UK Mobile Phone Segment - Coursework Example

? UK Mobile Phone Segment   Table of Contents Introduction 3 The Telecom Sector 3 Market Structure 7 Price and Output 10 Non-Price Competition 13 Economic Theory 16 The 2008 – 2009 Recession and its Effects 19 Conclusion 20 References 21 Introduction The current state of the UK mobile telecom segment is identified by extraordinary competition that hinges on price, package bundling and customer service (Anaman et al, 2009). The shifts in the segment have been heavily influence and impacted by the development and popularity of smart phones that have changed the dynamics of the mobile phone segment from a portable communications alternative from landlines, to one that includes a social (text messaging, social networking), bill pay and organisational devices with exceptional on the go email connectivity, multifunctional medium whereby smart phones resemble miniature computers in terms of capabilities (Ofcom, 2011). The preceding defines the major changes in the market that have been led by changing consumer tastes, demands and increased sophistication with varied packages that this study will delve into.   The Telecom Sector The nuisances of the industry that are noteworthy is that in 2010 mobile phone connections, meaning calls made, increased with smart phones, SMS messaging and tablet SIM cards contributing 80 percent to that growth (Ofcom, 2011). The near saturation of the market in terms of mobile phone placements means that price and package bundling competition has heated up as the means to retain, and gain new subscribers (Ofcom, 2011). The lead in terms of the number of subscriptions between 2003 through 2008 in the UK mobile telecom sector belonged to O2 from 2004 on as it wrested the top spot from Orange:   Figure 1 – UK Mobile Telecom Market Shares / 2003 through 2008 (Ofcom, 2008, p. 232)   O2’s 27.9 percent market share at the end of 2008 also included the lead in revenues as well: Figure 2 – Estimated Mobile Retail Revenue by Network Operator / 2003 through 2008 (Ofcom, 2008, p. 230)   O2 held this lead by ever decreasing margins on through 2009 when the merger of T-Mobile and Orange created Everything Everywhere:   Figure 3 – Mobile Telecom Operator Revenues / 2005 through 2010 (Ofcom, 2011, p. 290)   A look at mobile messaging as a result of smart phones and the trending toward a younger subscriber profile represented key factors in the revenue changes and changing face of the UK mobile telecom sector. Figure 4 – Mobile Messaging Volumes (Ofcom, 2011, p. 282)   As indicated, the growth in popularity of smart phones was responsible for the above:   Figure 5 – UK Smart Phone Sales (Ofcom, 2008, p. 210)   The shift from landlines to mobile services took off in 1998 as shown by the following:   Figure 6 – UK Telecom Industry Retail Revenue (Ofcom, 2008, p. 198)   As a result of heightened competition, mobile telecom service cost to subscribers has converged to the point where the cost is comparable to fixed line costs:   Figure 7 – Comparison of Average Fixed and Mobile Voice Call Services (Ofcom, 2011, p. 302)   The preceding figures reinforce the point that the industry has become price sensitive, thus explaining the rationale behind the merger that created Everything Everywhere.   Market Structure In equating the industry sector a PEST Analysis provides insight regarding the environment mobile telecom companies in the UK operate under. It aids in understanding the relevant trends by looking at the Political, Economic, Social and Technological factors (marketingteacher.com, 2009). Under a PEST Analysis, a scan of the overall general industry environment from a long-term perspective aids in understanding broad based trends (netMBA, 2009). In ascertaining the overall Political climate with regard to regulations in the United Kingdom as represented by the mobile telecom sector, the arena has been stabile. The actions of consumer groups have raised issues represented by the method of calculating call termination procedures they state are overcharging consumers (Ray, 2008). The regulatory history of Ofcom is marked by its balanced consideration of industry dynamics, consumer concerns and well being as well as aiding the industry. In terms of the economic structures of the United Kingdom with regard to its direction, consumer spending impacts and associated facets that affect the use of mobile phones, the industry has experienced increased call and SMS messaging volume, but lowered revenues due to heightened competition (Ofcom, 2011). Short Message Service (King, 2008) as well as MMS (Multimedia Messaging Service) (New Statesman, 2003) are increased usage sectors that are new revenue streams for mobile telecom operators. Despite the economic downturn that has impacted the spending habits of the general UK public, mobile calls and text services have risen thus adding revenue streams (Deloitte, 2009). The changing direction and nature of social habits, trends and outlooks of the consumer arena represent factors that change the dynamics of the sector (mobileeurope.co.uk, 2008). The Mobile Data Association uncovered that in the United Kingdom consumers are increasingly replying on their mobile devices for expanded uses (mobileeurope.co.uk, 2008). One if the most noteworthy developments are the increased enhancements of smart phones that continually become smaller, lighter, faster and more capable in terms of consumer usability (Ofcom, 2011). Other fields of developments on a technological plane represent enhanced networks that offer broader or enhanced services as a result of clearer and faster transmissions and infrastructure investments (The Birmingham Post, 2007). The rapid developmental pace among smart phone manufacturers that represent innovations in features, capabilities, memory and utility have a turnover of almost every 18 months (The Birmingham Post, 2007).   