The Indian telecom industry is the fastest growing industry with an addition of 9- 10 million monthly subscribers. The Indian telecommunications network with over 375 Million subscribers is second largest network in the world after China. Major players in this sector are BSNL, MTNL, Airtel, Vodafone, BPL, Tata, Idea, etc. Buyer power and threat of rivalry is very high in Indian Telecom Sector. Both these factors are formidable. This could be reason of consolidation in the industry. Companies try to reduce threat of rivalry by merging or buying out rival companies.
Telecom sector is one of the integrated parts of economy of any country and the Government regulatory and policy initiatives have also been directed towards establishing a world class infrastructure in India also. It provides an ideal environment for the investment but it also has a very complex structure. The challenges imposed on the Indian telecom market are increasing day by day because of the new technologies and knowledge. The government has taken many proactive initiatives to facilitate the rapid growth of the Indian telecom industry. The booming domestic telecom market has been attracting huge amounts of investment which is likely to accelerate with the entry of new players and launch of new services. Despite the gloomy outlook owing to the global recession/slowdown in the economy, the telecom sector of India continues to attract record number of new subscribers. The Indian mobile phone operators have been adding about 8-10 million subscribers every month throughout this year, and the figure has regularly topped the 10 million mark during the last three-four months. Considering the current pace of fresh additions per month, India has the potential of taking the total tally of subscribers to 700 million in the next five years from the current level of about 350 million, second only to China.
INTRODUCTION TO INDIAN TELECOM SECTOR
India's telecom sector is one of the world's fastest growing sectors. The industry has maintained its growth momentum despite a slowdown seen across various sectors. India has crossed the 500 million wireless subscriber mark in November last year. With the increase in the number of players and reduced tariffs, this number is expected to soar. Overall tele-density has touched 46.32, a whopping 250% jump in the last four years.
The rapid growth in Indian telecom industry has been contributing to India's GDP at large. Telecom industry in India started to set up in a phased approach. Privatisation was gradually introduced, first in value-added services, followed by cellular and basic services. Telecom Regulatory Authority of India (TRAI) was established to regulate and deal with competition (the service providers). This gradual and thoughtful reform process in India has favoured industry growth. Upcoming services such as 3G and WiMax will help to further augment the growth rate
Telecom Industry Sectors
From holistic point of view telecom industry can be divided to four sub-sets. The major forces in Indian telecom industry are Service providers. All major telecom equipment suppliers have their R&D centres in India. In last 5 years, global giants in mobile devices have set up their manufacturing facitilities in India
MAJOR PLAYERS IN INDIAN TELECOM INDUTRY
There are three types of players in telecom services:
- State owned companies (BSNL and MTNL)
- Private Indian owned companies (Reliance Infocomm, Tata Teleservices, Shyam)
- -Foreign invested companies (Vodafone, Aircel, Bharti Tele-Ventures, Escotel, Siestema Idea Cellular, BPL Mobile, Spice Communications)
1.4 TELEPHONE SUBSCRIBER BASE
The number of telephone subscribers in India increased to 581.81 Million at the end of January-2010 from 562.21 Million in December-09, thereby registering a growth rate of 3.49%. With this, the overall Tele-density in India reaches 49.50.
1.4.1 Wireless Segment (GSM, CDMA & FWP)
Wireless subscriber base increased from 525.15 Million in December-09 to 545.05 Million at the end of January-2010 at a monthly growth rate of 3.79%. Wireless Tele-density stands at 46.37.
A. Service Providers' share in net additions during the month
B. Service Provider wise Market Share as on 31-1-2010
Bharti-Airtel leads the wireless market with 22% market share. The company recently achieved the magic figure of 100 million subscribers. However, Bharti-Airtel expects a bloodbath in the Indian telecom market in the near future, and is looking to spread its risks by entering new geographies .With 12-13 players present in the market there would be a severe pressure on margins. Be it an Aircel or Etisalat, the new operators would not remain fringe players in the Indian market, but would try and rock the applecart of existing operators. The growth in Indian market could start tapering off very soon. According to an industry expert the subscriber base will not expand beyond 800 million in coming years from current number 400 million. Also, ARPUs in India have steadily falling ($5-$6). There have been talks about 3G and IPTV pushing growth, but it all seems far-fetched. The third generation of mobile services (3G) will be used by telecoms to gain more spectrums. Besides, the services will be used only in urban areas.
1.4.3 Wireline Segment
Wireline subscriber base declined from 37.06 Million in December-2009 to 36.76 Million at the end of January-2010. BSNL/MTNL, two PSU operators hold 84.96% of the Wireline market share. However, they lost 0.36 Million subscribers in the month of January-2010. Overall Wireline tele-density is 3.13.
Service Provider wise Market Share as on 31-1-2010
1.4.2 Broadband (≥ 256 Kbps download)
Total Broadband subscriber base has increased from 7.83 million in December-09 to 8.03
Million in January-2010, there by showing a growth of 2.42%.
