MICROECONOMICS PROJECT

IS THE INDIAN TELECOM SECTOR

MOVING TOWARDS A DUOPOLY?

Guided by: Prof. Vaibhav Bhamoriya

Prepared by: Group 03

AFROZ HUSSAIN: MBA21072

BUDDHA KINKAR BHAUMIK: MBA21087

KARTIKEYA AGARWAL: MBA21102

RISHABH KOTHARI: MBA21118

SRIJAN NEGI: MBA21133

ARUNIMA SINGH: MBAA21012

 TABLE OF CONTENT

ABSTRACT 2

PORTER’S ANALYSIS OF THE TELECOM INDUSTRY 3

HISTORY OF THE TELECOM SECTOR 4

2016-17: THE JIO EFFECT 5

HERFINDAHL-HIRSCHMAN INDEX 6

ENTRY BARRIERS 7

PRICE SENSITIVITY & CONSUMER BEHAVIOR 9

PRICE WAR BETWEEN JIO AND AIRTEL 9

GOVERNMENT REGULATIONS 10

FUTURE DEMAND FORECAST 12

THE 5G WAR - AN IMPENDING DUOPOLY 13

REFERENCES 16

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 ABSTRACT

The report is aimed at analyzing the Indian Telecom Sector and concluding whether it is moving

towards a duopoly. To do so we have analyzed multiple microeconomic factors like HHI, ARPU,

price sensitivity, and consumer behavior. We analyzed that the ARPU has significantly

decreased over the years which signifies that the number of firms has decreased increasing the

market concentration and we saw that the HHI has increased due to the increased market

competitiveness due to which the offered price by the companies have also decreased. We have

also looked upon the significant advances and changes that have taken place in the industry so

far. In the industry overview, we looked at the leading players in the industry and then we

analyzed the history of the telecom sector, the technological shifts that took place moving from

2G to 4G and now 5G. We also reviewed the effect on the market when Jio entered the market in

2016 and the current war between Jio and Airtel. Apart from that, we have analyzed the entry

barriers for the new entrants in the industry and all the regulations that the government has

imposed in the telecom industry. With help of this information, we have given our conclusion.

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 PORTER’S ANALYSIS OF THE TELECOM INDUSTRY

Supply: High supply in urban areas like metropolitan cities and low supply in rural village areas.

Demand: High demand due to the low tariff rates and scope for better penetration in the semi-

urban and rural areas.

Barriers to entry: High capital required for the investments, strong network presence of the

established firms, spectrum allocation issues, continuously evolving technology, and lowest

tariffs in the world.

Bargaining Power of Suppliers: Low bargaining power of suppliers due to the collaboration

between the telecom firms and suppliers of mobile handsets. Also, the large number of suppliers

available decreases their bargaining power.

Bargaining Power of Customers: High bargaining power for the customers due to the multiple

available alternatives and the low switching cost from one operator to another. Customers also

have readily available information about the different products available to make an informed

choice.

Competition: High competition among the players to gain market share has led to low prices

and decreased profitability. Currently, Reliance Jio and Airtel are leading the market with other

players like BSNL, Vodafone, and Idea facing a cash crunch.

The Threat of Substitutes: Moderate threat from non-traditional services like Internet-based

calls which include online calls and video calls. These services are lately getting highly popular

due to the strong user base of applications like Whatsapp and Zoom.

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 HISTORY OF THE TELECOM SECTOR

Previously the Telecom sector in India had a Sweezy Oligopoly setup with a higher number of

players in the market, contesting over Prices with each player trying to gain the Monopoly

Power, and with the liberal policies adopted by the Government of India, that that strong

consumer demand has been evident in the rapid growth of the Indian telecom sector. The

government had enabled easy market access to telecom equipment and a fair and proactive

regulatory framework that had ensured the availability of telecom services to consumers at

affordable prices. Mr

Although a point to be noticed is that historically the sector has been lucrative for new entrants,

with a higher Net Profit Margin in the years 2004 to 2009, which has significantly fallen in

today’s time. With the shift from 2G, 3G, and 4G spectrums, and now the upcoming 5G

spectrums, what the market has unfortunately noticed is a colossal drop in ARPU and a steady

growth in Herfindahl–Hirschman Index by Subscribers. This is that critical barrier in the entry

that has pushed many operators to either accept mergers or withdraw from the market.

