Chapter -1

Industry Profile

Today, it is the fastest growing market in the world and represents unique opportunities for U.S. companies in

the stagnant global scenario. The total subscriber base, which has grown by 40% in 2005, is expected to reach

250 million in 2007.

According to Broadband Policy 2004, Government of India aims at 9 million broadband connections and 18

million internet connections by 2007. The wireless subscriber base has jumped from 33.69 million in 2004 to

62.57 million in FY2004- 2005. In the last 3 years, two out of every three new telephone subscribers were

wireless subscribers. Consequently, wireless now accounts for 54.6% of the total telephone subscriber base, as

compared to only 40% in 2003. Wireless subscriber growth is expected to bypass 2.5 million new subscribers

per month by 2007. The wireless technologies currently in use are Global System for Mobile Communications

(GSM) and Code Division Multiple Access (CDMA). There are primarily 9 GSM and 5 CDMA operators

providing mobile services in 19 telecom circles and 4 metro cities, covering 2000 towns across the country.

INTRODUCTION

"Telecommunications is the backbone of our future economy. International competitiveness

increasingly depends on the development of a telecommunications infrastructure that is compatible with

international standards"

The cellular industry all over the world has been witnessing very high growth rates in
subscriber base in recent years. For developing countries in particular, cellular services are becoming a
very significant proportion of the overall telecom infrastructure. The
mechanics of competition within this market involve complex feedback effects between
individual service providers and with their operating environment, and these forces play
an important role in governing the growth of this industry.
In a country like India which is not yet telephone-saturated and the ongoing changes in related areas are

resulting in a rapidly changing profile of users, providers and their respective needs, continuous revision of the

telecom policy is imperative. Given the emerging new technologies and the integrating economies there must

be fairness among competitors.

The Indian telecommunications sector has undergone a major process of

transformation because of significant Government policy reforms during the recent
years. The New Telecom Policy, 1999 focused on creating an ideal environment for
investment, establishing communication infrastructure by leveraging on
technological development and providing affordable telecom services to all. These
objectives of the policies have resulted in rapid growth of subscribers and lower
tariffs. We believe that with these major initiatives of the Government, the mobile
market in India will have a promising future.

The tele-density in India is about four per hundred people in respect of the fixed telephones and a little less

than one in respect of the mobile telephony. The low densities are not because there is no need for a telephone

but because of its high cost that many cannot afford that one. The situation here is nothing but holding true of

the “law of demand”. Isn’t it?

The cost for the companies can come down if the revenue share imposed on them as a condition

of license is abolished or drastically reduced. Today every telephone company is bound to pay a

share out of its revenue to the exchequer. These costs are, however, not to be scheduled to take a

step further in the development of the telecom. In addition when we go through the telephone bill

there is a 5 to 8% service charge. This amount also does not go for the telecom development. If

these external cost are removed there can be seen a spurt in demand of not less then 40% as

expected.
While taking the side of suppliers a lot of new companies are coming into the battlefield

resulting in reduction of prices and hence a little less burdensome on to the customer. The cost of

interconnection with the incumbent is proving to be contributory to the high cost of services

provided by the competitors.

The delay in the interconnection disregards the quality of service and high cost will detract from

affordability. This is an area in which no consumer body can knowledgeably contribute unless it

has the assistant of experts or economists who alone can discover all the relevant fact of all the

contesting companies. It indicates the pre-eminent domain of TRAI (Telecom Regulatory

Authority of India).

As the driven down of the prices for long distance including international services reduces the
amount available for subsidizing the local service, the rental for local services are being
increased. Considering that about 90% of the long distance calls are made by less than 20% of
customers, 80% of customers are having to pay higher rental this depresses the demand for
telephones and affordability. The urban business subscribers
will be bearing the bond of the subsidies to be given to the rural private consumers

History of Cellular Telephony in India:

The technology that gives a person the power to communicate anytime, anywhere - has spawned

an entire industry in mobile telecommunication. Mobile telephones have become an integral part

of the growth, success and efficiency of any business / economy. The most prevalent wireless

standard in the world today, is GSM. The GSM Association (Global System for Mobile

Communications) was instituted in 1987 to promote and expedite the adoption, development and

deployment and evolution of the GSM standard for digital wireless communications.
The GSM Association was formed as a result of a European Community agreement on the need

to adopt common standards suitable for cross border European mobile communications. Starting

off primarily as a European standard, the Groupe Speciale Mobile as it was then called, soon

came to represent the Global System for Mobile Communications as it achieved the status of a

world-wide standard. GSM is today, the world's leading digital standard accounting for 68.5% of

the global digital wireless market. The Indian Government when considering the introduction of

cellular services into the country, made a landmark decision to introduce the GSM standard,

leapfrogging obsolescent technologies / standards. Although cellular licenses were made

technology. neutral in September 1999, all the private operators are presently offering only GSM based

mobile services. The new licensees for the 4th cellular licenses that were awarded in July 2001 too, have opted

for GSM technology to offer their mobile services.

