the graph the spectrum per operator is very

less in India.
Glo bal aver age o f s pec tr um (in MHz ) per o per ato r
69

65
50

49
39
28
18

Fig. 1.9 Global Average of Spectrum per Operator

Recommendation: Spectrum trading and

sharing should be allowed at the earliest to encourage its efficient use.

1. Governments surveillance based challenges: Laws/regulations, which provide
government access to user data without following robust procedural safeguards can create
an environment of uncertainty for businesses as well as citizens.
Recommendation: Guidelines and mandates need to be established to undertake any
surveillance activity and it should be preferably carried out under the watchful eye of an
independent judicial authority.
2. Weak Ecosystem for local manufacturing: In spite of Indias handset market growing at
a robust rate, almost 83% of the demand is met via imports, while domestic production
and manufacturing continues to lag.
Recommendation: This trend is expected to change after the Make in India campaign
pick up and local sourcing and manufacturing rises.
Mo bile ha nds e t unit im po rt e d a nd e x po rt e d ( m illio n)
Import

Export
259
225
188

50 55

70 68

90 80

130
105

130
85

73
14
0

3.

Fig. 1.10 Mobile Handset Unit Imported and Exported

Digitization

is

changing

the

competitive boundaries of the

telecom industry: Historical revenues such as voice, SMS, roaming and interconnect are
dropping even though the number of subscribers have increased year on year. This is
because people spend a mere 16% of their time on phone calls and the other 84% on
activities like browsing the web, communicating by email, using social apps, watching

videos or TV, gaming, etc. These applications are being delivered in an over-the-top
(OTT) model.
The major disruptions are brought in by new consumer touchpoints created by devices
based on Internet of Things. A range of technologies, including those embedded in
watches, apparel, and glasses, are vying to occupy the interface with telecom customers.
Recommendation: CSPs (Communication Service Providers) will have to venture into
non-traditional services like M2M, Media/Entertainment, Health, and Cloud Computing
in strategic alliances with diverse industries. Small & Medium Business (SMB),
Government & Public Sector etc. are the promising area for CSPs to generate revenue.
The key is to capitalize on the existing customer base and use that as a propeller to offer
them a variety of services.
In order to achieve this, CSPs will have to overcome challenges that come in the form of
complex partner ecosystem, delivery inexperience across multiple industries, lack of
domain knowledge etc. To overcome CAPEX challenges in the setting up of new
services, operators will have to arrive at the right engagement model like Joint Go to
Market (jGTM) / revenue sharing with the right alliance with solution providers.
4. Data Security for cloud based services: Customers are concerned that transmitting and
storing data over a public internet, as opposed to storing it entirely within an exclusive
corporate network, is likely to increase data vulnerability and expose it to unauthorized
users. As the cloud aggregates data and services of multiple users on the same platform, it
becomes an easy target for cyber-attacks.
Recommendation: The Government should identify best practices suchas ISO 27001 and
SAS 70 for the audit process and upgrade its encryptions standards of a cloud-based
service provider to provide assurance to its customers.
5. Sustaining margin and improving operations: Improving customer experience has
gained importance as a distinctive means of securing and enhancing lifetime value. The
bottom-line is that operators cannot afford to give them low or equal service levels,
holding IT and implementation issues responsible.
Major growth will be driven by the rural Indian subscriber base, where current
penetration is 30% and ARPU is just INR 160. Service providers will face the dual
challenge of serving them cost-effectively and giving relevant services that will be
adopted and used.
6. Challenges in 4G Business: Sunil Mittal, Bharti Enterprises Chairman, has described
Mukesh Ambanis telecom venture Reliance Jio as formidable competition. Reliance
Jio will offer low-priced devices in order to win customers, forcing big players like Airtel
and Vodafone to respond in kind, leading to a Price-War. It will reshape the Indian

telecom industry by lowering the number of major operators from ten to five.
Recommendations: Reliance Jios delayed launch has given some time to other players
to better equipped for future competition. So other players should focus on developing
stratefy and capturing market share.
Response Strategies of Service Providers
There have been sporadic price cuts on data plans by major telcos to drive data usage and
volume. Interestingly, Anil Ambani-led RCom has already kicked off the consolidation
phase with its merger with smaller operator Sistem Shyam Teleservices (SSTL). RCom is
also in talks with Aircel for a possible 50:50 wireless joint venture. Mittal said that Airtel
is putting $9 billion into network improvements and new spectrum over the next three
years, adding to the $23 billion the company has invested since it launched in 1995. The
investment will be an answer to Reliance Industries Limited (RIL), which is spending
more than $16 billion on Jios 4G network. Mittal also told the publication that Airtel
invested more than $4bn last year in anticipation of the arrival of Reliance Jio 4G
business.

References
Websites: http://www.ibef.com
http://www.trai.gov.in
http://www.itu.int
http://www.airtel.in
http://www.bsnl.co.in
http://www.marketrealist.com
http://www.slideshare.net
http://www.mckinsey.com
http://www.ukessays.com
http://www.ey.com
Reports: Indian Telecomm Sector by S P Jain Institute of Global Management
Five trends to watch in Indian Telecom in 2016 by PwC
ICT Facts & Figures by ICT