TELECOM DATA

SERVICES
An economic analysis of the market structure
ABSTRACT
A detailed study of telecommunication data services
industry in India to understand the type of market
model which exists. The report tries to analyse the
characteristics of the market like number of firms, type
of product, control over price, entry/exit conditions,
non-price competition, etc. and thus understand where
does the telecommunication data services market lie in
the market structure continuum
Rashmi Bangar F004
Mitali Bansal F005
Anubhuti Bansal F006
Rajat Bansal F007
Ronak Garg F018
Ankit Jain F023



Microeconomics


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Contents
1. Introduction .................................................................................................................................... 2
1.1 EDS (Enterprise Data Services) ................................................................................................ 2
1.2 VAS (Value Added Services) .................................................................................................... 2
1.2.1 Data services ................................................................................................................... 2
1.2.2 Traditional VAS ................................................................................................................ 3
1.3 Internet Dial-up and Broadband .......................................................................................... 3
1.3.1 Wireline broadband ............................................................................................................... 3
1.3.2 Wireless broadband ............................................................................................................... 3
2. Telecom Data Services Market ....................................................................................................... 4
2.1 Government Regulations ........................................................................................................ 4
2.2 Spectrum Technologies, Unified License, Sharing .................................................................. 5
2.3 Profit ....................................................................................................................................... 6
2.4 Not enough FDI inflows ........................................................................................................... 6
2.5 Number of Sellers ................................................................................................................... 6
2.6 Incumbents Wrath ................................................................................................................. 6
2.7 Homogeneous/Heterogeneous products ............................................................................... 7
2.8 Entry and exit barriers............................................................................................................. 7
2.9 Customer Switching Costs ....................................................................................................... 7
2.10 Non price competition ............................................................................................................ 8
3 Analysis ........................................................................................................................................... 9
4 Conclusion ..................................................................................................................................... 10
5 References .................................................................................................................................... 10
6 Annexure ....................................................................................................................................... 10
6.1 Enterprise Data Services ....................................................................................................... 11
6.2 VPN ........................................................................................................................................ 11
6.3 VSAT ...................................................................................................................................... 12
6.4 Wireless Service Providers (GSM, CDMA & FWP) ................................................................. 12
6.5 Wireline Subscriptions .......................................................................................................... 13
6.6 Broadband (wired+wireless) Subscriptions .......................................................................... 13



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1. Introduction
A phone has been transformed from a luxury good to a necessity connecting millions of people.
The idea of phones has changed from fixed line/wireline phones to mobile/wireless phones
connecting people everywhere and anywhere. The concept of connectivity has also changed. The
term telecommunications now includes many other services namely Internet services, radio paging
services, Very Small Aperture Terminals (VSATs), Public Mobile Radio Trunk Service (PMRTS) and
global mobile personal communication by satellite (GMPCS). The telecom data services industry can
be broadly divided in to three main categories viz.:-
1.1 EDS (Enterprise Data Services)
Enterprise Data Services (EDS) offer network connectivity across various locations and users in an
organisation. The data service used by organisations may differ depending on the span of area of
usage. Over the years, the requirements for data connectivity are getting complex with organisations
demanding quality service in a cost-effective manner. Enterprise data services are broadly classified
as below:-

(Source: CRISIL)
1.2 VAS (Value Added Services)
Non-voice or Value added services (VAS) by telecom operators can be broadly classified as:-

1.2.1 Data services
These constitute 2G/3G/4G services. The increased smartphone penetration, improved coverage of
3G/4G services and competitive data charges will see a shift will spur data usage among users. The
fall in tariffs is evident over the past few years when 3G tariffs have fallen substantially since launch.
However, headline tariffs for 3G still remain higher than 2G. As a result of the rise in volumes, the
average realisation per MB is likely to decline at almost a 10 per cent CAGR, during the next 5 years.

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(Source : CRISIL)