Fig 1- A Decadal View of the Indian Telecom Industry

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 2016-17: THE JIO EFFECT

Internationally, India offers the lowest data prices according to a report by Cable.co.uk. Even in

Purchasing Power Parity terms, India’s data prices are lower than Russia, China, Brazil, etc. This

was majorly affected when Jio entered the market with their price regime trying to capture the

market’s share and every other player in the market was compelled to reduce their prices just to

protect their market share. Jio offered the 4G service at a significantly lower price. Jio also

forced the other competitors to offer meaningful incentives to customers who did high-value

recharges. As we can see in the table below the average revenue per user significantly dropped

for Airtel since Jio entered the market. The ARPU declined drastically for both Vodafone and

Idea since their merger dropped below 100 in September’18 between March’19. The following

table shows the Average Revenue per User (ARPU) 一

Fig 2- HERFINDAHL-HIRSCHMAN INDEX

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 HERFINDAHL-HIRSCHMAN INDEX

The Herfindahl-Hirschman Index (HHI) is a common characteristic of prevalent market

concentration and is often used to determine market competitiveness or in other words, How

much Monopoly Power is prevalent in a Market. The Higher the HHI of an Industry, the higher a

firm enjoys Monopoly Power in the market. Thus, a market with an HHI of less than 1,500 is

considered a fairly competitive market space, an HHI of 1,500 to 2,500 is considered moderately

competitive, and 2,500 or greater is considered to have a significantly higher concentration of

Market Power.

Previously, in the years 2016-2018, even with the presence of Reliance Jio, the market was still

competitive as Jio had still not affected the market to a great extent. As the pricing policy of Jio

was extremely aggressive, it gradually captured higher market share while smaller firms kept on

losing market share, further leading to exit from the market due to a significantly low

Profitability. This is perfectly described by the HHI Index having a steep rise from the years

2018 to 2021. A significant point to be noted is that although Jio kept on occupying a higher

market share, Airtel was the only firm that could still manage to maintain its Market Share with

an equally competitive pricing policy as well as a focus in Data-Speeds. If the market doesn’t get

regularised by the Government further, this situation might get worsened for the Economy as a

Duopoly situation might lead to a Collusive environment that will incur a Deadweight Loss.

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 Fig 3- HERFINDAHL-HIRSCHMAN INDEX

ENTRY BARRIERS

The Telecom Industry is highly restrictive to new entrants due to the huge investment costs

associated with it. Some of the barriers to entry in the industry are as follows:

1. Infrastructural costs: The new entrants need to shell out huge capital to construct the

infrastructure required for a nationwide network. This includes the costs for equipment,

service, and networks in addition to the licensing fee for the various software. Such high

initial costs deter new entrants to the market. Another issue is the inflexibility of the

investment made by the new entrants as it is for a fixed network and only works in a

designated location. Unlike other industries, once an investment is made in the telecom

sector it is in a fixed asset and is considered a sunk cost, which means that the new entrants

also face issues in exiting the industry with huge losses.

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2. Lack of Spectrum: Spectrum is the most important resource in the telecom industry. It is

also a finite resource and there is huge competition among the players to acquire the

spectrum channels at exorbitant prices. Another issue in this regard is that India has limited

availability of spectrum as it is 40% less as compared to European countries and 50% lesser

than China. This steep competition leads to high costs which the newer entrants cannot easily

manage as compared to the already established players in the sector.

3. Incumbent’s Wrath: Incumbent’s Wrath is used to define the control or leverage that

existing firms have on the industry. Well-established players like Reliance Jio and Airtel

already have a presence in all parts of the country with their nationwide network coverage

and command a strong market share. They also enjoy great brand awareness due to their

services and marketing. Hence, the new entrants not only need to enter the market but also

need to carve a section of the audience in the face of stiff competition.

4. Lowest Tariffs Worldwide: India’s data tariff is one of the lowest in the world at $0.68

per GB as compared to the global average of $4.21. This was due to Jio’s entry into the

market and the ensuing competition in tariff prices among all the players in the industry. The

low tariff prices mean that the new entrants face the issue of low profits in a saturated

market.

5. Continuously evolving Technology: The Telecom Industry has always been

characterized by technological advancements with the most recent one being the 5G network.

This means that the firms need to be constantly updating their technologies according to the

time. In addition to this, the firms also have the added burden of improving their equipment

which can lead to added costs. Hence, newer companies also face the pressure of incremental

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 charges for advancement. The above-mentioned period factors will restrain newer entrants

into the market and allow Reliance Jio and Airtel to solidify their dominance in the telecom

industry leading to higher chances of a future duopoly.