The government has taken many proactive initiatives to facilitate the rapid growth of the Indian telecom industry.
- 100% foreign direct investment (FDI) is permitted through the automatic route in telecom equipment manufacturing
- FDI ceiling in telecom services has been raised to 74%
- Introduction of a unified access licensing regime for telecom services on a pan-India basis
- Plan to introduce mobile number portability in a phased manner
- The government is implementing a program of connecting 66,822 uncovered villages under the Bharat Nirman programme. The government will invest US$ 2 billion to set up 112,000 community service centres in rural India to provide broadband connectivity in 2008-09.
- The Department of Telecommunications (DoT) has stated that foreign telecom companies can bid for 3G spectrum without partnering with Indian companies. Only after winning a bid, would they need to apply for unified access service licence (UASL) and partner with an Indian company in accordance with the FDI regulations
MAJOR INVESTMENTS IN INDIAN TELECOM SECTOR
The booming domestic telecom market has been attracting huge amounts of investment which is likely to accelerate with the entry of new players and launch of new services. Buoyed by the rapid surge in the subscriber base, huge investments are being made into this industry.
- The Russian government picked up equity amounting to US$ 670 million-US$ 700 million in Sistema Shyam TeleServices Ltd (SSTL), a joint venture between Russia-based telecom major Sistema and Shyam Group in India, by the end of this financial year. SSTL is also planning to invest US$ 5.5 billion over the next 5 years in India.
- Norway-based telecom operator Telenor has bought a 60 per cent stake in Unitech Wireless for US$ 1.23 billion.
- Japanese telecom major NTT DOCOMO acquired a 27.31 per cent equity capital of Tata Teleservices for about US$ 2.6 billion in November 2008.
- Bahrain's Batelco has signed a deal to buy 49 per cent in Chennai-based S-Tel, a GSM service provider, for US$ 225 million.
- BSNL, India's leading telecom company in revenue terms, will put in about US$ 1.16 billion in its WiMax project.
- Vodafone Essar will invest US$ 6 billion over the next three years in a bid to increase its mobile subscriber base from 40 million at present to over 100 million.
- Telecom operator Aircel, which launched GSM mobile services in Bangalore in February 2009, plans to invest US$ 220.58 million over the next year to set up base stations across the state.
REVIEW OF LITERATURE
Jain (1993) analyzed that in response to the business needs of faster, cheaper, and more varied modes of communication, the telecommunication sector in many countries has been undergoing rapid technological and structural changes over the past few years. Since the mid 1980s, the telecommunication sector in India, too, has undergone major transformations. Private participation in the manufacture of end user equipment and services, reorganization of the monolithic Department of Telecommunication, and raising finances from the public for investment in the state owned factories and organizations have been some of the policy initiatives of the government. The Indian telecom sector is characterized by under-investment, amalgamation of regulatory and operational functions, ill-defined sector policies, and lack of financial and administrative autonomy - features which are common to many other developing countries. In such a scenario, the consequences of sectoral changes have implications both for decision makers at the national level as well as in other developing countries. The policy changes initiated by the government and the lessons to be drawn from India's experience are reviewed.
Monie (2002) stated that India is the great big oasis most multinational corporations are looking to as they consolidate their position in Indian companies. This was evident during the past year where foreign players accounted for approximately 35% of the value of Indian acquisitions. The telecoms sector dominated the M&A scene accounting for 24% of all deals done last year. The Batata-BPL telecom deal ($662 million) represented 10% of all deals done during 2001. This study show that M&A deal requires active management of desired business synergies, market prospects, price, structure, negotiations and human resources. However, before considering an M&A the acquirer would need to consider the legal and tax aspects of the deal.
Singh (2005), stated the role that information and communication technologies are playing for Indian society to educate them formally or informally which is ultimately helping India to emerge as an information society. Though India has a huge population, the illiteracy rate is also huge in this country. The paper has taken an approach to find the historical situation and present the prevailing scenario as well as the change that are taking place with the application of ICT to the advantage of the society in different areas including daily life. India is making all out efforts to be counted among the developed nations of the world. The article also describes the considerable attention India is taking for application of technology, development of infrastructure and human resource for meeting national needs. Basically India is building an information society. Technology has helped society to cut across the traditional boundaries for getting converted into an emerging information society. The study concludes that The Indian software and services industry has significantly helped to boost the Indian economy. In IT-enabled services too, India has been clearly perceived to be the dominant hub. The Indian software sector is being recognized as the single largest contributor to incremental market capitalization in India but the sector is still small in terms of contribution to GDP, especially when compared to other large sectors in the economy like agriculture and manufacturing. Similarly, the telecommunication sector has contributed a lot but still has a considerable way to go. The paper also enforces that comparisons of India's telecommunication statistics with those of developed and other emerging economies show that the country is still far behind its contemporaries.