1.2.2 Traditional VAS
Traditional VAS services include the Caller Ring Back Tone (CRBT), wallpaper downloads, music
downloads, video downloads, astrology, health etc. which are not subscribed through data (internet)
but rather provided by the telecom operator through modes such as interactive voice response
(IVR)/ SMS/ WAP modes. In the traditional VAS, CRBT is one of the major contributors to the overall
revenues. Revenues from traditional VAS had been growing steadily, but in the last few years with
the growing popularity of internet based-services and the effect of 2013 TRAI regulation, this
segment's revenues have been impacted. While subscribers are steadily adopting data services, a
large number of subscribers still own feature phones, which do not support high-speed data. The
proportion of feature phones was around 90 per cent as of 2013-14, which over the next five years
will gradually decline to around 40 per cent in 2018-19.
1.3 Internet Dial-up and Broadband
The different technologies currently available worldwide to provide broadband service are:-
1.3.1 Wireline broadband
Wireline broadband solutions may be grouped into DSL-based cable and fibre Ethernet solutions.
Fibre-based models such as fibre-to-the-home (FTTH) and fibre-to-the-curb (FTTC) have the
advantage of being future proof, given the immense bandwidth capacity of fibre. However, they
necessitate significant investments upfront.
1.3.2 Wireless broadband
Wireless broadband technologies include point-to-multipoint technologies such as local multipoint
distribution system (LMDS), multipoint microwave distribution system (MMDS), wireless fidelity (Wi-
Fi), worldwide interoperability for microwave access (Wi-Max), ultra wide band (UWB) and mobile
broadband technologies. Other technologies used for providing broadband services include satellite
technologies and broadband over power line.

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2. Telecom Data Services Market
The telecom data services industry is highly regulated. The market has seen evolution from being a
monopoly market structure to a regulated monopoly and is currently a mix between regulated
monopoly and perfect competition i.e. a Monopolistic competition exists. With technological
advancement, the regulatory body TRAI (Telecom Regulatory Authority of India) continuously makes
new policies and reviews existing ones to promote competition. The following exhibit gives a
timeline of the evolution of the telecom data services market.
(Source: DnB)
Following are the factors which helped us in understanding the market structure:-
2.1 Government Regulations
The process of liberalization in the country began in the right earnest with the announcement of the
New Economic Policy in July 1991. Telecom equipment manufacturing was de-licensed in 1991 and
value added services were declared open to the private sector in 1992, following which radio paging,
cellular mobile and other value added services were opened gradually to the private sector. This has
resulted in large number of manufacturing units been set up in the country. As a result most of the
equipment used in telecom area is being manufactured within the country. A major breakthrough
was the clear enunciation of the government's intention of liberalizing the telecom sector in the
National Telecom Policy resolution of 13th May 1994. The entry of private service providers brought
with it the inevitable need for independent regulation. The Telecom Regulatory Authority of India
(TRAI) was, thus, established with effect from 20th February 1997 by an Act of Parliament, called the
Telecom Regulatory Authority of India Act, 1997, to regulate telecom services, including
fixation/revision of tariffs for telecom services which were earlier vested in the Central Government.

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The TRAI Act was amended by an ordinance, effective from 24 January 2000, establishing a
Telecommunications Dispute Settlement and Appellate Tribunal (TDSAT) to take over the
adjudicatory and disputes functions from TRAI. TDSAT was set up to adjudicate any dispute between
a licensor and a licensee, between two or more service providers, between a service provider and a
group of consumers, and to hear and dispose of appeals against any direction, decision or order of
TRAI. Following figure gives a few milestones in the Indian enterprise data connectivity market till
date:-

(Source: PWC)
2.2 Spectrum Technologies, Unified License, Sharing
Spectrum is the radio frequency on which all communication signals travel. In India spectrum
allocated for telecom services is divided into various bandwidths, which cater to different
technologies or generations, as shown below. In 2012, the government introduced a unified licence
to allow the use of spectrum in any band for providing services in any technology. Following figure
shows the various spectrum technologies:-
(Source: CRISIL)