PRICE SENSITIVITY & CONSUMER BEHAVIOR

Success in a lifetime value program is dependent on how an organization uses customer data to

identify and leverage new customers. In the highly competitive business world that is prevalent

today, the creation of a single value proposition and a reason enough to be selected by the ideal

outlook is crucial. However, this can only be achieved when companies offer value propositions

that are in line with the needs of customers. And because customer needs and preferences are

different depending on many factors, it is increasingly necessary to create customer segments.

We also need to look at the price sensitivity of each segment of our target market. For example,

the corporates prefer high quality of services, safe and secure services, and are less price-

sensitive, so companies can work to offer better quality services and fetch a higher amount from

this segment. On the other hand, the general public is very price sensitive and tends to switch the

service providers if they get it from someone else at a lesser price, since they prefer to substitute

quality with the cost factor.

PRICE WAR BETWEEN JIO AND AIRTEL

The current price and product war between Airtel and Jio can be a perfect example of what

companies try to do to gain a market share in the oligopoly market by either engaging in the

price and a product war. This war when seen through the lenses of Game Theory gives us signs

of the ‘Dollar Auction Game’ where competitors constantly try to outbid each other to win a

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dollar first by reducing their profits and then reducing their losses, and this is an infinite move

game.

So to gain the market share, both the companies have made huge capital expenditures in the past

and also plan to increase their Capex in the future with Airtel already targeting a $5 Billion in

FY22 to replace the current 4G infrastructure with a 5G Infrastructure.

Now with the entry of Jio in the telecom market, we saw a major decrease in the ARPU

(Average Revenue per User, as mentioned above) composition for all the major players as Jio

came with an extremely low pricing model because of which every other major player in the

industry had to decrease their prices in the 4G segment of Mobile Data as initially, they provided

mobile data for free, the consumer just had to purchase the sim card, this was followed by every

other player reducing their prices. Then Jio launched the JioFiber which was the Wi-Fi service

(which included optic fiber, which ensures high speed) at low prices. This was followed by

Airtel cutting its Wi-Fi prices. The market saw different offers from both the companies

essentially providing free subscriptions to OTT platforms or cashback on recharges.

With all this happening continuously over the period, we see companies trying to gain the market

share by either undercutting the other player with prices or offering a better-differentiated

product continuously in the Oligopoly Market.

GOVERNMENT REGULATIONS

Telecommunications in India started as a government monopoly, but in the early 1990s, it was

liberalized, and private sector participation was progressively allowed. BSNL (Bharat Sanchar

Nigam Limited), Bharti Airtel, and Vodafone are all major players in the Indian telecom market.

The industry has experienced exponential growth and development, thanks to massive

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investments from both domestic and international investors. Due to its large user base, India has

seen remarkable growth in the telecom sector. In 2016 when Jio entered the market, to expand its

client base, it began offering free voice and data services to its subscribers as part of promotional

incentives. Vodafone India Ltd, Bharti Airtel Ltd, and Idea Cellular Ltd, the incumbents in the

telecom sector, claimed in multiple complaints before the CCI that Reliance Jio was engaging in

predatory pricing. It may be argued that the ‘promotion' was not a fair competition. The

allegations brought before the CCI, however, had no effect because Reliance Jio did not have a

dominant position. Reliance is in talks with Alphabet’s Google regarding offering a new

Android-based smartphone created in collaboration. If JioPhone Next's cheap pricing makes it a

popular entry-level option, Vodafone's battle to retain customers may come to an end. The

government has shown little interest in getting involved so far, although it has a pair of

unproductive, overstaffed state-run telecoms in far worse shape. Merging them with a

nationalized Vodafone Idea might result in the preservation of jobs and valuable capital. SpaceX

contacted TRAI last year to express interest in launching Starlink broadband, which is supported

by Elon Musk in India. By the end of 2021, the business claims to be able to provide regular

Starlink coverage across the country. But it does not appear to be arriving in India anytime soon,

the Department of Telecom is looking into whether Starlink's beta version introduction violated

the Information Technology (IT) Act of 2000, the Satellite Communication (SatCom) Policy of

India of 2000, the Indian Wireless Telegraphy Act of 1933, and the Indian Telegraph Act of

1885, among other laws.

