Analysis of Telecom Industry - Essay Example

Running Head: Analysis of Telecom Industry Analysis of Telecom Industry Table of Contents Introduction 2. Regulation and liberalization in TelecomIndustry 3. Market structure in Telecom Industry 4. Effect of Market structure on Pricing in Telecom Industry 5. Effects of Regulation, Market Structure on Performance of Telecom Industry 6. Outsourcing in Telecom Industry 7. Conclusion 1. Introduction The market structure characterized by the nature and type of players, products, and demands wield an influence on the overall economy of that particular industry. Market Structure refers to the competitive environment in which the buyers and sellers of the product operate. The process by which the price and output are determined in the real world is strongly affected by the structure of the market. Most markets fall within one of the four different types of market structures. They are perfect competition(many buyers and sellers for a homogeneous product with perfect mobility of resources and each seller is too small to affect the price of the product) at one extreme, pure monopoly at the opposite extreme, and monopolistic competition( many sellers for a homogeneous or differentiated product and entry & exit in to the industry is easy in the long run) and oligopoly(few sellers of a homogeneous or differentiated product with difficulty in entry in to the industry) in between. (Sven. Wunder, 2003) In this essay we shall discuss about World Telecommunication Industry in general and the UK industry in particular, analyzes its market structure, figure out the entry barrier for the operators and understands its advantages and disadvantages. Telecom Industry - An overview The telecommunications industry provides many services to businesses and consumers, using a growing variety of technologies and spanning an increasing range of communications media (voice, image, data, etc.). Worldwide, the ITU estimates that telecommunication service revenues have more than doubled, from US$ 517 to US$ 1,216 billion over the last ten years. As a result, total telecommunication revenues have substantially increased as a percentage of GDP in Africa, Oceania and Asia and have remained stable in Europe and the Americas. Today, they represent almost five percent of GDP in Africa, compared to 4.5 percent in Oceania, 3.8 percent in Asia, 3.3 percent in Europe and 2.9 percent in the Americas. (World Telecommunication / ICT Development Report, 2006) 2. Regulation and liberalization in Telecom Industry Initially all the dimensions of the public telecommunication services namely ownership, entry, pricing and output choices were controlled by the governments of the respective countries. Up to the beginning of 1980s, the telecommunication services were provided by the governmental enterprises that enjoyed monopoly in majority of the countries. These had strict regulations in the range, amount and the prices of services, regulated to meet the social goals and the constraints on returns. Large economies of scale relative to demand would justify the establishment of price regulated legal monopolies and externalities (network effects and the spill over effects on public goods such as health, information and defence) would justify the particular kinds of price and output restrictions. Direct ownership of the public telecommunication services and restrictions on foreign investment in the telecom industry were seen as the perfect strategy to meet the implications of the public telecommunication policies. But over the past two decades, these public telecommunication operators have been fully or partially privatized in many of the countries. Regulations concerning access to telecommunication markets, provision of services to users and pricing mechanisms have undergone a sea of change. The technological improvements and the changing structure of demand for telecommunication services necessitated the changes in the regulation and provided a ground for bringing liberalization policies. This resulted in erasing the monopoly structure of the telecom industry and brought in a number of players though limited in number. The change in technology and demand forced changes in regulation which in turn changed the industry organization, market structure and level of prices leading to a huge growth in the volume of telecommunication services consumption. In the mid 1980s, the industry represented 2.5% of the GDP, 1.55 of consumer expenditure, 1.5-2.5% of the total inputs in the industry and 3% of goods and services trades in the OECD area. But after a decade, share of telecom industry in GDP grew to 3%and the share of inputs grew by 1% in most of the countries. (Desarrollo Econmico, 2006). In spite of the move towards regulatory reforms, the timing and the pattern of change differed among the countries. Still in many countries, the PTOs are dominant players with an imbalance in the price structure. The legal barriers to entry were removed as early as 1980s in the United Kingdom and the US but liberalization to its true effect happened very recently in most of the continental European countries, Mexico and Korea. The restrictions on the extent of foreign investment are in place in many of the countries but the foreign players are allowed to associate with the domestic telecommunication market. In effect, the present day telecom industry in many countries is characterized by the control of PTOs by the governments, constraints on foreign ownership which ranges from limitations on the acquisition of shares by the foreign operators to restrictions on the size on any single ownership share. So the market remains concentrated in trunk and international services (PTOs holding 90% in trunk and 86% in International phone services and 66% in mobile services). But in countries like US and UK where regulatory y reforms and liberalization were implemented aggressively, the market is not concentrated and has become a level playing field. (Olivier Boylaud et al, 2000). The changes in regulation nearly transformed the industry and its operating economy apart from being beneficial to the consumers and businesses. It also increased the role of market mechanisms by redefining the role of public enterprises. Based on a comparative study of a large set of OECD countries over 1990s it is concluded that the changes in regulation leading to liberalization created entry and development of competition (oligopoly in nature) in the telecommunication services. This generally resulted in higher productivity, lower prices and improved quality of services. 