CHAPTER IV ANALYSIS OF GROWTH OF TELECOMMUNICATION SERVICE IN INDIA

CHAPTER IV ANALYSIS OF GROWTH OF TELECOMMUNICATION SERVICE IN INDIA 4.1 INTRODUCTION This chapter presents the current telecom industry scenario, both in the global and national perspective. Competitive position of various firms under study as well as the development of telecom services over the last decade is analysed. Government policy changes to facilitate the growth of the telecom sector as an important segment of the economy is also discussed. Telecom services are one of the fastest growing industries in the world. Due to advancement in technology, economy of use and expanding customer base, mobile phone has become a common man s product today. Developing nations today have quality telecom networks as good as the developed nations. Due to huge investments in development of telecom infrastructure, the entire landscape of India is covered by mobile service providers. To understand the developments in the industry and competitive position of various firms under study, a detailed analysis is presented. 4.2 MOBILE PHONE NETWORKS; A GLOBAL PERSPECTIVE Mobile Telecommunication refers to the exchange of information, ideas and thoughts through the medium of a mobile phone, telephone or wireless network. According to the World International Property Organisation, a mobile communications system/network refers generally to any telecommunications system which enables wireless communication when users are moving within the service area of the system. A typical mobile communications system is a Public Land Mobile Network (PLMN). Until the invention of modern technology, the use of semaphore, flags, heliograph, relay runners; riders and criers, smoke signals, drum, and light signals; message-carrying pigeons, and even the postal system were the 63

traditional long-distance communication media. According to Balasubramanian 86 et al., (2002, p. 349), the first transmission involving a single mobile platform occurred in June 1898, when Marconi transmitted a radio signal over 42 miles between a French naval vessel and the Wimereux shore station. The first transmission between a mobile transmitter and a mobile receiver occurred in July 1898 when aboard the Royal Navy warship Juno, Marconi received messages from the warships Alexandra and Europa at ranges of up to 45 miles. Mobile communications systems have been developed because of the increasing need to free users to move away from fixed telephone terminals without impairing availability of users. Mobile technology has rapidly developed from first generation (1G), second generation (2G), third generation (3G) to beyond third generation (3.5G and 4G) mobile technology that uses digital wireless technology that supports faster display of multimedia and global roaming. A comparison between developed and developing countries global investments in telecom sector is given in Table 4.1. TABLE 4.1 GLOBAL INVESTMENTS IN TELECOMMUNICATIONS (US$ BILLION) FROM 2008 TO 2012 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 Developed countries Developing countries 156 181 152 148 137 77 95 92 93 94 Total 233 276 244 241 231 Source: Report on global industry outlook 2011-12 published by International Telecommunication Union: August, 2012, page 147-149. 86 Balasubramanian, S., Peterson, R.A. and Jarvenpaa, S. L.,(2002) Exploring the Implications of M-Commerce for Markets and Marketing, Journal of the Academy of Marketing Science, Vol. 30, No. 4, Fall 2002, pp.348-361. 64

From table 4.1, it can be seen that during 2007-08, developed countries were investing more than double of the investment by the developing countries. However, by 2011-12, this gap has narrowed. In absolute terms, the investments by developed countries started declining by 2009, whereas the developing countries are still increasing the investment in telecom sector. The combined investment of developed and developing countries also shows a downward trend from 2009 onwards. 4.3 ROLE OF MOBILE TELECOMMUNICATION Mobile communication network providers, in delivering services to customers, operate in an environment that involves purposeful relationships and interactions between several actors in many activities and with different resources. Some of the players in mobile telecom industry providing services to the customers at their various locations are: the mobile operator who provides the location positioning infrastructure that tells where the customer is; the content provider that delivers the information; the supplier that combines the information with the location information and makes it location relevant; and the platforms through which the customers can access the services. Therefore it appears that any mobile telecom network needs to have several key players along its value chain in delivering services to its customers (Pura M,2005) 87. Together this means that phones have a positive impact on improved incomes, reduced risk, and an improved sense of well-being. Some of the roles played by mobile telecommunication are: It is an enabler of Mobile commerce and promotes dissemination of useful information to entrepreneurs and enhancing business creation. It is a source of employment for many people whose jobs are created and/or facilitated directly or indirectly by the existence of mobile telecommunication. It is a significant source of revenue not only for its business operators but also to 87 Pura, M. and Brush, G. (2005), "Hedonic and Utilitarian Motivations for Mobile Service Use", Paper presented at SERVSIG Research Conference, in Singapore 2.-4. 65

governments through taxes paid by income earners in the mobile telecom industry. It is a cheap means of communication and therefore cost-effective since it reduces the cost of travel. Some of the arguments raised against the use of mobile phones are that: It elicits more unwanted calls as a result of being accessible from anywhere in the country. There is a potential cost of using a mobile phone for business, and the costs will be so high as to damage their business. This is a potential danger, particularly when employees are using business mobiles, as there is a risk that some employees could misuse the phone raising bills massively. But ever- reducing call rates are keeping such arguments at bay. Table 4.2 gives a comparison of revenues and subscriber base for leading mobile phone network providers in the world. TABLE 4.2 COMPARISON OF WORLD S LEADING MOBILE PHONE NETWORK PROVIDERS ON REVENUES AND SUBSCRIBER BASE IN 2011. Rank Operator Revenue US$, Billion Subscriber Base Million Revenue $ Per Subscriber/ year 1 China Mobile 20 584 34 2 Vodafone 15 353 43 3 Verizon 14 102 139 4 AT&T 13 96 145 5 Telephonica 12 220 55 6 NTT Docomo 11 57 201 7 Deutsche Telecom 9 133 70 8 France Telecom 8 110 74 9 America Movil 7 225 32 66

