Managerial Economics

Assignment- 1

Product Pricing Strategies in the Telecom Industry (wireless)

Submitted By: Kumar Krishna

 INDEX

Description Pg. No:

1. Introduction
2. Scope
3. Pricing Strategies & Concepts
4. Study & Findings
5. Conclusion

Kumar Krishna k.krshn@gmail.com

Introduction:
A mobile call between Chief Minister of West Bengal and Union Communication Minister on
31st July 1995 was telecom revolution in India. Since, then mobile penetration has increased
leaps and bound. The Digital India program by Government of India with a vision to transform
India into digital empowered society and knowledge economy. India is#2 market in the world in
internet users and this growing demand of mobile data, telecom operators are turning towards
data for increase their revenue. With growing demand of smartphones and availability of the
same at reasonable price is adding fuel to the demand of mobile data. Apart from this Internet of
Things which currently connects billions of devices is growing exponentially with an expected
global revenue of 117 billion USD by 2026

In this case study, we will focus on mobile usage, strategies used by operators, pricing and effect
of launch of Jio which has changed the dynamics of telecom industry in India.

Kumar Krishna k.krshn@gmail.com

Scope:
The scope of this project is to understand the following:
a. To understand the concepts of different pricing strategies
b. To see the market share of various mobile operators
c. To see pricing strategies used by “Jio” to get considerable market share in 7 months
d. To see how other operators reacted to the strategies used by Jio

Kumar Krishna k.krshn@gmail.com

Product Pricing Strategies:
Price is the value that is put to a product or service and is the result of a complex set of
calculations, research and understanding and risk taking ability. Pricing strategy considers
segments, ability to pay, market conditions, competitor actions, trade margins and input costs,
amongst others.

There are various types of product pricing strategies:

 Price discrimination – First degree, Second degree and Third degree:

• First Degree or Prefect Price Discrimination-

First degree implies the practice of charging each consumer the maximum amount he or
she will pay for each incremental unit.

• Second Degree Price Discrimination-

Second degree implies the practice of posting a discrete schedule of declining prices for
different quantities.

• Third Degree Price Discrimination-

Third degree implies the practice of charging different groups of consumer’s different
prices in different markets for the same product.

 Two-part pricing:
Two part pricing implies is composed of fixed fee and then charge a per unit fee for each
unit which is purchased.

 Bundling:
It is the practice of bundling two or more products together to sell it in single combined
unit.

 Penetration pricing:
This is the type of pricing strategy where the price is initially set to low to attract the
customer.

 Trail Pricing:
This is the type of pricing strategy where the price of a new product is lowered initially to
attract the customers for a limited period

Kumar Krishna k.krshn@gmail.com

  Predatory Pricing:
The pricing of goods or services at such a low level that other firms cannot compete and
are forced to leave the market.

Kumar Krishna k.krshn@gmail.com

Telecom Industry requires heavy capital investment so the chances of success for a new player
are very minimal. The common barriers are as follows:

 Economies of scale: In this industry economies of scale comes from the supplier.
Therefore, operators must increase subscriber base for the success.

 License Fees: Large capital is involving in getting a license to operate in this industry.

 Technology: Rapid change in technology involves capital investments to adapt new

technology.

 Distribution Channel: Distribution channel is also a determining factor. They are

not loyal to any company and tend to switch for any better opportunity.

 Competitive Pricing: To increase subscriber base, Operators provide attractive

bundled services to new customers.

Despite these challenges, Jio became fastest growing telecom operator and in a short span of 6
months with its pricing strategies and investment it has achieved a subscriber base of 72.2
million.

Mobile Subscribers in August 2016, September 2016 & March 2017

Name of the Telecom Company Aug-16 Sep-16 Mar-17
Bharti Airtel 257.5 259.9 265.9
Vodafone 200.2 200.7
395.2
Idea 176.9 178.8
Reliance 87.1 87.2 86.5
BSNL 92.4 93.8 96.8
Tata Teleservices 58.3 57.1 53.0
Aircel 89.7 90.1 90.9
Telewings - Uninor 53.2 52.9 54.5
Jio 0.0 16.0 72.2
Others (Sistema & MTNL) 13.6 13.3 9.5
Total 1028.9 1049.7 1124.5
(Figures above are in millions, march data is up to 25th march)

Kumar Krishna k.krshn@gmail.com

 Market share of operators in Aug 2016
2%
Bharti Airtel
5%
9% Vodafone
25%
Idea
6%
Reliance

9% BSNL
Tata Teleservices
8% 19% Aircel
Telewings - Uninor
17% Jio

Jio was officially launched on 5 September, 2016. Above chart shows market share of top
players before launch of Jio with a total of 1028.9 millionsubscribers. Here we can see
operators like Sistema, MTNL, Telewings – Uninor are present in this industry for more than a
decade still have a very small subscriber base.