Cellular Industry in India:

The Government of India recognizes that the provision of a world-class telecommunications

infrastructure and information is the key to rapid economic and social development of the

country. It is critical not only for the development of the Information Technology industry, but

also has widespread ramifications on the entire economy of the country. It is also anticipated that

going forward, a major part of the GDP of the country would be contributed by this sector.

Accordingly, it is of vital importance to the country that there be a comprehensive and forward

looking telecommunications policy which creates an enabling framework for development of this

industry.
Cellular Market Structure in India:

As in other countries, in India, the Cellular Mobile Service Providers (CMSPs) are licensed to

operate in designated geographical operating areas. The service areas include four metro areas

and 18 circles categorized as A, B and C. (The categorization is based on the revenue

Proceedings of the 36th Hawaii International Conference on System Sciences). The potential with

category C circles in the lower end of the scale. For example the metros account for 40% of the subscriber

population, with Category-A, B and C accounting for 33%, 23% and 4% respectively. The CMSPs had to pay

an entry fee and subsequently annual license fee as a percentage of their revenue to the Department of

Telecommunications.

The entry and license fees varied according to the service area, highest for metros and lowest for Category-C

circles. Some of the CMSPs could not fulfill their licensing obligations and their licenses were revoked leading

to a monopoly situation in certain areas. Apart from these charges, each CMSP has to share the revenue with

the long distance operators for carrying inter-service area calls.

In profitable metros and circles, the competition is severe and the market is split between the two operators. In

a price-cap regulated market, the operators use appropriate pricing strategy to win customers and win market

share. In highly price-elastic markets, such as in India, as the service provider reduces the price,

the subscriber base increases considerably, and so is the network traffic. The increased network

traffic decreases the performance and the quality of service, inviting customers to switch. Being

a new entrant in a metro area, the government operator reduced the airtime charges to such an

extent that the subscriber base increased suddenly leading to poor network performance. The
operator did not have enough network capacity to handle calls leading to blocking of calls, with

frustrated customers switching over immediately to competitors.

The operators also have to resort to non-pricing competition strategies to win customers.
In India, CMSPs offer a variety of service plans as a means to attract new customers.

Different service plans include: pre-paid calling card schemes, discounted airtime rates for evening and night

time calls, discounted roaming charges, no or minimum activation fees, and reduced mobile to mobile long

distance call rates.

The service providers incur additional advertising and infrastructure cost for implementing these plans. Short

Message Service (SMS) and Wireless Application Protocol (WAP) service are fast catching up. For example,

in India, about 500,000 SMS messages are being carried by a service provider in one metro area alone. When

the sector moves over to an oligopoly market, the operators have to provide improved quality of service and

value added services in order to survive and gain market share.

Larger operators who have experience and infrastructure may be able to provide a higher quality of service and

other value-added service at a lower price. They also have access to larger project financing for enlarging their

networks and services. For example, a single large operator now has license to operate in 14 service areas in

the country with the largest footprint to cover most of the areas of the country. Mergers and acquisitions are

commonplace as the operators are consolidating their revenues to survive in the market places.

Cellular subscribers and those with a propensity to go mobile in Delhi have never had it so good. They now

have four service providers to choose from, each offering an array of both pre- and post-paid schemes. More

importantly, average tariffs across plans have, by some reckoning, dropped by at least 50 per cent in the last
six months. The entry of Vodafone saw a further drop in tariffs and the operators have come out with new

schemes to retain their subscribers and attract fresh ones.

What does this mean for subscribers and for the cellular industry in Delhi? All the four operators Essar Mobile

Services Ltd., Bharti Celluar Ltd, MTNL and Idea Cellular services are convinced that the market will only

expand and the subscribers will benefit even more. Their reasoning is that cellular penetration in Delhi, which

traditionally occupies the third position in other areas, is less than fifty per cent. Therefore, entry of new

players will only increase awareness about the facility, the companies say.

Moreover, the state-owned MTNL has also been playing with its cellular service for quite some time. that, with

the imminent launch of limited mobility using CDMA (code division multiple access) technology by

companies like Tata Tele Services will only add to the subscriber base, probably result in further reduction of

tariffs, and an even greater widening of the cellular market, according to officials in four cellular companies

now servicing Delhi.

However, the companies also sound a note of caution — any further drop in tariffs will be harmful to the

companies, points out one of the officials taking care of the — Sales & Marketing division of the, Essar

Mobile Services Ltd, average tariffs in Delhi across different plans have fallen by 30 per cent since December

with launching of the CDMA services.

Besides the fall in tariffs, what has really happened with the entry of CDMA is a heightened awareness in the

market. Mobile penetration in Delhi and its suburbs is estimated to be less than twenty-five percent of the

population and the cellular operators believe that this number should definitely go up.
It is here that Vodafone decided to target the customers with what it believes are unique products and features.

