Effects of Government Policies on Profitability of Telecommunications Companies in Australia - Case Study Example

Effects of Government Policies on Profitability of Telecommunications Companies in Australia Name of the Student: Name of the Instructor: Name of the course: Code of the course: Submission date: Effects of Government Policies on Profitability of Telecommunications Companies in Australia Introduction Government policies play an important role in influencing the performance of businesses. The frameworks and rules established by governments are aimed at ensuring that businesses compete effectively with each other. According to Trehan and Trehan (2010), government policies can create both favorable and unfavorable conditions for businesses. Furthermore, the policies can encourage investments and at the same time discourage foreign and local competitions. Policies provide an opportunity for governments to intervene and influence business activities in order to protect and promote local markets and this plays an important role in increasing profits. Support policies like tax incentives, preferential loans, subsidies and government contracts facilitate the development of domestic companies and this assists in improving the economy of a country. The policies make sure that businesses provide their customers with efficient services thereby protecting them from exploitation. Therefore, government policies are essential in regulating the operations of businesses. This paper is going to explore the effects of government policies on profitability of telecommunication companies in Australia. The paper will also determine the extent to which price regulation, customer protection and licensing policies affect the profitability of telecommunication companies in Australia. Additionally, the paper will explore the relationship between these policies. Price Regulation Policies According to Troshani and Hill (2008), price control policies are aimed at eliminating predatory pricing. This ensures that the prices are more satisfactory to the customers and at the same time, the policies make sure that the telecommunication companies obtain a guaranteed profit level. The operators are thus forced to improve their efficiencies and processes in order to attract more customers hence retain their profit levels. Campbell (2007) affirms that the price control policies in Australia are aimed at preventing telecommunication companies from taking advantage of their market power. The policies are focused towards promoting growth and fair competition in the communications industry. Brown, Hossain and Nguyen (2004) assert that Price control policies are key factors that characterize telecommunication companies in Australia. According to their studies, price controls are aimed at protecting customers against monopolies as well as to promote equitable competitions. Moreover, the regulations are aimed at encouraging the companies to achieve efficiencies in their operations. Price controls policies can lead to the improvement in the society’s general welfare and reduce the extra profits gained by telecommunication companies (Block, 1995). Bourreau and Dogan (2006) note that price control policies alter Australian telecommunications industry profits. Price regulations are set with an aim of encouraging the companies to come up with innovative ways of generating profits. Furthermore, the policies have been established in order to ensure that the companies attain maximum market growth. However, the policies create imperfections in the telecommunications industry and this has negative effects on the industry profits. Kiessling and Blondeel (2010) note that the objective of price regulation policies in telecommunication industry is to increase allocative efficiency so as to prevent excessive prices which might be set by dominant operators. In addition, price regulation policies promote increased technical efficiency and this leads to restructuring of local and long distance tariffs. According to Albarran, Olmsted and Wirth (2005), price control policies assist in making sure that tariff prices reflect the cost of providing telecommunication service hence this prevents inefficient entry in relation to long distance market and at the same time it places a barrier to the industry ability to generate huge profits . Gentzoglanis (2010) states that telecommunication retail price policies can create investment problems as firms may find it difficult to generate sufficient returns. The policies create difficulties to the telecommunication companies towards earning excessive revenues. According to Trewin (2006), the retail price control is aimed at ensuring that no telecommunication company misuses its market power to exploit its customers. This ensures that investors in the telecommunications industry earn justifiable returns from their investments. However, the policies can lead to development of inefficient markets making companies to generate insufficient revenues and this can make them collapse. Customer Protection Policies Consumer protection is a key issue in telecommunication industry. According to Trewin (2006), consumer protection policies are aimed at ensuring that telecommunication companies maintain privacy of their customers. Telecommunication operators are required to protect minors, maintain contractual relationships with their customers, protect the environment and access the market using the appropriate frequencies. Kiessling and Blondeel (2006) affirm that in order to comply with consumer protection policies, telecommunication companies must implement expensive procedures and guidelines that require huge capital outlays. Additionally, telecommunication companies which fail to comply with these policies are charged with huge penalties which can greatly affect their profits. Studies conducted by Troshani and Hill (2008) indicated that telecommunication companies in Australia incur substantial amount of costs in implementing and safeguarding privacy relating to their consumers’ information. This is due to the complicated encryption mechanisms and technologies as well as the high cost involved in providing location based services. Moreover, the study indicated that the companies incur huge expenses in preventing access of harmful, inappropriate and offensive information to minors. Telecommunication companies are required to implement age verification process and robust access controls in order to eliminate and restrict minors from accessing inappropriate services and contents. Luo (2006) notes that telecommunication companies incur huge costs in implementing control systems and age verification processes and this often leads to a reduction in their profits. According to Madden (2010), telecommunication companies that are able to effectively implement consumer protection policies are able to attract a large number of customers and this increases their profits. Customers are motivated to join telecommunication companies which adhere to the set policies because they are certain that their privacy will be protected. Gitman and McDaniel (2007) argue that telecommunication companies that are able to protect the bilateral and contractual relationships between demand and supply side stakeholders generate huge profits because of the fact that they protect their end users. A study conducted by Luo (2006) indicated that the unscrupulous players in the telecommunication industry have a strong capability of creating mistrust and this can in turn damage their public reputation. Therefore, implementing customer protection policies creates a trusting environment hence the companies are able to generate huge profits. Fleisher and Harris (2005) state that government policies