1n 1984, when telecom industry privatisation measures were introduced in the UK, Mercury communications became the major competitor to British Telecom, the state owned telecommunication services provider who was enjoying monopoly. Since then the market was dominated by these two players for almost seven years with BT providing services at the local, long distance and the international level and Mercury concentrating on the national and the international segments. But as more regulatory reforms were brought in, many small players entered the market. At present there are around 350 telecommunication licence holders in the UK including 90 cable operators having licence for voice telephony. 3. Market Structure in Telecommunication Industry State regulation played a crucial role in shaping up of this Industry over the last three decades and transformed it from a Monopoly to Oligopolistic Market structure. Ideally, the effects of competition on performance ought to be studied at the level of the single markets in which these services are supplied and demanded. However, due to data constraints, a trade-off exists between the chosen level of desegregation and the possibility to perform cross-country comparisons. Furthermore, some services (such as local fixed voice telephony) are still largely monopolistic in a vast majority of countries while others (such as value added services) have generally been competitive throughout the nineties. Analysis of these services would not yield insights on the relationship between competition and performance. Three broadly defined services that have undergone significant changes in regulation, market structure and/or performance in recent years are: domestic long-distance fixed telephony ("trunk"), international long-distance fixed telephony ("international"), cellular mobile telephony ("mobile"). Experience in the first-mover countries showed that it can take very long to translate changes in legislation into changes in market structure. In the transition from monopoly to competition the incumbent Public Telecom Operator ("PTO") often maintains a competitive advantage which can be exploited (sometimes through practices which violate competition laws) to preserve a dominant position. This partly explains why in most countries market structure is still very concentrated, especially in trunk and international services. Nonetheless, in some countries, such as the United States, the United Kingdom and Finland, in which entry has been going on for a longer time and/or where aggressive liberalization policies were implemented, these shares are substantially smaller and market structure has changed more radically. In many of the countries, the telecom industry is oligopoly in nature. (Gerald W. Brock, 1995) Four main factors are found to describe best the cross-country variance in the set of indicators of regulation and market structure. By looking at the indicators most closely associated with each of the factors , these can be given a straightforward economic interpretation: the first factor (associated with liberalization and market structure in trunk and international services, state ownership and internationalization) expresses the market and regulatory environment in fixed telephony, the second (associated with prospects of liberalization in all services) expresses the timing of the liberalization process; the third (associated with liberalization and market structure in mobile services) expresses the market and regulatory environment in mobile telephony; and the fourth (associated with prospects of privatization) accounts for the timing of the privatization process. Internationalization of domestic markets is strongly related to the market and regulatory environment of both fixed and mobile telephony given the large number of foreign operators participating in alliances or joint ventures in the mobile market. (Giuseppe Nicoletti et al, 2000) 4. Effect of Market Structure on Pricing The oligopoly market is characterized by the interdependence or the rivalry among the few players in the industry and the current telecom industry is evident to this. The major barriers to enter the telecom industry are the requirement of huge capital investments and specialized inputs, economies of the scale of operation, limit pricing (existing players charge a price low enough to discourage entry of new players in to the industry) and the governmental regulations. Also price discrimination in this industry does not the help the players in the long run and they prefer to compete on the basis of additional services, product differentiation and advertising. ( Dominick Salvatore, 2003). The above kind of market structure forces the telecom players into a different type of competition. The major firms, which are few in number in telecom industry (is the case in most of the countries), are entering into mergers and acquisitions to strengthen themselves. The reason behind this is strategic in nature rather than for achieving economies of scale or for financial reasons. Every large telecom company wants to be a one stop shop offering all types of telecommunication services to the customers to gain competitive edge over the competitors. The range of services from a single provider includes local and long distance telephone services, high speed data communications and cable televisions. Thus, though there is no huge price discrimination in this industry, ultimately the customer stands to benefit from the healthy rivalry in the oligopoly market of the telecom industry. 