Under the Porter’s Five Forces model an understanding of the environment is conducted through an analysis of the following factors:   Figure 8 - Porters Five Forces Model (LearnMarketing, 2009) Under the Threat of Substitutes opportunities in the mobile telecom sector are basically non-existent due to the tremendous investments required in infrastructure and the high degree of competition. This leaves the field open only to existing competitors and mergers. The foregoing means that the Threat from Established Rivals is the core aspect of the sector. The Barriers to Entry for New Entrants is the billions in investment represented by networks and supporting structures, consumer brand identity and trust are considerable barriers that include economies of scale.   Under Supplier Power, UK mobile operators hold the upper hand with the exception of Apple’s powerful and popular iPhone (Ofcom, 2011). O2 scored a major coup in securing the iPhone rights for the UK, which has served it well in terms of gaining market share (The Daily Mail, 2008). Whilst the Blackberry and Android phones have good market share, the iPhone has captured the imagination of consumers.   With regard to buyer power, consumers hold the key in that there is little to choose from among the different mobile operators with the exception of O2’s rights to the iPhone. In the UK mobile telecom segment Porter terms the consumers with having the primary control position under bargaining leverage (Adcock, 2000, p. 106). As a result, consumers can shift between varied mobile telecom operators with relative ease due to shorter contract lengths.   Price and Output The degree to which a market and or industry can be referred to as being competitive is dependent on the number of suppliers in the market to meet the demands or needs of customers, along with the ease of new companies entering a sector (Neary, 2001, pp. 536-561). The UK mobile telecom market is basically an oligopoly, which represents where there are a few firms controlling the majority of the market in a concentrated industry structure (Vives, 2001, pp. 34-36). With regard to competitive markets, they operate under a number of assumptions (Janssen et al, 2004, pp. 2-17).   Table 1 – Assumptions Behind a Perfectly Competitive Market (Villas-Boas and Hellerstein, 2006, pp. 132-140) Area Summary Share of the Market In many instances, suppliers or firms start with insignificant market shares. As a result their impact on the market is too small to impact pricing. Output Under a perfect market each firm has approximately the same output of the same product. As a result the consumer sees no real differences. Consumers Under the perfect model consumers have full information on competitor pricing and products / services. As a result, if a firm raises its prices consumers will tend to shift to a lower priced firm offering the same quality and services. Firms The assumption under a perfect market is that all of the participants in the sector have equal access to resources as represented by technology and other areas. Thus any improvements in service or packages are copied or adopted by other firms quickly, negating advantages. Barriers Under the perfect assumption there are no substantial barriers to entrance or exit. This is not the case for mobile telecom firms as identified under Porter’s Model herein.   In generating a visual representation of the above under a short run price and output for the industry and firms, the equilibrium price in the market is represented or determined by the interaction of market demand and market supply (Melitz et al, 2008, pp. 295-316). The following Figure shows that price (P1) is termed as market clearing and thus taken on by the firms in the segment. As it, the market price, is constant for the units being sold, the AR curve becomes what is termed as the Marginal Revenue curve, which is MR (Melitz et al, 2008, pp. 295-316). Companies maximise their profits when its marginal revenue equals its marginal cost (Melitz et al, 2008, pp. 295-316). The area that is shaded in the Figure is the supernormal profit that is made in the short run due to the market price (P1) being greater than the average total costs (Melitz et al, 2008, pp. 295-316).   Figure 9 – Short Run Price and Output (Brynjolfsson, 2006, pp. 793-808)     Under a different scenario, not all companies enjoy supernormal short run profits. The corresponding profits are dependent on the positioning of the short run costs (Brynjolfsson, 2006, pp. 793-808). In the instance where companies do not experience supernormal profits is represented by the fact their average costs are higher than the present average market pricing (Brynjolfsson, 2006, pp. 793-808).   