Telecom sector is one of the major industries contributing to Indias economic growth.

This sector has undergone major changes with respect to fixed phones versus mobile phones and public versus private partnership. Over the past years subscriber base has increased rapidly in the urban areas and has started expanding in the rural areas as well. In 2011-12, 82 million subscribers were added in the rural area. Rural subscribers constitute 37% of the total wireless subscriber in 2011.

Trend in rural and urban wireless subscribers:

Though new entrants have tried to enter into the market but have not been able to gain sufficient market share. Despite very low prices offered by them they have not been able to gain enough revenue. New entrants account for only 2% of the industry revenues. As the 3G spectrum is held majorly by the existing large players, power is going to remain with them in the next growth phase.3G spectrum will help the existing players to manage their APRU well and enhance service quality. Wireless segment contributes to 70% of the revenue. As per the CRISIL research, investment of about Rs 2 trillion is to be made into the telecom sector over 2011-16.Of this 90% investment has been made in mobile services.

Total mobile subscriber base

Table 1. Rivalry among competitors

In December 2011, private operators held 88.54% of the wireless market share [TRAI], whereas BSNL and MTNL held only 11.46% market share [TRAI].

Fig: Service provider wise market share as on 31.12.2011 Source: TRAI India has the presence of as many as 15 operators in different telecom circles (as compared to global average of 4), with the top 5 operators making three-fourth of the market share. Further, addition of low usage subscribers and competitive pressures have led to fall in Average Revenue per unit (ARPU). Shrinking ARPUs and high number of operators are expected to drive consolidation in the Indian telecom sector [S4].

Fixed Cost: The high requirement of infrastructure has led to a competitive industry of telecom infrastructure and telecom equipment manufacturing. Telecom service providers incur huge initial fixed cost to enter service areas. These costs include cost of land acquisition, telecom equipment costs, cellular towers and other costs such as talented human resource to develop and manage the technology. Thus, owing to huge initial investments, the attractiveness of the industry is very low. Differentiation: The differentiation is low in the industry. Presence of several operators in same areas drives prices down and lowering ARPUs. Wireless charges are almost equal with different offerings coming up at regular intervals to attract customers. The competitors now must depend on Value Added Services (VAS) to establish themselves as better service providers. The mobile VAS in India was estimated to be worth INR 145.0 billion in 2010, growing at a CAGR of more than 50% during 2006 to

2010 [6]. Key mobile VAS include person-to-person SMS, monotones, polytones, truetones as well as caller ring-back tones (CRBT), person-to-application (P2A) SMS, application-to-person (A2P) SMS, games and services such as mcommerce and mradio. Low differentiation in the services results into decreasing the attractiveness of the wireless telecom industry. Switching cost: Due to huge initial investments required to enter the industry, switching costs are high for the industry players. This makes the industry attractive. Openness of terms of sales: The Indian telecom market is set in a price war, with several offerings and plans offered by operators. Such plans, that include festival offers, low tariff plans, introduction of per second pulse, unlimited dialer tones, Super second and super saral packs and several others are provided to customers. Overall, with respect to the terms of sales being open, telecom industry can be rated to be fairly attractive. Excess Capacity: The telecom industry is currently undergoing rapid growth with massive investments in infrastructure development, with its primary target shifting to B and C circles. This has caused supply to significantly increase current demand, resulting in huge excess capacity and much lower prices for service offerings. The excess capacity and additional competition has resulted in declining revenues per unit. Thus, industry attractiveness is low due to huge excess capacity present. Strategic stakes: Strategic stakes are high in the industry with the major operators Bharti Airtel, Vodafone, Idea and BSNL operating their business in telecom industry only. Due to huge investment for infrastructure, spectrum and land acquisitions, it is strategically important for the firms to maintain their market share. With such high strategic stakes, industry attractiveness is lowered. Table 2: Barriers to exit Attractiveness Low 1 Asset specialization Cost of exit Government restrictions 1 1 5 2 3 4 High 5

Asset Specialization High Infrastructure cost is required in this sector. The assets like microwave radio equipment, antennas, switches and Trans receivers are highly specialized asset and cant be used for other purpose. This leads to low attractiveness. Cost of Exit

Telecom is a capital expenditure intensive business and needs investment on year to year basis to sustain growth. Very high cost is incurred for setting up. Networks and billing systems cannot be used for

other purpose, and their fast obsolescence makes liquidation pretty difficult.
As a result the cost of exit is high and hence attractiveness is low. Government restrictions TRAI recently (Jan 2012) has proposed to come up with an exit policy in which the part of license fees would be refunded and the exit will become easier. As the exit becomes easier Industry will become more attractive. But right now the exit barriers are high as many regulations regarding license, spectrum allocation and management are in place. Telecom authorities include Telecom Commission, DoT, TRAI, WPC and TEC. Table 3: Barriers to entry Attractiveness Low 1 Economies of scale Product differentiation Brand identity Switching cost Access to channels of distribution Capital requirement Access to technology Access to raw material Government Protection 3 1 3 5 5 1 5 2 3 4 4 High 5