5. Effects of Regulation, Market Structure on Performance of Telecom Industry 1. Pricing: The state ownership and prospective privatization leave prices and quality largely unaffected. Given that market structure and the degree of liberalization are controlled for, it is not ownership per se but the presence of market power that tends to be reflected in high prices. At the same time state control has often been associated with highly distorted price structures, since cross-subsidization tended to be tolerated in state-owned public utilities. It is also possible that privatization prospects leave prices unaffected due to the reluctance of governments to reduce prices in the run to privatization in order to maximize privatization proceeds. (Dan Stein bock, 2005) 2. Productivity: The negative effect of prospective privatization on productivity is more difficult to explain but still can be attributed to reverse causality: where productivity levels are low, governments accelerate the timing of privatization hoping that better governance mechanisms will enhance the competitiveness of the national PTO faced with global competition. 3. Alliances: The Internationalization of domestic markets enabled number of foreign Operators participating in alliances or joint ventures aimed at providing telecommunications services. Foreign operators would be attracted to markets where the revenue and market share gains to be reaped from efficiency improvements and aggressive price competition are larger, due to existing inefficiencies and price distortions. (Richard E. Caves, 1992, Industrial Efficiency in Six Nations, p. 197). In sum, the de-regulation move by the State in favour of liberalization resulted in beneficial effects on productivity and prices are felt as soon as it is announced. They also provided reasonable support aimed at encouraging and accelerating the establishment of new entrants, especially in fixed voice trunk and international services, where effective competition appears to bring about increases in productivity and downward price adjustments over and above those implied by the mere threat of competition. UK Telecom Industry - An example of a de-regulated telecom market: The major players in the UK include BT (who provides integrated services comprising basic telephone services at the local, national and international level, VANs(Value Added service Networks) like video text, sale of instruments and some specialised services like satellite and cellular radio), Mercury Communications (the major competitor to BT who enjoys the majority of market share in the international and long distance services) , Companies like Ionica and Energis (this company has built a digital network using power transmission lines) who are among the six to receive licence in 1991 to provide long distance services and the cable companies offering telecom services along with the television services. BT faced stiff competition from the cable providers at the local services level and lost out its monopoly to other players like Mercury in the long distance and international segments. Though there are many players currently in the market, it is still dominated by the above players at the different segments representing a oligopoly market structure. But the increasing number of players and the technological advancements are slowly narrowing the gap between the major companies and the others leading to a level playing field. The rising competition in the UK telecom market is due to the combined effect of supportive regulatory environment and rapid technological change. The increasing liberalisation fuels the competition with more international players entering the market. This forces the major players to go for mergers and acquisitions with smaller players. Though the merger efforts of BT and MCI of the US in 1997was termed as a failure, Mercury Communications' merged with Nynex, Bell Cable mania and Videotron (the cable companies) to form Cable and Wireless Communications in the same year. 6. Outsourcing in Telecom Industry: Changing customer demands, ever-changing industry standards, and legacy systems' inability to keep up with the growing volumes, inter-working challenges between diverse nodes are just some of the hurdles that mars the telecom industry. Businesses in today's turbulent environment should consider creative strategies to help them weather the volatility in today's telecom industry. Telecom players have been outsourcing various functions of their businesses from maintaining and supporting mature product lines, outsourcing of IT infrastructure to more recently co-developing sophisticated 3G node-elements. In fact, this view is supported by IDC's survey, which indicates that companies in volatile industries are already embracing outsourcing as way of managing uncertainty. (International Data Corporation, Report on Financial Services, Energy and Telecommunications, 2002). The outsourcing supplier should prefer a partner who can offer full-spectrum services. While timing pressures might force telecom OEMs to outsource the new product development services to an offshore vendor, it's worthwhile to evaluate the vendors not only on their product designing and development expertise, but also on their proficiency to test the system, establish its interoperability with other network elements, integrate the product in the field, offer bug-fix support and enhancement services to the OEM. In summary, the outsourcing firm should give serious consideration to establishing and maintaining a relationship