Figure 10 – High Short Run Costs (Brynjolfsson, 2006, pp. 793-808)   In equating price and output when market demand increases this results in the market price increasing as well as the amount of service and or units sold (Brynjolfsson, 2006, pp. 793-808). The revenue curve for a company thus shifts upward as represented by AR2 (which equals MR2) and the profit expands to Q2 (Brynjolfsson, 2006, pp. 793-808). The MC curve represents the supply curve of the company with higher prices thus causing a supply curve expansion (Brynjolfsson, 2006, pp. 793-808). Immediately following the up tick in demand, profit decreases over the short term as more efforts and resources are required to ramp up capacity (Brynjolfsson, 2006, pp. 793-808). After this has equaled out, profits increase correspondingly, with an inward shift concerning market demand having the reverse impact (Shaffer, 2004, pp. 585-592).   Figure 11 – Increase in Market Demand and This Price and Quantity (Brynjolfsson, 2006, pp. 793-808) Non-Price Competition Mobile companies engage in non price competition in that their profit curves have shrunk to the point where this type of approach is not sustainable in that the costs of network upgrades requires healthy profits. As a means to attract and retain subscribers, companies have to offer other areas such as service and bundling convenience (Koski and Kretschmer, 2005, pp. 89-113). In a review of the UK mobile sector a study conducted by Ciao (2011) revealed the following:   Table 2 – UK Mobile Providers (Ciao, 2011) Mobile Provider Survey Comments* Vodafone Customer service was rated as very poor Orange Customer services need upgrading BT Cellnet Rated as good if one is not a heavy user One 2 One Customer Service is not rated as being good O2 Customer service rated as good 3 Not rated Virgin Mobile Great customer service T-Mobile Great customer service Genie Mobile Not rated Cellular Operations Not rated Sainsbury’s One Not rated RSL Communications Poor customer service Value Telecom Terrible customer service   Other non-price areas represent 4G upgrades for better call clarity and speed that works in consort with the newer smart phones on the market. In this area Ofcom stated that in 2011 O2 had the fastest broadband download speeds that were followed by Vodafone, Three and then Everything Everywhere (House, 2011). As a means to understand the significance of the foregoing non-pricing facets a survey in 2010 revealed “68 percent of consumers rank reliability of service higher than price” (RealWire News Distribution, 2010). In a study conducted by J.D. Power and Associates (2011) the significance of non-price aspects were revealed:   Figure 12 – J.D. Power 2011 UK Mobile Phone Satisfaction Study Pre Pay Segment (J.D. Power and Associates, 2011)         Figure 13 – J.D. Power 2011 UK Mobile Phone Satisfaction Study Pay Monthly Segment (J.D. Power and Associates, 2011)   Economic Theory The United Kingdom, as a member of the European Union is required to adhere to the policies of the EU under Competition Law (Goyder, 1998). The legislative framework for the EU competition policy has four major rule areas (Sauter, 1997).   Table 3 – EU Competition Policy Four Major Rules (Sauter, 1997) Area Summary Agreements This represents the prohibition of any type of agreements that distort, restrict or hinders competition under Article 81 EC. The foregoing includes price fixing and cartels. Market Dominance This provision means companies in a dominant position must refrain from abusing their position under Article 81 EC. This specifies the non-use of predatory pricing to eliminate or reducing competition. Mergers and Acquisitions, Joint Ventures Council Regulation 107 TFEU specifies all firms doing business in the EU. State Aid This prohibits state aid of an indirect or direct nature under Article 107 TFEU.   Competition Law in the UK was updated in 2011 to incorporate all of the preceding provisions under the UK Enterprise Act 2002. The foregoing included the formation of the Office of Fair Trading (2004) that included the Competition Appeal Tribunal and the Competition. Table 4 – UK Competition Policy (Office of Fair Trading, 2004) Area Summary Competition Lessening This seeks to ascertain if a proposed merger, joint venture and or acquisition would be in the best interests of the public. The economic policy is to ensure a level playing field is maintained in an industry (Zahariadis, 2005). It seeks to eliminate market imbalances that could result in higher prices (Zahariadis, 2005). Turnover Test This looks at companies seeking to merge or acquire. It looks at sales of companies relative to the market, market share and the potential impact of a merger or acquisition (Bright and Currie, 2002). The economic theory of this seeks to maintain the function of the market that ensures efficient and fair operation as espoused by Eugene Fama (Bright and Currie, 2002). Case Presentation The Competition Appeals Tribune is the format for companies not included in a merger or acquisition to present their views against such an action. Criminal Sanctions This represents jail terms up to five years to deter illegal activities such as cartels (The Journal, 2008).   