Kokil et al. (2006) emphasized that the Telecom sector is one of the integrated parts of economy of any country and the Government regulatory and policy initiatives have also been directed towards establishing a world class infrastructure in India also. It provides an ideal environment for the investment but it also has a very complex structure. The challenges imposed on the Indian telecom market are increasing day by day because of the new technologies and knowledge. India's 21.59 million-line telephone network is one of the largest in the world and the 3rd largest among emerging economies (after China and Republic of Korea). Given the low telephone penetration rate -2.2 per 100 people of population, which is much below the global average, India offers vast scope for growth. There is great need of Indian Telecom companies to be flexible. This paper basically deals with the different kind of flexibilities and types of flexibilities exist in any company. Here, basic research is done for two Indian companies that are Bharti Tele-Ventures Limited (BTVL) and Bharat Sanchar Nigam Limited (BSNL) and this shows how any company do well in market if it is flexible.
Gupta (2008) stated that even there was slow down in the market but merger and acquisition were happening in the telecom sector, it showed that it is only sector which is on boom .the main thing is it's also boosting the Indian economy. near about 20 deals has done in telecom sector and worth $9.15 bn The study reveal that maximum of the telecom deals were inbound with foreign companies infusing money to the tune of $ 8.065 bn .in order to gain ground on the on the Indian soil during April to November 2008 merger worth $676 million was announced. The main considerable thing is that there is not any effect of Global liquidity Crisis on the telecom sector. Indian telecom market is fastest growing market in the world in 2008 the growth of telecom sector was near about 70 %. And cellular companies add their 26.1% subscriber in that year though there was liquidity crunch in the market. The telecom sector showed their 30% growth in September 2008.
Narayana (2008) estimated the contribution of telecommunication (or telecom) services to aggregate economic growth in India. Estimated contribution is distinguished between public and private sectors to highlight the impact of telecom privatization on economic growth. Knowledge of policy determinants of demand of telecom services is shown to be essential to enhance growth contribution of telecom services. Using a recent sample survey data from Karnataka State in South India, price and income determinants of demand for telecom services are estimated by capacity of telephone exchanges. Estimation results offer evidence for significant negative own price elasticity and positive income elasticity of demand for telecom services.
Mani (2008) addressed a number of issues arising from the growth of telecom services in India since the mid-1990s. It also discusses a number of spill over effects for the rest of the economy and one of the more important effects is the potential to develop a major manufacturing hub in the country for telecom equipment and for downstream industries such as semiconductor devices. The telecom industry in India could slowly become an example of the service sector acting as a fillip to the growth of the manufacturing sector. A beginning towards this has been made. The formation of a Telecom Equipment Export Forum and the announcement of the Indian Semiconductor Policy 2007 are steps in this direction. Success crucially depends on the response of the private sector to these incentives. Given the importance that a regulatory agency can play in this crafting, no effort should be lost in strengthening the powers of the TRAI. The benefits to the Indian economy from having both a strong services and manufacturing segments in the telecom sector cannot be undermined.
Debnath et al. (2008) stated that Technological modernization is increasingly viewed as a premeditated necessity in today's era of growth and prosperity for any country. Telecommunications has entered a new age of development with advanced technology and increased competition with established players. The technological advances in the telecommunication sector are associated with an uninterrupted growth of the mobile sector. The prime focus of the service providers is to create a loyal customer base by benchmarking their performances and retaining existing customers in order to benefit from their loyalty. The paper aims to address these issues. This paper employs the method of data envelopment analysis (DEA) to compare the relative efficiency of mobile service providers in India. The identification of the strongest and the weakest service providers could be very useful in improving their efficiency and performance. Mathematically, DEA determines the best weights for each input and output for a particular unit under study so as to maximize its relative efficiency. The results are insightful to the telecom policy planner as benchmark them in terms of their efficiency. It also identified the inefficient service providers who can improve their efficiency by making the efficient providers as their role model. This research paper contributes to the literature in two ways: firstly, this research identifies the different parameters for the mobile service providers in India for the benchmarking of the service providers. It also categorized them into various input and output parameters contributing towards the number of subscribers for different service providers. In the next stage, this research takes a further step and examines whether there are differences between the number of subscribers and the performance of the service providers. Benchmarking of the service providers would depend on the efficiency and quality of service. There is still great diversity in the relative performance of various service providers, which is a matter of concern to the telecom planner in this country.
Srinivasan (2009) stated that India is the fastest growing economy post its liberalization and globalization activism and Asia's third largest economy behind Japan and China. India's telecom density is not so high as compared to the western market. Many companies are easily attracted to the telecom sector and are interested in investing large amount which is good for both the telecom sector as well as the economy of the country. India's telecom market is the fastest growing investment pocket in the world. By 2010, it is expected that the investment will be around $24 billion and that the total number of subscribers to be around 500 to 600 million. Bharat Sanchar Nigam Ltd, Reliance Communication, Tata Teleservices, IDEA Cellular, Vodafone Essar and Bharti-Airtel are interested in investing further in the sector between $12 million to $15 million in 2009-10.
