Microeconomic Study Of Indian Telecom Sector 5j2f65
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MICROECONOMIC STUDY OF INDIAN TELECOM INDUSTRY
Topics…..
Market Structure
Kinked Demand Curve
Case for Oligopoly
Demand Analysis
Supply Analysis
Porters Five Forces Model
Innovative Strategies Adopted to capture market
Competition strategies explained through Game Theory
Problems Faced by Telecom Industry
Expected changes in the Telecom sector
Market Structure
India has 2nd largest number of telecom subscribers- 1002.5 million
India has 3rd largest telecom network in the world
Major industry – telephony, internet, broadcasting
India has world’s 3rd largest internet s – 243 million
15 operators provide telecom services :
State Owned Company
Private Indian Owned Company
Foreign Invested Company
Total revenue from telecom sector – USD 64.1 billion
“Kinked” Demand Curve Rival firms assumed to follow a price cut (making demand relatively in-elastic
Price
AR2
AR1 Main aim of the firm is to maintain market share Quantity
MR1 MR2
But, Firms are assumed not to follow a price increase (making demand relatively elastic)
Case for Oligopoly
Collusion (Cellular Operators Association of India)
Price Leader (None)
Abnormal Profit (Regulator TRAI)
Barriers to entry (High)
Termination Fee (Set by regulator)
Customer acquisition cost
Investor patience
Interdependence (High)
Demand Analysis
Main parameters governing demand are
Income capacity of Population
Youth Population
MVAS & Data usage
Demand Trend
Supply Analysis
Market Players and Scope
High degree of Imitation, lowering switching costs
Spectrum Availability and service Licensing
Economies of Scale
Technology
Government Policies: FDI in India High Fixed Cost
FDI in India
Porter’s Five-Forces Model
Strategies adopted
Marketing strategies
Vodafone ZooZoo
Idea’s IIN
Airtel- A.R Rehman, Shahrukh Khan
Service Differentiation
Airtel Money
Pricing strategy
More than Full talktime- Docomo
Tariff cards
GAME THEORY
The Premise •
Telecom sector is probably the only industry where, despite increasing inflation, tariffs fell unabated
•
Expanding Market -> Increasing Competitiveness -> Unrealistic pricing levels to grab customers
•
ARPU (Average monthly revenue per subscriber has been falling drastically for the biggest players) which could mean either usage has decreased or call rates fell.
•
The former is unlikely in a growing economy and the phenomenon actually resulted from aggressive price cutting measures
•
Subscriber base of top 3 companies had a CAGR increase of 37% from 2009-13.
The Picture Quarter Ended Decembe r
Vodafone' Airtel's Vodafone' s Idea's subscribe s ARPU subscribe ARPU (in rs (in ₹) rs ₹)
Airtel's ARPU (in ₹)
Idea's subscribe rs
2009
260.59
6.1173730 227.92 5
4.3232237 215.41 25
2.6896321 13
2010
200.58
7.9829736 170.55 38
5.9735866 172.09 5
3.6681360 38
2011
153.98
10.496725 130.05 24
8.4230154 127.82 75
5.3662517 25
2012
136.4
12.823838 117.42 18
10.744202 114.86 81
7.3233447 75
2013
136.67
13.995926 121.92 96
11.488995 107.2 53
8.7235904 63
2014
143.54
14.411243 138.5 33
11.646639 122.49 34
9.4573612 13
The Predicament of the Prisoners Situation
V reduces rates
V doesn’t reduce
A Reduces Rates
A and V retain market share
V loses market share
A doesn’t Reduce
A loses market share
A and V retain market share
Situation
B betrays A
B stays silent
A Betrays B
A and B imprisoned for 2 years
A goes free and B imprisoned for 3 years
A stays silent
B goes free and A imprisoned for 3 years
A and B imprisoned for 1 year
No prisoner can trust the other one and the optimal solution for each one would be to betray the other
No company can trust the others. In a bid to save their respective market shares, companies kept cutting their own rates.