Economies of Scale To provide service to a single person in an area is costly since huge sum of money is required for infrastructure setup. Once the set up is done and company is providing service to large number of people the cost per person comes down. So if all the lines are fully utilized the company saves cost. Also the operators are sharing their passive infrastructure like towers, battery backups, fuel and air conditioning which lowers the capital expense and operating expense. Hence economy of scale is present.

Product Differentiation Telephone and data services do not vary much irrespective of who is selling them. Generally the basic services are treated as commodity. Brand Identity Brand image is an important facet in telecom sector. Some of the brands like Airtel, Vodafone and Idea have strong brand identity and customers are loyal to these brands. For a new entrant, to build the brand identity is not easier. Switching Cost Since most of the services provided by various operators are quite similar the switching cost is low. Introduction of mobile number portability has given an option to the customers to switch to different service without changing the mobile number. Access to Distribution Channel Basically there are three kinds of distribution channel which includes DSA-Direct Selling Associates, CSA-Corporate Selling Associates and FSA- Franchisee Selling Associates. Various activities performed by the distribution channel include Order, handling, storage, display, promotion, selling and information & feedback. Although its easier to get access to FSA but access to other distribution channel involves time and money. Capital Requirement Huge capital is required for the infrastructure set up and then replacement of various tools. The assets like microwave radio equipment, antennas, switches, transreceivers and network and billing system requires lot of money. Its a capital intensive industry. Access to Technology Access to technology through various licenses is very difficult. Lots of government rules and regulations are in place. Basic, CMTS, UAS, Infrastructure Provider, ISP , National long Distance and international long distance are the various licenses which are hard to get. Government protection Government has set up Telecom Engineering Center (TEC) to enable integrated telecommunication network and granting of interface approvals for various service providers. DOT promotes private investment.FDI cap varies from 74%-100% for various sector in telecom which helps the players to raise capital. Government has made provision for sharing of passive infrastructure such as building, tower etc. To an extent government is trying to protect and help the players who are already in the market. Table 4: Threat from substitutes Attractiveness

Low 1 Availability of close substitutes Switching cost Substitutes price-value Profitability of the producers of substitutes 2 3 4 4

High 5

5 5 5

Availability of close substitutes The substitutes available are VOIP (Skype, messanger etc), Online Chat, Email and Satellite phone. None of these are a major threat. The number of internet users till 2010 was only 100,000,000. Year
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010

Users
1,400,000 2,800,000 5,500,000 7,000,000 16,500,000 22,500,000 39,200,000 50,600,000 40,000,000 42,000,000 81,000,000 100,000,000

Switching Cost Price performance trade off is very high. Internet connection in India requires computer and the Internet connection which are costly. A monthly broadband subscription costs starts from 199 rupees. http://www.internetworldstats.com/asia/in.htm Substitute price value Issue of mobility is there with the substitutes. Also the penetration is not high since much of the population does not have the computer which is the basic requirement for VOIP services. Profitability of the producers of substitutes

Profit of these service providers is not much and hence they cannot give tough competition to wireless providers. Table 5: Bargaining power of buyers Attractiveness Low 1 Number of buyers Availability of substitutes Switching cost Buyers threat of backward integration Industrys threat of forward integration Contribution to quality Contribution to cost Buyers profitability Y Y Y Y Y Y Y 2 3 4 High 5 Y

Number of Buyers: The wireless telecom subscriber base is expected to reach 650 mn in 2012. This number is more than 50% of the total population of India. Due to this large number of buyers, the attractive of the wireless telecom industry is very high. Availability of substitutes: While the wireless phones are mostly used for voice calling, many other functions like internet connectivity, messaging and video calling are used by consumers. Some substitutes like broadband and fixed lines can also perform these tasks. Due to this, the industry activeness due to this force is moderate. Switching Cost: The Sim card and mobile phones are (mostly) sold separately in India with mobile phones costing the bulk of the purchase. Sometimes, the sim card is even given free of cost. Moreover, customers are free to change the sim card at will without any transaction fees. A recent scheme of Mobile Number Portability empowers the customers to change the service provider without changing their number at a cost of Rs 19. Due to this small switching cost, the industry attractiveness is very low.

