Indian Telecom Industry - Microeconomic Perspective

CONTENTS

1. Acknowledgement

2. Introduction

a. Overview of the Industry

b. Timeline of the Indian Telecom Market

3. Market Structure: Present Scenario and Competitive Environment

a. Barriers to Entry in a telecom market

b. Overview of Market Structure and Evolution

c. Universal Service Obligation

d. Competitive Profile of the Telecom Sector

e. License Conditions Inhibiting Competition

f. Spectrum Assignment and Pricing

g. Interconnection Charges

h. Tariffs for Basic Service

i. Features of Indian Telecom Tariffs

j. Issues with Present Tariff Structure

4. Microeconomic Analysis

a. Demand and Supply

b. Costs

c. Basic Economic Cost Concepts

d. Concept of Costs used for determining prices

e. Pricing Methodologies

5. Issues Raised

a. Critical analysis of various pricing methodologies

b. Predatory Pricing and Vertical Price Squeeze - An overview

6. Conclusion

7. References

Acknowledgement

We would like to take this opportunity to thank our instructor, Dr. Rasananda Panda, for giving us an opportunity to explore the Pricing Strategies of Indian Telecom Operators.

It was a learning experience in more than one ways. Not only did we gain valuable economic insight, the project was also a lesson in the importance of teamwork and time management.

We would also like to thank KEIC for their co-operation during information research.

Thank you.

Aakash Srivastava

Sachin Lele

Shipra Rawat

PGPCM - 2005-07

Introduction

Overview and Introduction

It was in 1856 that the first telegraphic network was set up in India. Its initial use was during the First War of Independence the following year. For many years, therefore, the development of telecommunications was driven by military and governmental concerns, rather than consumer issues or commercial factors. This has changed somewhat over the past few years following the implementation of forward-looking liberalization policies.

Until the 1980s, the Department of Posts and Telegraphs (under the Ministry of the same name) had the mandate of regulating and offering telecommunications services. It was governed by the Indian Telegraph Act 1885 and the Wireless Act of 1933. In 1985, the Department of Posts and Telegraph was split up into the Department of Telecommunications (DoT) and the Department of Posts. The DoT was established as the state operator, regulator and licensor. It was only in October 1999 that the activities of the operator and licensor were somewhat separated, by the creation of the Department of Telecommunications Services (DTS). This separation, however, was a largely artificial one.

Although the DoT had been charged with operating telecommunications services, its efforts were seen as insufficient. Initial steps towards corporatisation saw the creation of Mahanagar Telephone Nigam Limited (MTNL), which started offering basic fixed services in Mumbai and Delhi in 1987. MTNL still holds a monopoly in those cities, where DoT/DTS is not present at the local level. MTNL is wholly owned by the Government of India and the DoT. Videsh Sanchar Nigam Limited (VSNL) was set up in 1986 as the monopoly operator for international gateway services.

On May 13, 1994, the government opened local basic and value-added telecommunications services to competition. Mobile services were introduced on a commercial basis in November 1994. India was thus divided into 21 "Telecom Circles". Circles correspond approximately to states and are categorized as either "A", "B" or "C" according to size and importance. Category A includes the heaviest volume areas such as Delhi, Uttar Pradesh, Maharashtra, Gujarat, Andhra, Karnataka and Tamil Nadu. Licenses for mobile services were also issued for the four metros (Delhi, Mumbai, Chennai, Calcutta). As part of the license conditions, traffic could be routed to VSNL's international gateway only by passing through DoT/DTS's network. In 1986, the Telecom Commission was set up with the mandate to accelerate the deployment of telecommunications services and to implement new telecommunication policy.

A bill passed in 1995 envisaged the creation of an independent and autonomous agency for the regulation of telecommunications, the Telecommunications Regulatory Authority of India (TRAI). Set up in 1997, the TRAI is responsible facilitating interconnection and technical interconnectivity between operators, regulating revenue sharing, ensuring compliance with license conditions, facilitating competition and settling disputes between service providers. The TRAI cannot grant or renew licenses and this remains the DoT's responsibility. The TRAI may also set the rates for telecommunications services. Its decisions can only be challenged by the High Courts or Supreme Courts of India.