Mishra (2010) stated that the economy of India has grown leaps and bounds during the last few years. The growth is eminent and is a motivation for targeting growth despite the challenges of global economic environment. The phenomenal growth of the industrial and services sector has been the real thrust creator in the aspiring Indian economy. Against this background, to give a further fillip and to sustain the past performance, infrastructure bottlenecks are posing challenges. There is a substantial lacuna between the desired and the actual availability of the infrastructural facilities in the country. Besides inadequacy, the other emerging challenge is unequal availability of the facilities across the country. One such vital area of physical infrastructure is the telecommunication services. The telecom sector has grown at a furious pace over the last decade but still there are constraints. The rising inequality in the availability of services in urban and rural areas is also a matter of concern, as it is creating a digital divide. This paper analyzes the growth and inequality in the availability of telecommunication services in the country and the role of Eleventh Five Year Plan in providing the required thrust to the sector's future growth and bridging the digital divide.
OBJECTIVES OF THE STUDY:
- To analyse the industry telecom sector through the application of Porter's Five Forces Model.
- To analyse the attractiveness of the Indian Telecommunication Industry for Investment purpose.
Research Design:Descriptive Research
Data collection: The secondary data has been collected from various websites, books, journals, newspapers & magazines etc.
Tools for analysis: To fulfill the objectives of the study, tools used are Porter's Five Forces Model, Porter's Diamond Model.
In order to fulfil the objectives, several case studies and articles are being studied and on the basis of them, tools of analysis are being used as stated above.
In order to do analysis of Indian Telecom Sector, Porter's Five Forces Model has been used which deals with factors in an industry that influence the nature of competition within it, the forces inside the industry (microenvironment) that influence the way in which firms compete, and so the industry's likely profitability is conducted in Porter's five forces model.
The Diamond model of Michael porter for the competitive advantage of nations has been used to see the competitive position of Indian Economy in global competition so as to meet the second objective.
ANALYSIS OF INDIAN TELECOM SECTOR THROUGH PORTER'S FIVE FORCES MODEL
Porter's five forces model is very important tool for analysing everything from the intensity of competition to the profitability and attractiveness of an industry. Due to large investment needed, there are very few players who can enter into. Lower tele-density in the country provides huge opportunity for the telecom players.
Force 1: The Degree of Rivalry (HIGH)
The intensity of rivalry, which is the most obvious of the five forces in an industry, helps determine the extent to which the value created by an industry will be dissipated through head-to-head competition. The most valuable contribution of Porter's “five forces” framework in this issue may be its suggestion that rivalry, while important, is only one of several forces that determine industry attractiveness.
Now let us understand the implication of degree of rivalry in Indian telecom sector. The dimensions of this parameter are determined by:
High Exit Barriers:In any industry, if the exit barrier is high it increases the difficulty of any organization to leave the industry sector. The telecom industry suffers from high exit barriers, mainly due to its specialized equipment. Networks and billing systems cannot really be used for much else, and their swift obsolescence makesliquidation pretty difficult.
High Fixed Cost:The industry also suffers from high fixed cost which makes the entry barrier also very high for the industry. It comes as no surprise that in the capital-intensive telecom industry the biggest barrier to entry is access to finance. To cover high fixed costs, serious contenders typically require a lot of cash. When capital markets are generous, the threat of competitive entrants escalates. When financing opportunities are less readily available, the pace of entry slows. Meanwhile, ownership of a telecom license can represent a huge barrier to entry.
- 6-7 players in each region
- 3 out of 4 BIG-Four present in each region
Very less time to gain advantage by an innovation:Every company in this industrial sector in investing a huge amount in research and development and marketing strategy. That is why we see any offer launched by any company is counter attacked by other companies very soon. This makes the industry rivalry most prominent.
EXAMPLE: Caller tunes, life time card
Price wars:The price war is really very fierce in this industry. Price war in telecom industry has commoditized the market that branding has taken a backseat.
STRATEGY USED TO TACKLE THE INTENSITY OF COMPETITIVE RIVALRY
FORCE 2: THE THREAT OF NEW ENTRANTS (LOW)
Both potential and existing competitors influence average industry profitability. The threat of new entrants is usually based on the market entry barriers. They can take diverse forms and are used to prevent an influx of firms into an industry whenever profits, adjusted for the cost of capital, rise above zero. In contrast, entry barriers exist whenever it is difficult or not economically feasible for an outsider to replicate the incumbents' position. The most common forms of entry barriers, except intrinsic physical or legal obstacles, are as follows:
1. Well Established Brands:There are 11 well established players in the telecom space namely Vodafone-Essar, Airtel, Aircel, Idea Cellular, Tata Indicom, Reliance Communications, Loop Mobile, Spice Telecom, Virgin Mobile, BSNL, MTNL.
