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India welcomes 2009 with 346.9Mn mobile subscribers, India+Welcomes+2009+With+3469Mn+Mobile+Subscribers.aspx, January 28th 2009
http://www.itu.int/ITU-D/ict/newslog/
This case study was written by Hepsi Swarna under the direction of Akshaya Kumar Jena, IBSCDC. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources. 2009, IBSCDC. No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner. Background Reading: Chapter 4, Applications of Supply and Demand, Economics (Paul A. Samuelson and William D. Nordhaus)
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Source: Singh K. Sanjay, The Diffusion of Mobile Phones in India, http://home.iitk.ac.in/~sanjay/skspresentation.ppt, page 3
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Source: Brahmadhandi Vivek and Soans John, Indian Telecom Industry, http://d.scribd.com/docs/ u5l1dzmf24gok0by150.pdf, page 24
The fall in prices of mobile handsets also contributed to the increase in mobile usage. In 2005, 32 million handsets were sold in India, as handsets were available for as low as INR 2,000. It was reported that from July 2006 onwards 5 million handsets2 were sold monthly and in 2008, India stood as the second largest market for handsets in the world, when handsets were available for even INR 1,000. In March 2008, India had the second highest minutes of usage per month, only next to US (Exhibit III). Thus, the mobile phone, which once was a rich mans toy became affordable even by the common man. International Telecommunications Union opines, The ever-growing rate of subscriber base in India is driven by cheap call rates, low-end handsets and network expansion spree.3
Source: Brahmadhandi Vivek and Soans John, Indian Telecom Industry, http://d.scribd.com/docs/ u5l1dzmf24gok0by150.pdf, page 9
An estimate by Vodafone Public Policy series in January 2009 revealed that demand for mobile phones is highly sensitive to price with a negative relationship. The own-price-elasticity of mobile phones is minus 2.12, which implies that a 10% price increase would reduce demand by roughly 21%.4 Price elasticity of demand is a negative number because of inverse relationship between price and quantity demanded. The above Vodafone estimate also showed that demand for mobile phones in India is positively correlated with increase in income. The income elasticity of demand for mobile phones is estimated to be 2.455 and this makes mobile a luxury in the technical sense of economics. A study using household sample survey data from Karnataka, a state in South India has, however, found out that a
Mani Sunil, Growth of Indias telecom Services (1991-2007): can it lead to emergence of a Manufacturing Hub?, http:// poverty.developmentgateway.org/uploads/media/poverty/Griowth%20of%20Indias%20Telecom%20Services.pdf, page 45 India Welcomes 2009 with 346.9 Million Mobile Subscribers, http://wirelessfederation.com/news/14151-indiawelcomes-2009-with-3469mn-mobile-subscribers/, January 22nd 2009 India:The Impact of Mobile Phones, http://72.14.235.132/search?q=cache:iIcMvHoqhCgJ:www.vodafone.com/ e t c / m e d i a l i b / p u b l i c _ p o l i c y _ s e r i e s . P a r . 5 6 5 7 2 . F i l e . d a t / public_policy_series_9.pdf+india,+impact+of+mobile+phones&cd=1&hl=en&ct=clnk&gl=in, January 2009, page 16 Ibid., page 17
rise in monthly income of households by 5% increases mobile phone services to the extent of 0.638%6, which makes mobile a normal necessity rather than a luxury good. With the rise in their income, by the beginning of 2005 the Indian customers started demanding for stylish phones.The trend continued over the years and in 2008, it was reported that Indians with income patterns rising, were increasingly wishing to be seen with smart mobile handsets. As mobile service providers turned innovative, offering tariff plans like lifetime validity pre-paid cards (aimed at low-income group), cheap handsets with loads of features, internet and online payment facilities, more and more Indians started demanding more and more mobiles. The tremendous growth of mobile phones has adversely affected the subscriber base of fixed phones in India. Fixed phones per mobile decreased from 5.87 in 20012002 to 0.25 in 20062007 (Exhibit IV).
Source: Narayana Ranganathan Muttur, Substituability between Mobile and Fixed Telephones: Evidence and Implications for India, http://www.e.u-tokyo.ac.jp/cirje/research/dp/2008/2008cf550.pdf, March 2008, page 21
A study7 using household sample survey data from Karnataka estimated that an increase in access price8 of fixed phones by 5% would increase subscriptions for mobiles phones by about 0.3% while increase in usage price9 of fixed phones by equivalent percentage would increase subscriptions by 10.6%. Thus, the increase in usage price of fixed phone has a larger impact than the increase in access price. The cross price elasticity between fixed and mobile phones is positive, implying substitutability. On the count of access price, the magnitude of cross price elasticity is, however, very small implying that the prices of fixed phones do not have much impact on the demand for mobile phones.
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Narayana Ranganathan Muttur, Substitutability between Mobile and Fixed Telephones: Evidence and Implications for India, http://www.e.u-tokyo.ac.jp/cirje/research/dp/2008/2008cf550.pdf, March 2008, page 14 India:The Impact of Mobile Phones, op.cit., page 16 Access price comprises onetime installation charges and monthly rentals. Usage price refers to the call rates.
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Demand for mobile phones is thus almost independent of fixed phone prices. There are many reasons for this. It is very easy to get a mobile connection. More importantly, one can be contacted anytime, anywhere. Airtel, Indias largest mobile service provider, underscored this point by flashing an advertisement where a girls plane crashes in a jungle; and when she thinks there is no way of contacting anybody, she looks at her mobile, sees Airtel signal still strong and then makes the life saving call. Mobile comes with loads of features, which an ordinary fixed phone does not have.
Source: Brahmadhandi Vivek and Soans John, Indian Telecom Industry, http://d.scribd.com/docs/ u5l1dzmf24gok0by150.pdf, page 35
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Mobile Phones India, http://www.factsaboutindia.org/mobile-phones-india.htm Gopalan Krishna, Action hotting up once again in Indian telecom, http://www1.economictimes.indiatimes.com/ articleshow/msid-3606382,prtpage-1.cms, October 17th 2008
With falling call rates, the subscriber base has increased exponentially. This has given the carriers the benefits of economies of scale and ensured them profits. Still a large part of Indias consuming power, like the rural areas remain untapped. The declining ARPU during the period March 2007 March 2008 indicates that India is tapping a large market of low-income households by reducing the tariffs (Exhibit VI).
CDMA
September 2007 March 2007 December 2007 March 2008 June 2007
Source: Brahmadhandi Vivek and Soans John, Indian Telecom Industry, http://d.scribd.com/docs/ u5l1dzmf24gok0by150.pdf, page 9
Whether further lowering of call rates will ring profits for the mobile telephone sector of India remains an open-ended issue. While the key to understanding this issue lies in measuring the elasticity of demand and probing its relationship with the revenue, this is often forgotten, leading to faulty reasoning and false debates.