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TRAI in July 2014 released the recommendation for the spectrum sharing which if accepted would
enable telcos to share spectrum among themselves. Given the significant number of telcos across
circles, the spectrum holding per telco is fragmented. This results in less efficient utilization of the
spectrum. The recommended guidelines, if implemented, will provide opportunities to telcos to pool
their spectrum holdings and thereby improve spectral efficiency and also help a telco add to its
capacity wherever it faces network congestion. The denial of renewal request of licenses by
Supreme Court means that new entries can be made into the market though the entry cost is very
high.
2.3 Profit
The Indian telecom sector has been highly debt laden. The price wars in 2009 and spectrum auction
in February 2014 has resulted in cumulative debt of the industry at INR 250,000 crore while the
annual revenue of the industry is at INR 180,000 crore. The new 4G technology would need more
spectrum and capital expenditure to deploy and maintain. Hence, most of the profits go into debt
serving. This makes the industry not so attractive to new entrants.
2.4 Not enough FDI inflows
Despite 100 percent FDI allowance in telecom, the FDI inflow in telecom in comparison with the total
FDI inflow in the country is quite less. The uncertainty of policy and other factors like unfavourable
M&A policy, 2G scam, and highly competitive market are discouraging the investors. The new
government has to take actions for better inflow of FDI and thus deployment of better next
generation technologies and quality of service in telecom services.
2.5 Number of Sellers
Although the telecom industry started off as a monopoly and was an oligopoly with few strong and
influential firms until few years back, strong regulatory reforms by the government after
recommendations from TRAI, the Supreme Courts decision to deny renewal of licenses, fresh
auctions of spectrum with low base price has improved competition and increased the number of
players to more than ten. Hence, the market is moving towards pure competition in the market
structure continuum and has features of both regulated monopoly and perfect competition.
2.6 Incumbents Wrath
The new entrants into the sector used to depend on the incumbents. The incumbents used to grow
because of an established network presence, a brand that consumers are aware of and sheer
economies of scale. By leveraging these points of strength, these players were able to fight late
entrants and challengers more effectively. That is what was happening between the incumbents
(Airtel, Vodafone, Idea, Reliance Communication, and Aircel) and the challengers (Datacom, Unitech,
Swan Telecom, Shyam, and Loop). The piece under contention was the mobile termination charge
which one operator paid to the other when the customer of the further used the roaming charges of
the later. This was charged to the consumer as the cost of roaming. With an all India footprint (or
80% coverage), the incumbents effectively didnt have to pay termination charges. The full coverage
ensured that calls are terminated within their network. The incumbents had either been pocketing
the termination charges or passing them to consumers no roaming charge kind of schemes.
However, NTP 2012 recommendation to have free national roaming has been accepted by the union
government which would make the industry attractive for the new entrants and investors.


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2.7 Homogeneous/Heterogeneous products
In telecom data services, although the products are homogeneous, the telcos create brand names
which cause consumers to perceive differences that do not really exist. The differentiation is also
brought about through after sales services. All the companies are dealing in the same product, i.e.
providing network for wireless telecommunication. The introduction of a new technology by any
player is disruptive and competitors try to replicate the same. In the long run, products and
technology offerings are the same and this leads to high price sensitivity of buyers and poses a
constant price war threat to the industry. Following gives the broadband internet rates for 128 KB
and up in Mumbai as on September, 2014.
(Source: http://www.internet-compared.com/)

2.8 Entry and exit barriers
Initially, the barriers to enter the telecom industry were very high and large sunk costs were involved
in the construction of essential facilities and infrastructure such as local networks. However, the
government took steps to promote competition. The price of NLD and ILD licenses were reduced
from INR 100 crore to INR 2.5 crore and this saw the entry of several new players in the market. The
base price for auctioning various spectrum technologies was also reduced. For DLC, all service
providers were obligated to share their facilities with other service providers. FDI was relaxed to
100% and the industry saw the entry of foreign players like BT and AT&T into the Indian market.
BSNL started allowing leasing its towers which helped both the older and newer players to penetrate
into new markets. These factors make the telecom industry moderately attractive for the new
players and investors.
2.9 Customer Switching Costs
The cost of obtaining a new connection is negligible nowadays in fact free in a number of cases. The
CUG connections were offered free of cost to new students of NMIMS this year. With the
introduction of mobile number portability, switching has become very easy. TRAI set the ceiling price
of switching to INR 200 and some operators do it for free. For broadband, ISPs give monthly plans
which allow the customer to switch to another provider with ease. These factors give new entrant
and investors a reason to entry this industry.



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2.10 Non price competition
The competition in telecom industry covers various aspects that a consumer looks at rather than just
price. Non-price competition in telecom includes competition over:-
Better coverage of network Aggressive advertising techniques Branding
Celebrity endorsements Better customer service
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. The core behind non price competition is the
difficulty faced by competitors to counter techniques like aggressive advertising, personal selling, or
improvement in the product or service. The only 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 amongst the competitors.
E.g. To attract masses market leader Airtel always endorses superstars of Bollywood with its brand.
Superstars like Shahrukh Khan and Amitabh Bachchan are associated with the brand for a long time.
On the other hand, Vodafone created animated characters called Zoozoos for its strong advertising
campaign which created a buzz in the market. To lure consumers and target a larger market share,
both the companies have indulged in non-price competition of advertising.


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3 Analysis
Short run Equilibrium (Firm Equilibrium)
In the short run, a monopolistic competitor makes an economic profit over and above the normal
profit, known as supernormal profit. The figure below demonstrates these aspects of monopolistic
competition:-

From the above graph we can see that the point A where MC intersects MR gives us the equilibrium
quantity q. Point C, where the equilibrium quantity q intersects AR (which is also the demand curve
for the consumer) gives us p, the price which the consumer pays. The difference between p and p
gives the supernormal profit for the firm.
E.g. Data services propelled Airtel to 61% profit growth in Q1(June 2014), as per business standard.