But very recently, there has been some positive news for the telecom industry from the

government. Firstly, the government has provided the much-needed moratorium for pending

dues. This will allow companies, particularly Vodafone Idea which is almost at the brink of

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bankruptcy due to cash-crunch, to improve its efficiency and pay off its due over a longer period.

The government has also redefined Adjusted Gross Revenue and now non-telecom revenues will

be excluded from AGR. This will save taxes of these companies which could be infused to

improve their business performance. The government has also decided to rationalize the

spectrum charges and has allowed 100% FDI through automatic route, which was earlier only

49%.

FUTURE DEMAND FORECAST

The total demand in the telecom industry is on the rise over the years. When we plot the number

of users for major service providers over the years the slope has always been positive, and this is

because India is on a demographic dividend, with a larger population in the age gap that are users

of the internet and cell phones. The disposable income has also increased over the years and

people are willing and able to pay more due to increased reliance on the Internet. The Covid-19

also created conditions where Education is shifting from offline to online and India has the

highest numbers of students in the world so anyways the demand is favorable for the sector and

at the same time the workforce all over is also moving towards Work from home and the demand

of internet with better connectivity and services is going to arise. Taking these points into

consideration we feel that the major players of the market will work to penetrate new markets

and thrive to provide the best of services to its customers to be the market leader.

To predict the future total demand (wireless and wireline), assuming all the variables change

invariably, we have forecasted based on the same trendline as from 2010 to 2021. For plotting

the Trendline we have used the concept of Linear Regression. Here the total number of users (in

millions) has been taken as the dependent variable on a Timescale. This time-series data is then

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forecasted based on a Linear Regression Line. As we get a high R-squared value (~94%) for this

Trendline, we assume with high certainty that the predicted Trendline of the number of

subscribers over time has a good fit. The demand over the years would increase. With the

demand showing a rising trend, we can infer that the market is well available for new entrants or

revival of old players. It must also be noted that multiple advancements can take place that might

shift the forecasted demand. For example, a change in government’s policies, the introduction of

5G / 6G.

Fig 4- Demand Forecast

CONCLUSION - AN IMPENDING DUOPOLY

On 30th August India’s second-largest telecom operator by subscribers, Bharti Airtel, announced

plans for a rights issue to raise ₹210 billion. It puts this company in a stronger financial position

to weather an ongoing price war carved out by JIO and also while devising a 5G rollout. Airtel

started offering shares at a discount rate of 10% to the next Friday’s closing price, and the deal

was underwritten by the top investor Sunil Mittal Bharti. It underscored a solid position in a

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cutthroat industry and made it clear that Airtel was the mentioned period going head-on in the

fight for 5G.

The third-largest operator Vodafone Idea is still clinging on to its previously acquired 255

million subscribers while already straining under a very high debt. It is also facing a funding

crunch if it doesn’t refinance or find new strategic investors. The key stakeholders, Kumar

Mangalam Birla and Britain’s Vodafone are demanding a minimum floor price to tackle the

Cheap Pricing Trick used by Reliance Jio. With the widening funding gap between rivals,

Bharti’s plans tee up an impending duopoly noticeably between Reliance Jio and Airtel. Since

this Aggressive Price War situation has emerged, multiple operators have gone bankrupt, and the

existing ones, excluding only Airtel, are struggling to stay in the market. The operators not only

have to expand their network but also pay off their debts. According to an ET Telecom report,

Devusinh Chauhan, Minister of State for Communications, in Rajya Sabha, recently claimed that

the Indian government is taking necessary steps to ensure that the telecom companies aren’t too

stressed financially.

Chauhan was asked by an Indian lawmaker whether the situation is heading towards a probable

duopoly and what is the government doing to ensure that it is avoided. According to Mr.

Chauhan’s claim the government has imposed a 35% price restriction on the total spectrum that

an operator can have in a specific telecom circle, preventing the market from becoming a

monopoly. Further, it can be noted that the operators were given the option to defer the spectrum

auction payment installments for two financial years, including 2020-21 and 2021-22. To further

help the telcos, the government has increased the number of installments for repayments.

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The minister also mentioned how the Supreme Court had asked the telcos to pay their AGR dues

over 10 installments in 10 years. Regardless of these comments, a point to be noted is that there

still isn’t much help provided to Vodafone Idea and BSNL-MTNL by the government, which can

be the only way to deal with an Impending Duopoly in this Industry.

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