2. Economies of Scale:Already established players in telecom Industry are enjoying economies of scale and if new entrant want to enjoy such economies has no choice but to start out at a relatively large scale of operations, in order to achieve unit costs close to existing players.
3. Limited Spectrum Availability:With private initiatives increasing in telecom and broadcast service provision, demand for spectrum has increased. Digital technology has increased the scope of applications and created new areas of service provision. Cellular telephony and wireless Internet are examples of such services. Despite technological changes that reduce the demand for spectrum, availability of spectrum continues to be a constraint. In order to allocate spectrum amongst competing service providers, regulatory agencies often use auctions. From the regulatory and policy perspective, spectrum auctions ensure efficient usage by allocating it to those entities that value it most, while also generating revenues for governments. But auctions may lead to unexpected outcomes as, for example, when regulatory agencies have inadequate market information, there may be a mismatch between expected and actual bidder behaviour, or auctions may be poorly designed. The key challenge before regulatory agencies is to design auctions in such a way as to meet the objective of fostering competition while at the same time ensuring that bidders can effectively use the spectrum for their business.
4. Licensing Requirement:Licensing requirement also act as barrier to entry. Sometimes it became very difficult for the new entrants to obtain license.
(i) Unified License for Telecommunication Services permitting Licensee to provide all telecommunication/telegraph services covering various geographical areas using any technology.
(ii) License for Unified Access (Basic and Cellular) Services permitting Licensee to provide Basic and /or Cellular Services using any technology in a defined service area.
STRATEGY OF TACKLING NEW COMPETITORS
IN INDIAN TELECOM INDUSTRY
FORCE 3: THE THREAT OF SUBSTITUTES (LOW)
The threat that substitute products pose to an industry's profitability depends on the relative price-to-performance ratios of the different types of products or services to which customers can turn to satisfy the same basic need. The threat of substitution is also affected by switching costs - that is, the costs in areas such as retraining, retooling and redesigning that are incurred when a customer switches to a different type of product or service. It also involves:
- Product-for-product substitution (email for mail, fax); is based on the substitution of need;
- Generic substitution (Video suppliers compete with travel companies);
- Substitution that relates to something that people can do without (cigarettes, alcohol).
Now let us discuss this concept for Indian telecom industry. The potential major substitutes for telecom industry are as follows:
- VOIP (Skype, Messenger etc.)
- Online Chat
- Satellite phones
All of these technologies have a huge potential, though none of the above a major threat in current scenario.
Strategy of Tackling Threats of Substitute Products in Telecom Industry
Indian telecom companies should invest more in self Research & Development activity rather than depending upon foreign suppliers to tackling the threats of substitute.
FORCE 4: BARGAINING POWER OF BUYERS (HIGH)
Buyer power is one of forces that influence the appropriation of the value created by an industry. The most important determinants of buyer power are the size and the concentration of customers. Other factors are the extent to which the buyers are informed and the concentration or differentiation of the competitors. Kippenberger (1998) stated that it is often useful to distinguish potential buyer power from the buyer's willingness or incentive to use that power, willingness that derives mainly from the “risk of failure” associated with a product's use.
- This force is relatively high where there a few, large players in the market, as it is the case with retailers a grocery stores;
- Present where there is a large number of undifferentiated, small suppliers, such as small farming businesses supplying large grocery companies;
In the context of Indian telecom industry we can say that the following points influence the buyer power:
- Lack of differentiation among the service provider
- Cut throat competition
- Customer is price sensitive
- Low switching costs
Number portability to have negative impact
Strategy of Tackling the Bargaining Power of Customer
FORCE 5: BARGAINING POWER OF SUPPLIERS (MEDIUM)
Supplier power is a mirror image of the buyer power. As a result, the analysis of supplier power typically focuses first on the relative size and concentration of suppliers relative to industry participants and second on the degree of differentiation in the inputs supplied. The ability to charge customers different prices in line with differences in the value created for each of those buyers usually indicates that the market is characterized by high supplier power and at the same time by low buyer power.
In case of Indian telecom industry the following should be kept in mind:
(i) Limited number of suppliers: The industry basically has limited number of suppliers. BSNL is one of the major supplier in Indian Telecom Sector, it provides link to all other service providers.
TABLE:1 -SUPPLIERS OF INDIAN TELECOM INDUSTRY
(ii) Shared tower infrastructure: Technology has helped them to share the tower infrastructure. This basically helps them to reduce the initial investment a lot.
(iii) Limited skilled Managers: Limited pool of skilled managers and engineers especially those well versed in the latest.
(iv) Medium Switching Cost: Medium cost of switching since changing their hardware would lead to additional cost in modifying the architecture.
(v) Overall influence on the industry - medium.
STRATEGY OF TACKLING NEW COMPETITORS
IN INDIAN TELECOM INDUSTRY
1. Indian Telecom companies negotiate with 4-5 suppliers at the same time for the same contract so that to keep the psychological pressure and also give the message that they have so many options.