Each prisoner’s ideal choice is to stay silent and spend a year in jail instead of 3 years, that would result, if anyone of them betrays the other.
Would the telecom companies also have achieved better results if they had not indulged in price wars?
NO
Situation
V reduces rates
V doesn’t reduce
A Reduces Rates
( 2068, 1400)
(2068, 984)
A doesn’t Reduce
(1590, 1400)
(1590, 984)
• The Nash equilibrium (the action point from which no company has an incentive to deviate given the action of the other company) as well as the ideal equilibrium is for both companies to reduce rates as per the monthly revenue figures. • The telecom industry didn’t necessarily suffer due to price cuts, at least in of revenues. However, this strategy would have remained profitable as long as the price elasticity of the industry’s demand remains greater than 1. • In 2013, a rise in prices (indicated by ARPU) led to an increase in the three companies’ revenue. Thus, this year marked an end to the telecom industry’s price-cutting strategy.
Problems faced by the Industry
Market Price
Saturation
War
Declining
ARPU
In debt ¿
The net debt to EBITDA ratio is a debt ratio that simply shows how many years it would take for a company to pay back its debt if net debt and EBITDA are held constant.
Profitability Connection s
Connection s
Price
Revenues for relatively elastic demand
Deman d Quantity
Revenues for relatively in-elastic demand
Falling Prices and rising sales volume don’t always increase total revenue.
Quantity
Expected changes in the Telecom sector
Early harvest program
IT for Jobs
Electronics manufacturing
Information for all
E-Kranti
E-governance
Public Internet Access Program
Universal Access to phones
Broadband Highways
Nine pillars of Digital India
In the backdrop of Digital India…
Broadband and NOFN
Spectrum trading and sharing
Rural Telephony – Connecting the Real India
Infrastructure Sharing – A Profitable Proposition
Managed Service- Outsourcing in Telecom
3G and 4G
Unconventional data monetization options
Intense competition due to delayed M&A
Topics…..
Market Structure
Kinked Demand Curve
Case for Oligopoly
Demand Analysis
Supply Analysis
Porters Five Forces Model
Innovative Strategies Adopted to capture market
Competition strategies explained through Game Theory
Problems Faced by Telecom Industry
Expected changes in the Telecom sector
Market Structure
India has 2nd largest number of telecom subscribers- 1002.5 million
India has 3rd largest telecom network in the world
Major industry – telephony, internet, broadcasting
India has world’s 3rd largest internet s – 243 million
15 operators provide telecom services :
State Owned Company
Private Indian Owned Company
Foreign Invested Company
Total revenue from telecom sector – USD 64.1 billion
“Kinked” Demand Curve Rival firms assumed to follow a price cut (making demand relatively in-elastic
Price
AR2
AR1 Main aim of the firm is to maintain market share Quantity
MR1 MR2
But, Firms are assumed not to follow a price increase (making demand relatively elastic)
Case for Oligopoly
Collusion (Cellular Operators Association of India)
Price Leader (None)
Abnormal Profit (Regulator TRAI)
Barriers to entry (High)
Termination Fee (Set by regulator)
Customer acquisition cost
Investor patience
Interdependence (High)
Demand Analysis
Main parameters governing demand are
Income capacity of Population
Youth Population
MVAS & Data usage
Demand Trend
Supply Analysis
Market Players and Scope
High degree of Imitation, lowering switching costs
Spectrum Availability and service Licensing
Economies of Scale
Technology
Government Policies: FDI in India High Fixed Cost
FDI in India
Porter’s Five-Forces Model
Strategies adopted
Marketing strategies
Vodafone ZooZoo
Idea’s IIN
Airtel- A.R Rehman, Shahrukh Khan
Service Differentiation
Airtel Money
Pricing strategy
More than Full talktime- Docomo
Tariff cards
GAME THEORY
The Premise •
Telecom sector is probably the only industry where, despite increasing inflation, tariffs fell unabated
•
Expanding Market -> Increasing Competitiveness -> Unrealistic pricing levels to grab customers
•
ARPU (Average monthly revenue per subscriber has been falling drastically for the biggest players) which could mean either usage has decreased or call rates fell.