Buyers threat of backward integration: As already discussed, the buyers are mostly individuals with very little power of scale. Due to this, there is no threat of backward integration from them. Hence, the industry seems very attractive. Industrys threat of forward integration: Airtel's forward distribution channel is divided into three segments: DSA-Direct Selling Associates, CSA-Corporate Selling Associates and FSA- Franchisee Selling Associates. Currently, the wireless telecom operators don't focus on developing DSAs and CSAs extensively. Moreover, given the vastness of the distribution channel, the FSA channel is most likely to remain the key. So the threat of forward integration is moderately low. Contribution to quality: There is a high use of sophisticated technology in the fabrication of SIMs, operation of network equipments etc. There are also factors like Quality of Service (QOS) and premium features like caller tunes, 3G etc which prove operators ability differentiate given the similar equipments and spectrum that is available to all players. Due to this, the telecom operators contribution to quality is high. Contribution to cost: The Average Revenue Per User (ARPU) of Indian wireless industry is Rs 155 per month. As compared to the per capita income of Rs 54000 for an average Indian, which is growing at about 12.8% annually, the ARPU per year is 3.44% of the total income. Moreover, schemes like no monthly rentals and free active connection for lifetime enable the customer much less than that and according to their needs. Due to this low contribution to cost, the industry attractiveness is high. Buyers profitability: The wireless phones are not only a medium of informal communication between two individuals, they have evolved as an effective medium of operating business. For example, the radio cab services or field agents of a marketing research company rely greatly on wireless phones for their work. Due to this the buyers profitability and the industry attractiveness is moderate.

Table 6:Bargaining power of Suppliers The major physical infrastructure providers in the telecom industry are: Physical Infrastructure Telecom Equipment Passive Infrastructure (Towers) Information Technology services Call centre Services Supplier Ericsson, Alcatel Luscent, Nokia-Siemens, Huawei Indus Towers, GTL & GIL, TowerVision, Quippo Telecom, Bharti Infratel, ITIL IBM, TCS IBM Daksh, Mphasis. Aegis BPO, Nortel, Hinduja TMT

ATTRACTIVENESS Low 1 Number of Suppliers Availability of Substitutes Switching Cost Suppliers Threat of Forward Integration Industrys threat of backward integration Contribution to Quality Contribution to cost Industry Importance to the Supplier Number of Suppliers: There are a large number of suppliers. Hence, bargaining power of suppliers is low and the industry is attractive. Availability of Substitutes: There are no substitutes available. Bargaining power of supplier is high and so industry attractiveness is low. Switching Cost: Cost for changing telecom equipment provider is medium to high hardware change will lead to a change in network architecture. Cost for changing tower providers and call centre and IT service provider is low to medium as it causes temporary disruption in service. Bargaining power of supplier is high and so industry attractiveness is low. Suppliers Threat of Forward Integration: There is no threat of forward integration of supplier. Equipment manufacturers provide managed services to the telecom provider but do not possess spectrum to start operations. The same with IT and call centre companies. Bargaining power of supplier is low and so industry attractiveness is high. Industrys threat of backward integration: There is no threat of backward integration of industry. The core competency of Airtel is to provide telcom service. They have no R&D facilities and have no inclination towards equipment manufacturing due to cost constraints and limited pool of skilled engineers. Airtel have outsourced their tower requirements, IT infrastructure and call centre services to cut costs. They will not backward integrate due to increasing costs. Bargaining power of supplier is high and so industry attractiveness is low. Contribution to Quality: The equipments supplied and services provided play a significant role in the quality of the service provided by Airtel. Bargaining power of supplier is high and so industry attractiveness is low. Y Y Y Y Y Y 2 3 4 High 5 Y

Contribution to cost: The equipments supplied and services provided play a significant role in the contribution to the overall cost expenditure of Airtel. Bargaining power of supplier is high and so industry attractiveness is low. Industry Importance to the Supplier: Telecom industry is of prime importance to telecom equipment provider. But they have other businesses. Industry is not so important to Call centre and IT infra providers. For tower infra providers the telecom industry is very important. Overall, the importance of industry to suppliers is medium. Table 7: Government actions Attractiveness Low 1 Industry protection Industry regulation (pollution, etc.) Customs and tariff restrictions abroad Industry protection Government has set up Telecom Engineering Center (TEC) to enable integrated telecommunication network and granting of interface approvals for various service providers. DOT promotes private investment.FDI cap varies from 74%-100% for various sector in telecom which helps the players to raise capital. Government has made provision for sharing of passive infrastructure such as building, tower etc. To an extent government is trying to protect and help the players who are already in the market. Industry regulation Many regulations regarding license, spectrum allocation and management are in place. Telecom authorities include Telecom Commission, DoT, TRAI, WPC and TEC. 5 2 2 3 4 High 5