2. Always make sensation in media about new project or new requirements so that more and more supplier comes to offer and they can easily bargain with the supplier.
Indian telecom industry should make alliance with foreign supplier and invest jointly in Research & Development activity.
INDIAN TELECOM: AN ATTRACTIVE INVESTMENT DESTI NATI ON
Telecom has been an active sector in India in terms of M&A deals in the last six-seven years.At a time when the economies globally are witnessing recessionary trends and mobile handset manufacturing companies are cutting their projections of handset sales in 2009, the Indian telecom industry continues to ring aloud with multi-billion dollar deals. Mega investment plans for India are being drafted by overseas telecom service providers, as they seek to participate in the world's fastest growing mobile telecom market.
FACTS AND FIGURES AT A GLANCE
1. Potential to achieve 700 million telecom subscribers by 2012 from 374 million currently.
2. Mobile subscribers at 350 million, second only to China
3. High on mergers and acquisitions—NTT DOCOMO acquires 26 per cent stake in Tata Teleservices for $2.7 billion; Telenor buys 60 per cent of Unitech Wireless for $1.07 billion
4. Launch of new platforms. Auction for 3G services soon
DEAL BUZZ CONTINUES
The Indian telecommunication sector with total deal value of $5.8 billion garnered the maximum share of 19 per cent in the overall merger and acquisitions (M&A) in 2008. It started the year 2009 on a high note with the country's first mega deal announced. Quippo Telecom Infrastructure, the telecommunication infrastructure arm of India's largest infrastructure equipment rental company Quippo Infrastructure Equipment Limited, has announced signing a deal with India's sixth largest mobile telecom service operator Tata Teleservices to buy 49 per cent stake in its subsidiary Wireless-TT Info-Services Ltd (WTTIL) for about $500 million (Rs 24 billion).Quippo Telecom is a part of SREI Group having diversified interests in areas such as infrastructure, capital market services and financial services. Under the arrangement, Quippo and WTTIL will merge their operations comprising about 5000 and 13,000 telecom towers, respectively. Tata Teleservices will have the 51 per cent majority stake in the merged entity. Earlier, NTT DOCOMO Inc., the largest mobile service operator of Japan, bought 26 per cent stake in Tata Teleservices Limited (TTSL),a part of India's largest industrial conglomerate Tata Group. The $2.7-billion deal is the largest in the Indian telecom market since early 2007, when Vodafone Group Plc, the UK-based world's largest mobile telecommunications network company, had acquired 67 per cent stake in Hutchison Essar (now Vodafone Essar) for $11.1 billion. TTSL stake provides NTT DOCOMO an instant presence across India along with a well-established nationwide mobile network and a subscriber base of more than 30 million. The NTT DOCOMO-TTSL deal values the company at more than three times of what it commanded three years ago. Temasek Holdings, the investment arm of the government of Singapore, had picked up a 9.9 per cent stake in TTSL at a valuation of about $3 billion in early 2006. So much is the attraction of this market that even the new entrants, which are yet to roll out their network and win their first Subscriber, are commanding billion dollar-plus valuations. Telenor ASA, the biggest Nordic telephone company, has signed a deal with India's second largest real estate company Unitech to buy 60 per cent of its wireless arm Unitech Wireless (UW) for $1.07 billion (including $400 million debt) on October 29, 2008. UW has the licences for all 23 telecom circles of India, enabling it to have a nationwide footprint. UAE-based Emirates Telecommunications Corporation (Etisalat) has acquired a 45 per cent stake in Swan Telecom for $900 million, valuing the company at $2 billion in September 2008. Swan, a part of Mumbai-based real estate and hospitality business house Dynamix Balwas (DB) Group, has secured licences for 13 circles (two more licences in process) out of the total 23 circles.
MORE TO FOLLOW
Telecom has been an active sector in India in terms of M&A deals in the last six-seven years. Yet, we can expect many more equity deals to take place sooner or later. The rush of overseas telecom companies will continue, as they are facing saturated markets at home, while the Indian market has a huge potential for further growth. The prominent overseas telecom companies that are seeking an entry into the lucrative Indian market include a number of Middle-East and European service providers such as Qatar Telecom, Kuwait-based Zain Group, Bahrain Telecom, Italy-based Telecom Italia SpA and a leading Turkish telecom company Turkcell. South Africa's MTN Group has also been interested in acquiring, or being acquired by, or merging with an Indian company. Acquiring a stake in an existing Indian company is the only certain way of entry in the Indian market, and the other option available right now is to participate in the auction for 3G services, which are expected to happen very soon. The government of India has set a target of 45 per cent tele-density compared with the current level of 31.50 per cent. It has estimated that the telecom sector will need $73 billion during the next five years to achieve the target of 45 per cent teledensity, and a major chunk of the required investment is expected to come through foreign direct investment (FDI) inflow, which has gone up to $1261 million in 2007-08 from$478 million in 2006-07.