Market share of operators in Sep 2016

2%

5%
Bharti Airtel
9%
25% Vodafone

6% Idea
Reliance

9% BSNL
Tata Teleservices
Aircel
8% 19%
Telewings - Uninor
Jio
17%

Kumar Krishna k.krshn@gmail.com

The above chart shows market share of top players on 30 September 2016. We can see in 25
days Jio has achieved 16.0 millionsubscribers with a market share of 2%

Market Share of operators in March 2017

1%

6% Bharti Airtel
5% Vodafone & Idea
24%
8% Reliance
BSNL
5%
Tata Teleservices
8% Aircel
Telewings - Uninor
8% Jio
35%
Others

The above chart shows market share of top players on 25 March 2017. Total subscribers has
increased from 1028.9 to 1124.5 withan increase of 95.6 million subscribers
subscriber and out of which
72.2 are of Jio with a market share of 6%

80

70

60

50

40 Jio

30 Existing

20

10

0
Aug-16 Sep-16 Oct--16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17
17

Mobile subscriber growth from September 2016 to March 2017

Kumar Krishna k.krshn@gmail.com

Study & Findings
Jio Beta was launched to Jio's partners and employees on 27 December 2015 on the eve of 83rd
birth anniversary of late Dhirubhai Ambani, founder of Reliance Industries. Apart from this Jio
has setup Free Wi-Fi hotspots at various public places throughout the country with penetration
level to small towns. With this high speed, free internet services made a buzz in the industry.

Bundling pricing strategy:

Jio runs only in 4G enabled device, On April 2016, Jio launch affordable 4G device (Price range
from Rs. 4000/- to 15000/-) with free voice, SMS and data services till 31stDecember 2016. For
customers, whose monthly average expense on mobile usage is Rs. 500/-or above were attracted
to this offer. Here, Jio has used Bundling pricing strategy where it has combined services and
device bundled for a one-time price.
OnSeptember 5,2016, Jio launched its free SIM campaign where any one can get the SIM for
free that can be used in any 4G device with free Calls, SMS & Data bundled with various
services like Movies, Chat, Music etc. Other operators were charging premium for 4G data.

Average 4G Data plans of all other operators

28 Days Validity 1GB 2GB 4GB 8GB
Price (Rs.) 300 500 700 900

Jio used Trial Pricing and Penetration Pricing strategy to enter highly competitive market
with zero Rs. plan.

This strategy became game changer in telecom history of India and new era of price war began.
All other operators made hue and cry before TRAI and CCI.

Telecom Operators always have Tacit Collusion. They understand the risk of price war so send
unofficial signal not to compete over price. Due to this aggressive pricing, Jio became dominant
player in setting up the price compelling other players to match.

Earlier, existing operators focused more on voice call than data as 70% of their revenue come
from voice call. Due to launch of Jio with focus only on data compelled other players to change
their revenue model with more focus on data.

Kumar Krishna k.krshn@gmail.com

Jio launched Jio-Fi device (A Wi-Fi dongle to which 32 clients can be connected at a time) at a
reasonable price of Rs. 1999/-. This enabled customer to use all Jio services free without having
a 4G mobile device. Same Bundling pricing strategy was used which combined all Jio services
and hardware device.

Benefits from these strategies:

1. Exponential growth in subscriber as customers were getting free services.
2. Jio Network was exhaustedly tested before official launch.

Two-Part Pricing Strategy:

On December 31,2016, Jio adapt Two-partpricing (applicable from 01-04-2017) which consists
of one time Jio Prime member fees of Rs. 99/- plus monthly usage plans where customers can
use all Jio services at very reasonable price for another 1 year.

Two-part pricing
1 Year Subscription Fees 99
28 GB Data validity of 28 Days 303

Apart from this it also extended the free usage till 31st March 2017. Due to this pricing, other
operators also reduced their data plans.

Plan comparison of major operators after March 31 2017

Kumar Krishna k.krshn@gmail.com

Third degree price discrimination:
All operators use Third degree price discrimination based on location in the form of Roaming
charges when a customer travel or relocate to non-home circle. Customers must pay more to use
same services in other geographical region within the country. On the other hand, Jio treated
entire country into one entity with no additional charges for usage within India.
All operators use Third degree price discrimination based on time. They provide free bees
during non-peak hours that is unlimited usage of data and calls during specified time.