•
The former is unlikely in a growing economy and the phenomenon actually resulted from aggressive price cutting measures
•
Subscriber base of top 3 companies had a CAGR increase of 37% from 2009-13.
The Picture Quarter Ended Decembe r
Vodafone' Airtel's Vodafone' s Idea's subscribe s ARPU subscribe ARPU (in rs (in ₹) rs ₹)
Airtel's ARPU (in ₹)
Idea's subscribe rs
2009
260.59
6.1173730 227.92 5
4.3232237 215.41 25
2.6896321 13
2010
200.58
7.9829736 170.55 38
5.9735866 172.09 5
3.6681360 38
2011
153.98
10.496725 130.05 24
8.4230154 127.82 75
5.3662517 25
2012
136.4
12.823838 117.42 18
10.744202 114.86 81
7.3233447 75
2013
136.67
13.995926 121.92 96
11.488995 107.2 53
8.7235904 63
2014
143.54
14.411243 138.5 33
11.646639 122.49 34
9.4573612 13
The Predicament of the Prisoners Situation
V reduces rates
V doesn’t reduce
A Reduces Rates
A and V retain market share
V loses market share
A doesn’t Reduce
A loses market share
A and V retain market share
Situation
B betrays A
B stays silent
A Betrays B
A and B imprisoned for 2 years
A goes free and B imprisoned for 3 years
A stays silent
B goes free and A imprisoned for 3 years
A and B imprisoned for 1 year
No prisoner can trust the other one and the optimal solution for each one would be to betray the other
No company can trust the others. In a bid to save their respective market shares, companies kept cutting their own rates.
Each prisoner’s ideal choice is to stay silent and spend a year in jail instead of 3 years, that would result, if anyone of them betrays the other.
Would the telecom companies also have achieved better results if they had not indulged in price wars?
NO
Situation
V reduces rates
V doesn’t reduce
A Reduces Rates
( 2068, 1400)
(2068, 984)
A doesn’t Reduce
(1590, 1400)
(1590, 984)
• The Nash equilibrium (the action point from which no company has an incentive to deviate given the action of the other company) as well as the ideal equilibrium is for both companies to reduce rates as per the monthly revenue figures. • The telecom industry didn’t necessarily suffer due to price cuts, at least in of revenues. However, this strategy would have remained profitable as long as the price elasticity of the industry’s demand remains greater than 1. • In 2013, a rise in prices (indicated by ARPU) led to an increase in the three companies’ revenue. Thus, this year marked an end to the telecom industry’s price-cutting strategy.
Problems faced by the Industry
Market Price
Saturation
War
Declining
ARPU
In debt ¿
The net debt to EBITDA ratio is a debt ratio that simply shows how many years it would take for a company to pay back its debt if net debt and EBITDA are held constant.
Profitability Connection s
Connection s
Price
Revenues for relatively elastic demand
Deman d Quantity
Revenues for relatively in-elastic demand
Falling Prices and rising sales volume don’t always increase total revenue.
Quantity
Expected changes in the Telecom sector
Early harvest program
IT for Jobs
Electronics manufacturing
Information for all
E-Kranti
E-governance
Public Internet Access Program
Universal Access to phones
Broadband Highways
Nine pillars of Digital India
In the backdrop of Digital India…
Broadband and NOFN
Spectrum trading and sharing
Rural Telephony – Connecting the Real India
Infrastructure Sharing – A Profitable Proposition
Managed Service- Outsourcing in Telecom
3G and 4G
Unconventional data monetization options
Intense competition due to delayed M&A
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