with a partner with flexibility in service-offerings and which exhibits expertise in bridging quality, cultural and process gaps between the partnering organizations. (Richard E. Caves, 1992) The present major outsourcing destinations in the global telecom industry are India, China, Brazil, Russia and Philippines. The emerging economies of India and China fuel the speed of change that occurs in the global economy and the advances in the information and communication technology are changing the trading and business models of the telecommunication companies. In case of telecom, the ICT technology has enabled the transfer of technical work across continents very easy without any geographical and time constraints. The amount of outsourcing tends to increase the in the coming years and this helps the offshore sites countries to strengthen their economy. (UNI telecom, 2005) Just as with any other industry, the telecom industry s also facing opposition to outsourcing. The main concern expresses is that the outsourcing of core telecom work such as installation, maintenance, customer support etc. done on the basis of cost cutting to meet the regulatory demands and the fill the shortage skills on the long run will lead to decline in the quality of services and damage to the company's reputation leading to customer dissatisfaction and triggering customer defection. This is done without any long term planning to ensure the maintenance of skill base. Also it brings a major distrust among the company's workforce. The major disadvantage cited is the poorer and inconsistent customer service with problems of management control, contract inflexibility and high staff turnover. (Phil Taylor, 2004). According to OECD report on outsourcing, the employments in the services sectors are likely to be affected more in telecom along with IT and financial services. But with the current advancements in the technology and communication and the increasing competition in the telecom industry, outsourcing is likely to increase in the coming years. 7. Conclusion By the end of 2006, the world telecommunication industry including UK had undergone continuous growth and rapid progress in technology and policy development. This has been enabled by the huge regulatory reforms and the liberalization measures. Still many of the countries are in the transition stage with the governments still having a hold on the industry. The changes in the regulatory measures and liberalization have brought more players with increased competition. This has resulted in increased productivity with enhanced quality of services with comparatively lower prices of the services. The economy of telecom industry is gaining strength with an increase in overall GDP contribution. The growth of mobile telephony is phenomenal with one out of every three persons in the world is a mobile subscriber. (Vanessa Gray et al, 2006) But there is a slightly different picture for the developing countries. Research has shown that telecommunication services can contribute to economic development and could distribute social benefits more equitably through out the nation. The development of telecommunication services in a country is measured by the penetration of fixed line telephony. The International telecommunication Union's research (1994) shows that the penetration of fixed line telephone services is correlated with the GDP per capita of many countries. The penetration is measured in terms of tele density (number of fixed telephone lines per 100inhabitants). ITU suggests that telecommunication investments with goals of increasing teledensity could bring social and economic rewards to the developing countries. In these places, extensive reforms and liberalization alone does not guarantee the increase in telecom services but a less competition oriented policy alternatives could bring about the changes. (News Report, 2007) References 1. News Report, 2007, 2006 Telecoms, Mobile and Broadband in Asia report, budde.com, , electronic, 1-4-07, http://www.budde.com.au/publications/annual/asia/central-asia-summary.html 2. Dr. Peter Boulding, CRI, UK, UK Telecommunication Regulation 1998, Available from http://www.connect-world.com/Articles/old_articles/12UKTELECOMMUNICATIONS.html [Cited 5 February 2007] 3. Paul McDougall, (2005), Gartner research, available from http://www.informationweek.com/news/160401277 [Cited 1 April, 2007] 4. Desarrollo Econmico, 2006, Switzerland: Seizing the Opportunities for Growth, Organisation for Economic Co-operation and Development, p. 68 5. Gerald W. Brock, 1995, Toward a Competitive Telecommunication Industry: Selected Papers from the 1994 Telecommunications, Vol I, p. 45 6. Dan Steinbock, 2005, The Mobile Revolution: The Making Of Mobile Services Worldwide, Kogan page 7. Richard E. Caves, 1992, Industrial Efficiency in Six Nations, p. 197 Outsourcing - A must for Telecom Industry, White Paper, 2006, Available from www.aricent.com, [Cited 4 February 2007] 5. Phil Taylor, 2004. Call Centres in Scotland and Outsourced competition from India, Available from info@scotecon.net, [Cited 5 February 2007] 6. The New York Times, (August 31, 1999). AT&T joins Rivals by Lowering Rate for Long distance, p.1 7. UNI-Telecom (June 2005), Outsourcing and Contracting Out, Available from www.union-network.org [Cited 5 February 2007] 8. Vanessa Gray et al, (2006) World Telecommunication: ICT Development Report 2006, Available from http://www.itu.int/ITU-D/ict/informationsharing/index.html) [Cited 4 February 2007] 9. Wave of Telecom mergers puts regulators to the test, (July30, 1998), The Wall street Journal, p B4 10. Sven. Wunder, 2003, Oil Wealth and the Fate of the Forest: A Comparative Study of Eight Tropical Countries, Routledge (UK), P. 20, http://books.google.com/booksvid=ISBN0415278678&id=NGx2XUgrWTMC&dq=process+price+output++real+world+strongly+affected+structure++market+UK Read More