Change in market structure - Challenge for the cellular Industry

The National Telecom Policy (NTP) announced in March 1999 cleared the decks for the entry of the Department of Telecommunications (DoT)/Mahanagar Telephone Nigam Ltd. (MTNL) as the third cellular operator in circles. The decision on the entry of fourth operator has been left to the Telecom Regulatory Authority of India (TRAI).

Following the announcement of NTP '99, the DoT had made initiatives to begin services in major cities across India, including the metro cities of Chennai and Calcutta. However, the initiatives had slowed due to the interference of the Telecom Commission. The Telecom Commission was in favour of the DoT doing a pilot project before proceeding with the plans. However, the DoT later got approval from the Telecom Commission.

With the formation of the Department of Telecom Services (DTS) the uncertainty about the third operator is over. The DTS is created as part of separating the policy-making and service provision functions of the DoT. The policy related functions would remain with the DoT. The DTS/MTNL is expected to commence service in 2000-2001 fiscal year. The TRAI is not expected to permit the entry of the fourth operator at least for the next few years. The regulatory authority is likely to observe the market developments following the entry of the third operator to take a decision on the fourth operator. The following sections analyze the impact of change in the market structure.

The advantages of the shift to revenue sharing are weighed down by the shift from duopoly to multipoly market structure. Private operators are seemingly under the impression that the shift to revenue sharing would solve their problems. They are yet to forecast the impact of the shift in market structure. Except for the metro operators in Delhi and Mumbai, the entry of the third operator is a matter of concern for all existing operators.

The entry of DTS ensures a third operator in most of the telecom circles. Category C circles may be an exception. If the DTS is not the third operator, the scenario could be different. Like existing operators, players that intend to enter the market as third operator also need to think carefully before making investments. In the category A circles, the high capital expenditure required is an issue of concern. Market affordability is the matter of concern in B circles and metro circles of Calcutta and Chennai.

On the other hand, the DTS is making an entry with many advantages. Firstly, it gets financial aid from the government. Secondly, the DTS would get equipment at competitive rates. Thirdly, it has the advantage in terms of buildings, personnel, backbone network, and so on. These factors sufficiently compensate for the challenges of market affordability and expenditure. This would enable DTS to run the network at competitive prices.

Once DTS starts competitive pricing, the private operators would have to follow. The move is likely to affect the financial viability of the projects. The revenue sharing pattern that is to be fixed by the TRAI is expected to have an impact on the financial viability. The DoT’s interim package of 15 per cent revenue sharing is not likely to bring down the tariffs to the required level.

If the entry of the fourth operator were allowed, the scenario would change totally. Bigger companies, which intend to expand their operations, would use this opportunity. Companies with weak financials would be at a disadvantage. Given the existing premium demands, bigger companies are likely to start afresh rather than acquire an existing company. Financially weak companies are not in a position to lower the valuations considerably because of the investments made. Considering the license fee obligation until July 31, 1999, the major investment comes from license fee payments.

The shift from duopoly to multipoly market structure is expected to drive market growth. Though multipoly raises the issue of the viability of existing participants, its impact on expanding the market is beyond doubt. The entry of more players is likely to result in aggressive marketing by all market participants. This is expected to result in further decline in tariffs and bring cell phones within the reach of many potential customers. Moreover, the operators are likely to pay more attention to the distribution structure. This is likely to have a tremendous impact on market expansion.

The influence of the shift in market structure on market expansion depends on the third operator. The DTS plans to garner market share through aggressive pricing. As other players are bound to follow, declining tariffs are likely to drive market growth. The impact of the entry of the third operator on market expansion is expected to be visible in the financial years 2000-2001 and 2001-2002.

The MTNL is likely to commence services in the metro circles of Mumbai and Delhi in fiscal 2000-2001, while the DTS is likely to start services in the major cities of other circles. The prospective cities include Ahmedabad, Hyderabad, Bangalore, Pune, Chandigarh, Coimbatore, Kochi, Indore, Lucknow and, Jaipur.

The DTS has ambitious plans. For instance, it plans to bring 10,000 subscribers to its network in each city in the first year. Given the existing scenario, it looks difficult for the DTS to materialize these plans. The success of the DTS to a great extent depends on its pricing. On this account also, things are not smooth for the DTS. Firstly, due to the TRAI ceiling, the tariffs have come down considerably.

Secondly, with the shift to revenue sharing, the private operators are likely to get further finance in the form of equity as well as debt. This would help the circle operators to expand their geographical coverage. When more subscribers are added to the network, the operators are likely to bring down the tariffs.

Despite these factors, the DTS would be in a position to offer competitive pricing. Hence, if the TRAI puts any ceiling on lower tariffs, the plans of DTS would not be realized. More important for DTS/MTNL is the issue of convincing customers that they can provide the same quality service as of the private operators. Going by the existing scenario in basic services, the DTS is likely to take time to achieve this. The corporatization of DTS is expected to play a significant role in the above development.

The entry of the third market participant is not expected in the C circles, at least for the next two to three years. This is due to market affordability. The NTP '99 has left the decision on the issue of the entry of the fourth operator to the TRAI.

Until now, the spending on marketing has been relatively low. This is due to the insufficiency of funds. This trend is likely to witness a significant change in the coming years. Initially, the trend is expected among the metro operators. More thrust on marketing is required in the coming years especially due to the entry of the third market participant. Currently, the spending on marketing for most of the operators is about 15 per cent of revenues. This is likely to increase to 20 per cent in coming years.

The intensity of competition due to the entry of the third operator is expected to be higher in the metro circles of Mumbai and Delhi. This is due to the fact in both these circles, the MTNL is the third operator. MTNL is likely to put up a better market performance than DTS. MTNL is likely to get more market share in the Delhi circle than Mumbai. This is because the prices are relatively low in Mumbai. Secondly, the Mumbai operators have a relatively better distribution set-up.

Given the size of the market, the entry of the third operator is not expected to adversely affect the viability of the existing market participants in Mumbai and Delhi. However, the entry of the third operator is likely to delay the breakeven point for the existing operators in Chennai and Calcutta. The impact is likely to be the same for circles too.

The change in the market structure is expected to bring down the prices further. In order to expand the market, the private operators are likely to introduce pre-paid packages with competitive pricing. This is to counter the DTS/MTNL's competitive pricing. The level to which MTNL can bring down the prices depends on the TRAI's stance. It is to be seen whether the TRAI would put any ceiling on lower tariffs or not.

Until now, the major marketing devices have been the pricing and packaging. By the latter half of the forecast period, the major marketing tool is likely to shift from pricing to quality service. The operators are likely to focus on fighting the competition with a difference. What matters on this account are the value-added services.