The economic facets of the UK competition Policies represent the theory of the efficient market hypothesis as espoused by Eugene Fama (1991, pp. 1575-1617) that refers to the balance in a market as reflected in information made available to the public in pricing equities that calls for effective competition policies to maintain a level playing field. In further elaborating on Fama’s (1970; 1991; 1998) Efficient Market Hypothesis, he argues market respond to acquisitions and mergers as a result of their economic impact.   Competition policy in the UK was formulated to ensure fair market operation through protecting the free market in operation (Basedow, 2007). In addition, the policies under competition in the UK have been formulated to incorporate the elasticity of demand that represents that the amount of the quantity on demand rises in keeping with price reductions (Cunningham, 1993). The cross elasticity of demand represents the measurement of demand for one product that increases when the price goes up for another in the same category (Okubo, 2008). All of these actions and policies work on consort with profit maximisation under welfare economics that is based on markets and components acting in a rational manner that allows them to thus maximise profits (Miller and de Matta, 2008).   The 2008 – 2009 Recession and its Effects It is well known that the collapse of the subprime mortgage market in the United States under former President Bush represented the cause of the global recession due to credit default swap derivatives (Eichengreen et al, 2009). The crashing of loans as investors defaulted on their obligations for a host of reasons, along with the fallout from subprime loans collapsing caused a credit crunch as over extended banks had to reel in lending to cover their abnormally high bad loan debt ratios (Eichengreen et al, 2009). The tightening of money to lend, along with the loss of jobs as companies had to pull back on spending and lay off employees impacted elasticity and caused mobile telecom operators to accelerate pay as you go plans at lower rates to lure subscribers, along with the bundling of packages as a means to save consumer outlays on mobile, television and internet services (Ofcom, 2011). The switch by consumers to lower priced mobile plans and bundling options represented their response to tighter budgets that the mobile industry responded to through new methods.   In terms of long term, the UK mobile telecom market did not mortgage the future by engaging in price reductions, but simply opened up the pricing field to accommodate reduced call options and thus modes of affording service to a wider audience profile. As a result, this does not impact them over the long term in that consumers will raise their calling plans as the economy strengthens and their budgets permit.   Conclusion As brought forth herein, the UK telecom sector, whilst experiencing a decline in revenues as a result of the recent economic downturn, has and is emerging from this period in fine shape. This assessment is made due to the fact that whist overall revenues retreated, call volumes increased in 2010 and are projected to do the same for 2011 once the figures are in. The foregoing is due to the understanding of mobile operators that price reductions in the sector that are already close to fixed line costs was not the solution. Instead, the mobile operators aimed at increasing non-price options such as reduced entry rates for pay as you go plans that start as low as twenty pounds per month. By opening up subscription plans, mobile telecoms actually increased subscribers and calls placed along with putting more people onto networks. Mobile telecom operators also continued the upgrading of their networks to 4G, enhanced Internet connectivity, increased text capacity as well as customer services. These actions strengthened brands among consumers thus positioning them for the port recession recovery. As a result, whilst competition will continue to be fierce in the sector, growth will continue as a result of more youths taking on mobile services and their higher use of text and broadband utilisation as revenue streams. Growth will slow as a result of the saturation of the market, even with new youth generations coming into the service arena, but mobile operators will be reaping higher per subscriber revenues as a result of more service use as smart phones continue to growth along with tablets that use broadband connections. As more of these devices are sold, the mobile operators will continue to reap more revenues from communications that has become a new way of life in that people need to stay connected. References Adcock, D. (2000) Marketing Strategies for Competitive Advantage. John H. Wiley & Sons. New York, New York, United States Anaman, M., Lycett, M., Love, S. (2009) Enhancing customer experience within the mobile telecommunications industry. Accessed on 27 January 2012 from http://is2.lse.ac.uk/asp/aspecis/20080075.pdf Basedow, J. (2007) The Modernization of European Competition Law: a Story of Unfinished Concepts. Texas International Law Journal. 42(3). Pp. 429-431 Bright, C., Currie, K. 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