require businesses to set standards of operations and this can have an effect on their profits. Businesses have to ensure that they comply with the government policies in order to be allowed to operate. However, this polices can increase the operating cost of the companies and hence reduce their profits. Albarran, Olmsted and Wirth (2005) emphasize that government policies have a great effect on industrial development and financial performance trajectories. The excessive customer protection policies create barriers to the companies’ capability to generate profits hence affecting the telecommunication industry development. Horton (2010) indicates that the telecommunications industry has a responsibility of protecting its customer’s welfare. Companies are required by the policies to pay for expenses relating to customer complain. The costs involved in dealing with unhappy customers are billed on the companies involved. This in turn increases the companies’ expenses thereby reducing their profits. Therefore, the Australian customer protection policies increase the operating cost of telecommunication companies hence reducing their profits. Licensing Policies Licensing policies plays an important role in promoting effective competition among telecommunication operators in the country. According to Kiessling and Blondeel (2010), licenses limit the number of frequencies hence this enables the government to minimize the number of operators in Australian telecommunications industry. This can in turn assist the companies to generate high profits. Studies conducted by Pluckett (2007) indicated that the cumbersome procedures required in order to comply with the licensing policies discourage new market entrants hence making the existing companies to generate large profits. Moreover, the study found out that telecommunication companies experience considerable amount of expenses in order to act in accordance with the licensing policies. This in turn creates negative impacts on their revenues. Luo (2006) emphasizes that licensing policies require telecommunication companies to pay annual and recurring fees. In addition, the policies require companies to demonstrate good reputation and professional qualifications and at the same time they are required to provide specified financial guarantees. This increases the industry operating costs thereby reducing its profits. The European Commission (2012) affirms that telecommunication companies in Australia incur huge amount of expenses in order to comply with licensing policies. According to Brown, Hossain and Nguyen (2008) licensing in Australia is aimed at ensuring that telecommunication companies provide the required standard of services to their customers. Licensing policies ensure that the companies implement the required standards of operation. World Bank (2010) notes that telecommunication companies must set aside considerable amount of funds in order to enable them to implement the stated operating standards. Furthermore, the license requires companies to provide their customers with access networks and transmission lines and this requires substantial amount of resources. Arup (2009) asserts that Australian licensing policies place a limitation to the telecommunications companies’ capacity to generate revenues hence this reduces their profits by a large extent. On the other hand, telecommunication companies in Australia have an obligation to contribute to the universal service levy and the national relay service costs. In addition, the companies are obliged to pay costs related to providing digital data services. The universal service costs are designed with an aim of ensuring that all people in Australia have adequate access to standard telephone services regardless of where they reside. However, this charges increase the operating cost of the companies thereby reducing their profits. According to Campbell (2007), telecommunication companies in Australia are required to establish several network carriers in order to comply with the licensing policies. The carriers include line links which are physical media used in communications and designated radio communication facilities which facilitate effective transmission of information. Albarran, Olmsted and Wirth (2005) indicate that telecommunication companies incur huge costs in purchasing and maintain the carries thus affecting their profits. Therefore, licensing policies established by the Australian government have a negative impact on the telecommunication industry revenues hence reducing its profits. Relationship between price regulation, consumer protection, licensing and profitability According to Troshani and Hill (2008), Australian government policies reduce profits that are generated by the companies in the telecommunications industry. Price regulation, consumer protection and licensing policies increase the companies’ operating costs hence this has a negative impact on their profits. Kiessling and Blondeel (2010) emphasize that the different forms of policies implemented by the government in the telecommunications industry create a barrier on the ability of the companies to generate enormous profits. The policies require the companies to implement expensive operating procedures and guidelines which reduce their profits by a considerable extent. According to Trewin (2006) the policies which govern the telecommunication industry in Australia are aimed at ensuring that customers receive quality services. This is due to the fact that the telecommunication industry is unique because it is politically and technically limited. Therefore, licensing, price regulation and consumer protection policies ensure that telecommunication companies provide quality services. In addition, the policies assist in creating equitable market access for the companies. This in turn increases competition leading to a reduction in profits. Conclusions In conclusion, government policies have a great impact on the profitability of telecommunication companies. The Australian government has established Price control policies with an aim of protecting customers. However, these policies place a limit on the ability of the companies to generate profits. The companies are required to set aside huge amounts of funds in order to enable them meet the standards relating to the licensing policies. To be licensed the companies must establish a number of carriers and at the same time they are required to contribute to the universal service cost. Moreover, customer protection policies increase operating cost of the companies and this leads to a reduction in their profits. References Albarran, A., Olmsted, S., & Wirth, M.(2006). Handbook of Telecommunications. London: Routledge. Arup, C .(2009). Innovation, Policies and Law. Cambridge: Cambridge University Press Block, W.(1995). Professor Modigliani on Price Controls: The Baleful Influence of the Perfectly Competitive Model, Journal of Social Economics, 22(5), 27-30. Bourreau, M., & Dogan, P.(2006). Regulation and Innovation in the Telecommunications Industry. Regulation and Innovation, 3(1), 1-38. Brown, A., Hossain, M., & Nguyen, D.(2008). Telecommunications Reforms in the Asia-Pacific Region. Massachusetts, Edward Elgar Publishing Inc. Campbell, D.(2007). International Telecommunications. York, York hill Publishing. Fleisher, C & Harris, P. (2005). Handbook of Public Affairs. London, SAGE Publications Ltd. Gitman, L., & McDaniel, C. (2007). The Future of Telecommunications Business. Mason: Cengage Learning. Horton, B.(2010). Consumer Protection in the Australian Telecommunications Industry. Australian Communication Industry, 1(1), 1-7. Kiessling, T., & Blondeel, Y.(2010). 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