PORTER’S FIVE FORCES

ANALYSIS OF INDIAN
TELECOM INDUSTRY
The low level of service differentiation escalates rivalry as players compete intensely
through quality measures, brand awareness, functionality, and value pricing.

A fixed line telecoms company may own and operate its own physical network
(exchanges or fibre optic cables, for example). New entrants to the fixed line market may
be put off by the declining penetration of fixed line telephones and the increasing
popularity of wireless technologies. The market faces a strong threat from mobile phones
and internet applications (particularly Voice over Internet Protocol (VoIP)).

The majority of wireless telecoms providers are 'facilities-based', meaning that these
companies own and operate the infrastructure of networking equipment, masts, base
and stations. The number of suppliers is often low as few companies have the necessary
ability to supply complex, reliable and geographically extensive networks.

A major driver of wireless service growth is the consistent international demand for
communication. This pressure drives mobile communication companies to research and
develop new ways of carrying more information on specific frequencies. The market is
highly regulated by the government which, along with the dominance of incumbent
operators, limits potential new players' options.

Rivalry is increased in most fixed line telecoms markets, as end-user switching costs are not
prohibitive and telecom services are not strongly differentiated, which will intensify market
competition. In the coming years, mobile devices with internet access will continue to
lead the market, and rivalry in the telecommunication market will likely depend on the
development of wireless technology and variation in demand.

While fixed-line services and wireless services are technically substitutes for each other, the
main threat against the telecommunication services market as a whole is internet-based
communication.

I. Buyer Power
The telecommunication services market displays signs of classic oligopolistic behaviour,
with a small number of large incumbent players and a high number of buyers (both
individual and commercial). This weakens buyer power as the loss of a single customer will
have a limited impact on market players.

The inelastic nature of demand and the move to multi-play services should ensure the
market as a whole against any major downturn, weakening buyer power.

The low levels of product differentiation leave players competing on quality, reliability,
brand awareness, functionality, customer service and value pricing to try to capture new,
and retain existing customers in the telecommunication services market. However, as
services are inherently standardized, buyer power is strengthened.

Customer loyalty is low and buyers are largely price-driven. As such, buyers are prone to
switching between the available market players if they offer a better price. This
strengthens buyer power. Switching costs vary, and include the difficulty of leaving a long-
term service contract early and the cost of unlocking a phone so that it can accept a
different SIM card.

Buyer power at present remains very healthy because of the relatively fragmented nature
of the Indian market, particularly in regards to mobile phones. This has already forced
tariffs to come down in price, making them accessible to a greater number of consumers.
Furthermore, a lack of differentiation among services ensures consumers are becoming
more price conscious, forcing companies to adapt to developing consumer
expectations.

In terms of vertical integration, there is no possibility that players can forward integrate as
the buyers are independent, increasing buyer power. However, this is negated by the fact
that it would be almost impossible for a buyer to backwards integrate into providing
telecommunication services because of the scale and equipment needed.

Overall, buyer power is assessed as moderate.

II. Supplier Power

In India, the state remains active in the sector with the two largest companies. This means
that large companies often own and operate their own physical network. These market
players are referred to as asset-based carriers (ABC), and their suppliers are usually large
companies, resulting in an extremely strong position within the market. There are a limited
number of such suppliers who provide reliable and extensive networks. If regulators
continue to allow consolidation in the market to continue at a strong speed, the power
major supplier command will increase – the merger between the Indian arm of Vodafone
and Idea Cellular to form a giant company being one example.

Alternatively, a virtual network operator (VNO) may offer telecoms services by purchasing
access to an ABC's infrastructure. The suppliers of such operators are network owners,
which once again are large companies. Switching costs within this market are often high,
as exiting long-term supply contracts can be difficult. This is mitigated to some degree by
the fact that specialized suppliers are dependent on the income from the telecoms
market.

In addition, suppliers have to sign long-term contracts in order to get lower prices for the
raw materials they require, as prices for raw materials are easily affected by the stock
market due to most of the times being of commodity nature. Raw materials of that kind
originate from oil, steel and other commodities, which are very likely to experience high
levels of volatility. Thus, in order for suppliers to obtain them in lower prices they would sign
long-term contracts.

National governments are also important in this market as they act as the gatekeepers to
the electromagnetic spectrum and bandwidth supply. Licenses are allocated either
through periodic auctions or 'beauty contests' (competitions on the basis of service
provision). This is not simply a regulatory issue – bandwidth is also allocated in periodic
auctions, and the amounts paid by successful bidders can be substantial.

Supplier power is assessed as moderate overall.

III. Threat of New Entrants

The costs to switch between providers are low and the services provided by fixed-line
telecom companies in lesser developed markets are less likely to be differentiated,
meaning competition from substitute providers is a probability. However, in mature
markets, established companies hold dominance, meaning that new entrants may
perform poorly in terms of total revenue.

Entering the telecommunication services market as a facilities-based provider requires

significant capital outlay in order to build infrastructure that covers most of the
geographical area of the country of interest. Companies presenting such business
models benefit from large scale operations, economies of scale, and diversification,
and are therefore difficult to compete with, as they can usually offer lower prices.

A potentially lower cost mode of entry is to operate as a MVNO (mobile virtual network
operator). MVNOs rely on wholesale access to the network infrastructure of facilities-
based mobile network operators. A more cost-effective option may be the acquisition
of a company that already has a network in place. Several MVNO-like trials have
been run, such as Virgin Mobile's deal with Tata DoCoMo.

New entrants must also get the necessary infrastructure installed and set up billing and
operational support systems, which represent another group of costs.