First degree price discrimination:

All operators including Jio use First degree price discrimination based on per day usage. All
plans have per day usage limit called Fair Usage Policy. If this limit is utilized by a customer and
he still want to use the services for the same day, then he must pay extra.
All operators have packaged their services (calls, data, SMS) into a plan. On the other hand, Jio
has technological advantage which has enabled them to have only data plans.

Predatory Pricing:
Airtel, Vodafone & Idea formed a consortium and complained to TRAI alleging Jio for
Predatory pricing. TRAI rejected their complain giving clean chit to Jio

Other strategies that helped Jio to come up with such aggressive pricing:
1. In June 2010, Reliance Industries (RIL) bought a 96% stake in Infotel Broadband Services
Limited (IBSL) for 1 Billion USD. Although unlisted, IBSL was the only firm to win broadband
spectrum in all 22 circles in India in the 4G auction that took place earlier that year. Later
continuing as RIL's telecom subsidiary, Infotel Broadband Services Limited was renamed as
Reliance Jio Infocom Limited (RJIL) in January 2013.

On the other hand, all existing operators did not bid for 4G broadband spectrum rather
concentrated on 3G spectrum which cost them 16 Billion USD.

2. After split of Reliance Industries Limited into RADAG & RIL 2005 a no compete agreement
was signed between both companies. This agreement was mutually scrapped in 2010 just before
acquiring IBSL.

Kumar Krishna k.krshn@gmail.com

3. Jio has signed agreement with Reliance Communication to use its fiber optics cable which
enabled him to launch pan India service in limited period.

4. Jio has signed agreement with BSNL which allows Jio to use BSNL’s 2G spectrum in rural
areas and BSNL can use Jio’s 4G spectrum in near future.

5. 3G has limited bandwidth and have limited support of data and call simultaneously. All other
operators still use 3G technology for call and SMS. On the other hand, Jio works on 4G
technology which can handle data and call simultaneously. Therefore, Jio use voice call on
VolTe which uses data for making voice calls.Jio has set up its 4G technology with technical
collaboration with Samsung. Its 4G technology can easily migrate to upcoming 5G.

Kumar Krishna k.krshn@gmail.com

Conclusion:

Battlefield shifts from cheaper calls to cheaper data:

The days are gone when Operators raised the bar by offering one paisa per second call, now
the demand is over the internet data packs and attracting customers with faster connection
and cheapest rates specially in post Jio era.

VoLTE calls moving ahead:

Telecom service providers have earned a higher margin with traditional calls, almost 500 per
cent more than voice over. With JIO offering the window to calls over internet, the industry
is looking at a serious telecom shift.

Consolidation of players:
Airtel acquired Telenor to synergies its operations and expand its presence in at least 7
circles. It has added 52 million subscribers from Telenor and will be aggressively positioning
itself in 1800 MHZ band in Andhra Pradesh, Maharashtra, Bihar, Gujarat among other
circles.

Vodafone-Idea merger, Vodafone will hold 45 percent in the combined entity, Idea
promoters 26 percent, and the rest by the public. Now, the biggest telecom company with
consolidated revenues of Rs 80,000 cr.

BSNL-MTNL merger, BSNL has pan india presence and MTNL operating only in cities.
Both being a PSU companies speculations are they will merge soon.

Employees are looking at uncertainty:

Per the recent GSMA report, telecom industry employees 2.2 million people directly and
consolidation in the sector could lead to up to 30 percent job losses in the next 12-18 months.
Employees are more focused towards uncertainty. However, the industry is also growing at
the rate of 5.2 percent CARG and is expected to touch 37 Billion USD by end of 2017-18.

Consumer is the king:

As per the graph above, Jio pricing strategies with customers signing up till March given a
choice of unlimited data and free voice service for a year at Rs 303 per month by becoming a
prime member at the upfront one-time cost of Rs 99. These pricing strategies will lead to
increase in the subscribers.

Kumar Krishna k.krshn@gmail.com

Bibliography:
 https://www.jio.com/

 http://www.ril.com/OurBusinesses/Jio.aspx

 http://www.trai.gov.in/

 http://trak.in/Tags/Business/category/telecom/

 https://en.wikipedia.org/wiki/Mobile_network_operators_of_India

 http://www.moneycontrol.com/

 Truett & Truett, "Managerial Economics", John Wiley & Sons

Kumar Krishna k.krshn@gmail.com

Kumar Krishna k.krshn@gmail.com