WHAT MAKES INDIAN TELECOM SECTOR ATTRACTIVE?
Despite the gloomy outlook owing to the global recession/slowdown in the economy, the telecom sector of India continues to attract record number of new subscribers. The Indian mobile phone operators have been adding about 8-10 million subscribers every month throughout this year, and the figure has regularly topped the 10 million mark during the last three-four months. Considering the current pace of fresh additions per month, India has the potential of taking the total tally of subscribers to 700 million in the next five years from the current level of about 350 million, second only to China. About 10.35 million wireless subscribers were added during the month of November 2008, taking the total number to 336.08 million and a similar number was expected during the month of December 2008. The total number of both wireless and wireline subscribers reached 374.13 million at the end of November 2009, according to the Indian telecom industry regulator, Telecom Regulatory Authority of India (TRAI).
In terms of projected revenues, such a huge subscriber base is expected to generate more than $37 billion by 2012 growing at a CAGR (compounded annual growth rate) of 18 per cent. This growth potential offers enough incentive to overseas telecom companies to vie for their share of the pie. Investor-friendly regulations by the government, allowing up to 74 per cent holding in a domestic entity by a foreign company, is an icing on the cake.
AN ANALYSIS OF THE INDIAN TELECOM INDUSTRY UNDER THE PORTER'S DIAMOND MODEL REVEALS THAT INDIA OFFERS A COMPETITIVE ADVANTAGE FOR FIRMS OPERATING IN THE COUNTRY.
India is the fastest growing free market democracy in the world. It has a mature and dynamic private sector, which accounts for 75 per cent of India's GDP, and a market with enormous potential due to its large size and diversity. It is also expected to achieve the highest growth rate among the BRIC countries (Brazil, Russia, India and China). India offers significant business opportunities to the services, as well as the manufacturing sectors. This is because India offers benefits such as cost advantage in product development and back-office processing and the large-scale availability of skilled English-speaking professionals. The middle class population is also a significant market for any business entity. AT Kearney ranked India as the second-most attractive democracy in its FDI confidence index. The success of MNCs is a proof that India is an attractive investment destination. India's huge domestic market and buoyant economic growth have always attracted foreign investors.
Some of the key advantages of investing in India are outlined below.
Stable Economic Outlook
A decade of reforms has opened the country to greater competition and spurred industries to become more efficient. India is currently the fourth-largest economy on PPP basis and is well positioned on a continuously increasing growth curve. India's emergence as a leading destination for foreign investment is a result of positive indicators such as a stable 6 per cent annual growth, rising foreign exchange reserves of over US$ 266.18 billion(July 24th 2009) and Foreign Direct Investment (FDI) of US$ 15 billion. Goldman Sachs had earlier predicted that India will become the third-largest economy in the world. However, it has now revised its previous estimates and claims that by 2050, India will even surpass the US and become the second-largest economy after China. The country's economic growth has become more attractive due to the rising share of the services sector in the GDP.
Large Market PotentialAround 30-40 million people in India join the middle class every year. The country's upper middle class spends 6 percent of its earnings on telecom services. India is one of the largest consumer markets in the world. Due to rapid economic growth and rise in disposable income, the spending power of consumers is increasing rapidly. It has been forecasted that 15 years down the line, Indians will be approximately four times richer than they are today. As per this forecast, Indians will purchase five times more cars and consume three times more crude oil than they do today.
According to the 2001 census, about 54 per cent of the country's total population was below 25 years of age. By 2013, another 200 million people will be joining the league, representing an exponential growth in the ‘consuming class'. India will become a large consumer of world resources - be it natural or man-made, thereby offering numerous opportunities to marketers around the globe. Approximately 33 per cent of India's population will be residing in urban areas by 2026, as against 28 per cent in 2001.
Large Talent Pool
The working age population is expected to rise by 83 per cent by 2026. India has over 380 universities and about 1,500 research institutes, which churn out approximately 200,000 engineers, 300,000 post graduates, 2,100,000 other graduates and around 9,000 PhDs. This large base of skilled manpower offers unparalleled advantages to the companies operating in India. As a result, many multinational companies have either established operation hubs in India to leverage this sizeable talent pool, or they have outsourced their work to a third party in India. The numerous BPOs and KPOs flourishing in India are a direct consequence of companies choosing the latter option.
Low Labour Cost
CII estimates that manufactured product outsourcing accounted for US$ 10 billion in 2007. The value will escalate to US$ 50 billion by 2015. India has one of the lowest labour costs among the developing countries, which is the foremost factor for attracting multinational giants in every sector. The Ministry of Commerce, Government of India, has estimated that off shoring operations to India can provide a cost benefit of up to 40 to 60 per cent, as compared to developed countries. The country has also emerged as a major R&D hub with more than hundred Fortune 500 companies based in India. An apt example is Nokia, which has set up its manufacturing operations in India considering the long term sustainable demand for mobile telephony. The company believes that this initiative will help the company in reducing time to market and respond better to customer requirements. It has pumped in US$ 150 million into its Chennai facility.