Price making power
Telecom is a monopolistic competition like the telecom data services industry, the sellers are the price
makers. They differentiate their products through advertisements and brand ambassadors and charge
a premium and increase their profits. This ability is known as the price making power. It has been
illustrated in the graph below. However, there is a ceiling price given by TRAI which cant be exceeded.

According to the Lerner Index, Price making power = (P-MC)/P which in the graph is effectively shown
by the distance AC
E.g. Technological innovation makes a firm in telecom have the advantage to be disruptive and set the
price of the product. Reliance was the disruptor in voice by announcing INR 1 calling rates and hopes
to do the same in data after buying spectrum in all 22 circles for 4G. In India, prices are set low as a
natural consequence of progressively adding customers from lower income segments, division of
household telecommunication expenditures between separate cell connections by family members
and fall in prices due to fierce competition. After the recent spectrum auctions and consequent launch
of services by new entrants, currently 10 to 11 operators in a circle jostle with each other for the same



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pie.
Ideal Long Run Equilibrium (Industry Equilibrium)
In ideal condition the market which is dominated by a single player is not a stable condition as the
supplier will keep on making supernormal profit. In order to maintain equilibrium, new players
enter the market and there is competition.

This competition leads to shift in the AC curve upwards and it continues to go up till the firms
start making normal profit from supernormal profit. The second diagram shows the firm making
a normal profit. In this condition the AC curve is tangent to the AR curve. This is the stage where
the market is in equilibrium and also is called the ideal desirable situation.
As TRAIs NTP 2012 are implemented by the current government, competition will be promoted,
number of new players in the market would increase and hence shift from supernormal to
normal profit for these data service providers.
4 Conclusion
India is one of the most competitive telecommunication markets in the world. India is at a stage
when market forces and a tariff forbearance policy can take over from price controls. The
uncertainty and ever changing policies are barriers to valuable transitions in the telecom
landscape. The fragmented market is eagerly waiting for the liberal M&A policy which would
lead to market consolidation as well as more FDIs. The opportunities and scope of the Indian
telecom are yet to be fully tapped. The digital agenda of the government to digitally empower
every household, village, panchayat, and government office by creating broadband highways
will give huge opportunities to the telecom industry. With newer technologies like M2M, cloud,
NFC, growth in data users, rise in rural teledensity, the operators could improve their profits.
5 References
https://www.dnb.co.in
http://www.pwc.in
http://www.communicationstoday.co.in
http://pib.nic.in/
http://cci.gov.in/
http://www.dot.gov.in/
CRISIL database
6 Annexure


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The following charts show the market share of various players in the different telecom data services
segments as on June 30, 2014. The source for the data is TRAI:-
6.1 Enterprise Data Services


6.2 VPN

VSNL
23%
Bharti Airtel
17%
Reliance
18%
BSNL
17%
MTNL
2%
Sify
5%
Tulip
6%
HCL
5%
Hughes
4%
Others
3%
Enterprise Data Services Market
Tulip Telecom
28.0%
Sify
21.7%
Reliance
21.0%
Bharti Airtel
12.0%
HCL
5.9%
VSNL
5.2%
BSNL
2.2%
Others
4.1%
VPN Market

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6.3 VSAT


6.4 Wireless Service Providers (GSM, CDMA & FWP)


Bharti Airtel
21%
HCL
31%
Hughes
31%
Others
17%
VSAT Market
Vodafone
18.6%
Idea
15.2%
Reliance
11.9%
BSNL
9.8%
Aircel
8.0%
Tata
6.9%
Telewings
4.3%
Sistema
1.0%
Videocon
0.6%
MTNL
0.4%
Loop
0.3%
Quadrant
0.2%
Bharti Airtel
22.9%
Wireless Service Providers

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6.5 Wireline Subscriptions


6.6 Broadband (wired+wireless) Subscriptions



BSNL
64.3%
MTNL
12.6%
Bharti Airtel
12.0%
Tata
5.6%
Reliance
4.3%
Quadrant
0.8%
Vodafone
0.2%
Sistema
0.2%
Wireline Service Providers
BSNL
26.9%
Bharti Airtel
21.5%
Vodafone
15.0%
Idea
12.8%
Reliance
8.9%
Others
15.0%
Broadband Market