Competition among big brand names in the market tends to be fierce, reducing
threats of new entrants. Big brand names such as MTNL, Tata Telecom and Reliance
Communications, tend to compete constantly with each other, trying to provide
consumers with the cheapest and best service possible. Companies of that scale are
easily recognizable through their brand name, influencing buyers’ decision making
process. However, buyers, owing to being end-users, are highly influenced by the
prices those telecom companies are offering, leaving aside their brand recognition,
considering only prices and customer service.

Fixed costs in the telecommunication market are high. Telecom is a capital-intensive

industry. It requires an extensive network infrastructure to provide fixed line and
wireless services. High investment requirements restrict new entrants in the industry.
High fixed costs result in high operating leverage. Acquiring new customers
significantly increases a telecom company’s profitability. Losing customers results in a
steeper decline in profits. High operating leverage makes the telecom industry focus
on customer acquisition and retention. Operating leverage and retaining existing
customers impacts a telecom company’s profitability. The cycle of upgrading
networks is shorter for wireless companies, while the cycle is shorter due to reasons
ranging from technological innovations to managing increased network traffic. So,
they have to recoup their network investments, in shorter intervals of time, to redeploy
them for the next upgrading cycle of networks. Due to high fixed costs, telecom
companies in mature markets, have to manage their profitability and cash flows by
controlling their variable costs, like workforce and marketing costs. Wireless players
have more recurring capital investments, compared to established wireline telecom
companies. Wireline telecom companies already invested significantly, particularly in
their extensive legacy networks.

As a small number of large incumbent players exist in the market, demand conditions
require the prospective player to be large as otherwise post entry prices will lead to
an economic loss.

Infrastructure related to mobile phone communications standards is crucial for the

expansion of wireless telecommunication services. For instance, Silicon Valley of India,
Bengaluru and superstar metropolis of yesteryears, Kolkata have become the lucky
Indian cities to get India’s first 5G cities. Airtel has just deployed Massive Multiple-Input
Multiple-Output (MIMO), which has been claimed to be India’s first 5G capable
network. This has been done under Airtel’s Project Leap network transformation
program, wherein the network capability has been expanded by three to seven times,
using the same spectrum.

The Telecom Regulatory Authority of India significantly influences entrant barriers by

setting rules and regulations concerning access to distribution channels, infrastructure
and networks, thereby prohibiting seller concentration. The telecommunication
services market is subject to domestic regulations which may discourage or even
legally forbid certain parties willing to enter the sector.

Entering the market is becoming harder due to the rate of consolidation the market
has experienced of late. However, compared to many other countries the market is
still occupied by a large number of competitors. The benefit of a relatively fragmented
market is that players are able to establish a lasting presence among competitors via
a smaller market share than in a consolidated environment. Given the growth in
wages and positive economic performance, India will remain an attractive
proposition for large foreign companies to move into. The most likely form of
introducing a new company will be to buy an existing player.

Overall, the threat of new entrants is assessed as weak.

IV. Threat of Substitutes

The fixed-line and wireless segments technically act as substitutes for each other,
although many with a fixed line are also likely to own a mobile device.

The main substitute to the telecommunication services market as a whole is internet-

based communication. Email, messaging services, social and business networking
sites, and internet calling programs (such as Skype or VoIP Buster) provide cheaper
alternatives to traditional telephone communication. Many of these options are free,
requiring only an internet connection and the appropriate computer software.

However, the quality of internet voice calling can be unreliable and often depends
on the user's internet connection speed and computer specifications. Moreover, in
many cases these services are only available from fixed line or wireless operators,
which increase user dependency on telecommunication companies.

Many players in this market will offer a range of packaged services including a fixed-
line internet connection and television subscription. The use of the internet from mobile
phones is increasingly common. As such, players also tend to offer the substitute
products, which lessen threat to some extent.

Overall, the threat from substitutes is assessed as moderate.

V. Degree of Rivalry
Rivalry within the telecommunication services market is intensified by the presence of
large incumbents such as Bharat Sanchar Nigam Ltd and Mahanagar Telephone
Nigam Limited. The low level of service differentiation escalates rivalry as players must
compete via quality measures, brand awareness, functionality, and value pricing.

Data services have become a key component of both fixed and wireless service
providers' products and the emergence of 3G, 4G and 5G wireless technologies have
meant that the size and price of data packages offered by wireless telecoms has
become a key means of service differentiation. Bharti Airtel launched the first 4G
service in Kolkata in April 2012.

Competition will increase with the entry of new firms should an additional radio
spectrum be made available for commercial wireless services. Competition is
expected to increase further as a result of other technologies and services that are
being developed and will be introduced in the future, such as the currently unlicensed
spectra and 5G.

The convergence between telecommunication services, technology, media and the

consumer electronics market is causing lateral competition as competition extends
into converging markets, which provides the opportunity for growth as well as
competitive threats in the wider converged market.

Although the market experienced moderate growth, it is consolidating. The antitrust

watchdog, the Competition Commission of India (CCI), reported approved the
takeover of Norwegian-owned rival Telenor India by Bharti Airtel, the largest mobile
provider in terms of subscribers in India. Since then the third-largest mobile operator,
Idea Cellular has merged with the Indian branch of Vodafone. According to official
statements, the combined company will occupy 35% of the mobile market.

Existing market players tend to be big in size and competing with each other for the
market leader position. The fact that there is more than one clear leader in the market
increases rivalry, making the market players to compete for the first position. Rivalry in
the industry is highly influenced by the brand name of each of the market players
carries. Brand names such as Bharat Sanchar Nigam Ltd and Mahanagar Telephone
Nigam Limited, are easier recognizable by consumers who tend to prefer more those
two brands than the rest of the market players due to the feeling of safety and
wellness those two companies create, regarding their customer services; however,
consumers tend to be more price-driven in this market.

Rivalry within the telecommunication services market is strong overall.