Its emphasis has been on value proposition and brand building. Mobility is not only about carrying voice, as

per the reports from the marketing department and adds that the unified messaging system for the post-paid

customers of (now Vodafone) is one such unique product.

Accordingly, Vodafone signed in its subscribers in lakhs from the year onwards it has been launched in Delhi.

Industry analysts say that a majority of them will be pre-paid customers, whose loyalty to a particular brand is

always in doubt. However, pre-paid for the cellular is nothing but the engine for growth and there is always a

possibility that most of them will shift to post-paid once they are convinced of the quality of service provided.

On the other hand the entry of a new operator lends more visibility to the service and there is also increased

trade activity — that is the number of dealers will increase and more people will be on the road trying to sell

the service and product. There is also greater consumer awareness of what cellular service can deliver and

expectations go up in terms of pricing or service standards or network availability.

The Churn in the Cellular Industry:

As like the other products Cellular industry has not been left untouched from the Churn
(switching over). During the survey this fact comes to the fore. According to the cellular
operators, there is a normal seven to eight percent churn in the customers, especially in the pre-
paid category. Among the post-paid customers, the Churn is much lower about
two-three percent.

They say that one significant change that has happened in the last few months, more so since

lowering of the tariffs, is that the bias in favour of incoming calls as far as call charges are

concerned — incoming calls has been set free while they are charging reasonably only for the

outgoing ones — has changed. A tariff re-balancing has definitely taken place.
This means that the cellular operators are encouraging their subscribers to not just receive calls,

but also make calls — increasing the usage of the service. With falling tariffs, cellular operators

are convinced that increasing usage is one way to ensure that average revenue per user (ARPU)

does not fall very low. The industry figure for ARPU is believed to be about Rs.1,100 while it

may vary from operator to operator. The operators are also concentrating on introducing more

value added services to the customers. Value- added services have not really taken off. Only the

SMS (short messaging service) has really caught on, but operators like Bharti are bringing in

services like music messaging and concierge facility for its subscribers.

MOBILE SUBSCRIBER STATISTICS

Recently, mobile phone connections in India have crossed the 400-million mark, which

means over forty in 100 Indians have a phone. Adding on to this benevolent and happy

information, telecom companies are anticipating the number will nearly treble in the next two

years. According to a survey, by 2010, the cellular networks are expected to cover 4,50,000 (out

of 6,07,000) villages, covering 550 million people.

 Figure 1 Market Share of both mobile and wire line Service Providers in India

GSM Subscribers

The cumulative All India GSM subscriber base rose to 72.12 million in April 2006 from

69.19 million in March 2006 which is a growth of 4.23% for a month under review [4]. Table I

shows the subscribers growth rate for one month along with market share of each provider with

coverage

CDMA Mobile Subscribers

The total cumulative all India CDMA subscriber base rose by 0.97 million from 23.25 million in
March 2009 to 24.22 million in April 2009, representing a growth of 4.2% in the month under
review. India has an urban population of about 26.8% and rural population is about 73.2%. And
there are over 600,000 villages in India. But a vast section of the rural sector is still cut off from
the benefits of telecom services. The rural population of around 700 million is waiting for its
share of economic growth. Initially the big telephone companies focused only on urban centres,
which they felt were more profitable. However, this mindset is gradually changing with the
realisation that there is equal, if not bigger money in rural areas.

Table II. CDMA Subscribers growth rate

It is estimated that a one per cent increase in rural connectivity can generate 0.5 per cent

economic growth. Thus a well-planned 10 per cent increase in rural connectivity can propel India

into double-digit growth and unprecedented prosperity.

Rural India possesses enormous potential in terms of economy and human resources. Recent

experiments have confirmed that ICT (information and communication technology) helps

improve the timeliness and efficiency of rural farm operations and enhance income through

producer-oriented markets. Hence the communication ministry has requested the finance

ministry for higher allocations from the USO Fund for executing rural telephony network. The

finance ministry has made a budgetary allocation of 15 billion from the USO Fund. The rural

telephony targets include, providing 50 million telephones by 2009(i.e. one phone per three rural

households) and 80 million by 2012 (i.e. one phone per two rural households) and provisioning

mobile access to all villages with population more that 5,000 by 2009 and more than 1,000 by

2010.The Government is confident that the Bharat Nirman Programme target of providing

coverage to remaining 41,000 villages would be met by March 2010 which will be much earlier

than a schedule of November 2010. india plans to establish 0.25 million, village knowledge

centres. The ICT industry can establish rural call centres modelled on the Kisan Call Centre

established by the Ministry of Agriculture to provide domain knowledge in the services,

agriculture and manufacturing sectors. This spread will increase the volume of users and

automatically bring down bandwidth cost, with a spiralling effect on efficiency and economy.

Advanced telecom services are no longer considered a luxury but a necessity for all. Thus,
providing telecom services to every individual in a country like India is a huge challenge, and at

the same time holds immense opportunities for those in the telecom industry.