The telecom industry is fastest growing industry in the Indian market with an addition of 9- 10 million monthly subscribers. The Indian telecommunications network with over 375 Million subscribers is second largest network in the world after China. Major players in this sector are BSNL, MTNL, Airtel, Vodafone, BPL, Tata, Idea, etc.· Buyer power and threat of rivalry is very high in Indian Telecom Sector. Both these factors are formidable. This could be reason of consolidation in the industry. Companies try to reduce threat of rivalry by merging or buying out rival companies.Indian Telecom Sector has been an active sector in India in terms of M&A deals in the last six-seven years. Yet, it is expected that many more equity deals would take place sooner or later. The rush of overseas telecom companies will continue, as they are facing saturated markets at home, while the Indian market has a huge potential for further growth..Telecom industry in India has undergone a revolution in the recent years. The country is ranked second worldwide in terms of having the largest telecommunication network, after China. With the ongoing investments into infrastructure deployment, the country is projected to see high penetration of Internet, broadband and mobile subscribers..India's emergence as a leading destination for foreign investment is a result of positive indicators such as a stable 6 per cent annual growth, rising foreign exchange reserves of over US$ 266.18 billion(July 24th 2009) and Foreign Direct Investment (FDI) of US$ 15 billion.
The Indian telecom industry is a fine example of what can be achieved by easing governmental regulations with respect to production, imports and exports and focusing more on tariffs and other conditions of sale. In order to sustain this high growth, the government ought to be very serious about examining various proposals for bridging the digital divide through the support of private sector service providers as well. The policy focus of the government should be to maximize the spillovers of this activity to local Indian companies especially downstream industries such as components and semiconductor manufacturing. A beginning towards this has been made. The formation of a Telecom Equipment Export Forum and the announcement of the Indian Semiconductor Policy 2007 are steps in this direction. Success crucially depends on the response of the private sector to these incentives. Given the importance that a regulatory agency can play in this crafting, no effort should be lost in strengthening the powers of the TRAI. The benefits to the Indian economy from having both a strong services and manufacturing segments in the telecom sector cannot be undermined.
Source: Essay UK - http://www.essay.uk.com/free-essays/finance/indian-telecom-sector.php
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panded to include data transport, video conferencing, e-mail, instant messaging, Web browsing, and various forms of distributed collaboration, enabled by transmission media that have also expanded (from traditional copper wires) to include microwave, terrestrial wireless, satellite, hybrid fiber/coaxial cable, and broadband fiber transport.
Today consumers think of telecommunications in terms of both products and services. Starting with the Carterphone decision by the Federal Communications Commission in 1968,1 it has become permissible and increasingly common for consumers to buy telecommunications applications or equipment as products as well as services. For example, a customer-owned and customer-installed WiFi local area network may be the first access link supporting a voice over Internet Protocol (VoIP) service, and a consumer may purchase a VoIP software package and install it on his or her personally owned and operated personal computer that connects to the Internet via an Internet service provider.
The technologies used for telecommunications have changed greatly over the last 50 years. Empowered by research into semiconductors and digital electronics in the telecommunications industry, analog representations of voice, images, and video have been supplanted by digital representations. The biggest consequence has been that all types of media can be represented in the same basic form (i.e., as a stream of bits) and therefore handled uniformly within a common infrastructure (most commonly as Internet Protocol, or IP, data streams). Subsequently, circuit switching was supplemented by, and will likely ultimately be supplanted by, packet switching. For example, telephony is now routinely carried at various places in the network by the Internet (using VoIP) and cable networks. Just as the PSTN is within the scope of telecommunications, so also is an Internet or cable TV network carrying a direct substitute telephony application.
Perhaps the most fundamental change, both in terms of technology and its implications for industry structure, has occurred in the architecture of telecommunications networks. Architecture in this context refers to the functional description of the general structure of the system as a whole and how the different parts of the system relate to each other. Previously the PSTN, cable, and data networks coexisted as separately owned and operated networks carrying different types of communications, although they often shared a common technology base (such as point-to-point digital communications) and some facilities (e.g., high-speed digital pipes shared by different networks).
How are the new networks different? First, they are integrated, meaning that all media— be they voice, audio, video, or data—are increasingly communicated over a single common network. This integration offers economies of scope and scale in both capital expenditures and operational costs, and also allows different media to be mixed within common applications. As a result, both technology suppliers and service providers are increasingly in the business of providing telecommunications in all media simultaneously rather than specializing in a particular type such as voice, video, or data.
Second, the networks are built in layers, from the physical layer, which is concerned with the mechanical, electrical and optical, and functional and procedural means for managing network connections to the data, network, and transport layers, which are concerned with transferring data, routing data across networks between addresses, and ensuring end-to-end