Rank Operator Revenue US$, Billion Subscriber Base Million Revenue $ Per Subscriber/ year 10 Sprint 6 50 130 11 Au(KDDI) 5 33 175 12 Telecom Italia 5 82 60 13 Soft Bank 4 25 164 14 MTN 3 111 35 15 Vivendi 3 39 88 16 China Unicom 3 167 18 17 Bharti Airtel 3 200 15 18 SK Telecom 3 26 109 19 STC 2.5 31 84 20 Telenor 2.5 109 23 Source: Key ICT indicators for developed and developing countries. Published by International Telecom Union, April, 2010, page18-26. From table 4.2, it is seen that China telecom is the leader in subscriber numbers as well as revenues as per 2011 data. Multinational form Vodafone, American Movil and India s Airtel also have sizable subscriber base. Average revenue per user is one of the lowest in India for Airtel, whereas it is highest in Japan, for NTT Docomo. 4.4 MOBILE PHONE NETWORKS BUSINESS IN INDIA India s telecom sector has been doing exceptionally well in the past decade. Its structural and institutional reforms have provided tremendous growth opportunity to this sector. India has nearly 200 million telephone lines making it the third largest network in the world after China and the USA. With a growth rate of 45%, Indian telecom industry has the highest growth rate in the world. The first reforms in Indian 67

telecommunications sector began in 1980s when the private sector was allowed in telecommunications equipment manufacturing. In 1985, Department of Telecommunications (DOT) was established. Liberalization, technological advancements, and increasing demands of the customer for more sophisticated services have helped the cellular mobile sector to become increasingly competitive and market- oriented. In India, rapid diffusion of telecom, at least in the urban areas, has been progressing, thanks to the hypercompetitive telecom markets with the post-liberalization entry of several Indian and global players. In such a competitive milieu, survival and success of the Indian players will depend on competitiveness. For service providers, the pursuit of service quality is essential for competitiveness and is gaining momentum. As a result, service quality has become an important means of differentiation and is critical for achieving corporate success. For the past few years, cellular mobile service sector has been experiencing the highest growth rate in terms of revenues and subscribers in many countries as well as in India (www.nationmaster.com). Table 4.3 shows the growth rate in telephone lines from 2004 to 2011. 68

TABLE 4.3 GROWTH OF INDIA S TELECOM SERVICES DURING THE PERIOD 2004-2011(LINES IN MILLIONS ; GROWTH RATES IN PERCENTAGES; TELE-DENSITY IS NUMBER OF TELEPHONES PER 100 SUBSCRIBERS) 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 Fixed line 45 49 40 39 37 37 35 36 Growth rate Mobile phones Combined Growth rate 5 8-17 -3-3 -2-5 -5.5 50 76 149 233 346 525 752 912 48 52 96 56 48 51 43 40 Teledensity 7 10 17 25 33 46 66 71 Source: Annual Performance Indicators during the year 2005 to 2012. Published by Telecom Regulatory Authority of India during 2005 to 2012. It can be seen from table 4.4 that fixed line or land line connections declined from 2006-07 and its growth recorded negative trend thereafter. But mobile phone service recorded tremendous growth right from introduction till now. In eight years it has grown from 50 million to 912 million users. However, the combined growth rate for both sectors show a stagnant trend. Tele-density of population has also shown a steady increase from 7 per 100 in 2004-05 to 71 in 2011-12. Despite the ongoing concern about service quality, most of the cellular mobile service providers in India focus primarily on expanding their subscriber s base and tend to overlook investing in service quality. Profitability of leading firms for the past five years is given in table 4.4 69

TABLE 4.4 PROFITABILITY (PERCENTAGE) OF MAJOR TELECOM NETWORK PROVIDERS IN INDIA FROM 2008 TO 2012 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 Vodafone 17 11 0-3.01 Idea 11 16 10 9 5 Aircel 35 9-8 -66 0 Reliance 21 18 30 4-6 Bharti 23 24 23 26 20 TTSL -46-35 -33-21 0 BSNL 20 8 2-6 -8 Source: Annual report 2011, published by Cellular Operators Association of India, 2012, April, p16-19. From Table 4.4, it is seen that the profitability of the firms have been decreasing and many of the firms are in the red showing negative profitability. Falling Average Revenue per User and diminishing tariffs due to severe competition has caused this situation. Bharti Airtel with 20% and Idea with 5% are the only companies that reported profits in 2011. 4.4.1 Beginning of telecommunication in India India has also kept pace with the developments in telecom technologies globally. Today the Mobile service customers in India have access to the best and latest technologies in the world. From its inception in 1851 during the British rule till today, Indian telecom industry has gone through a steady progress trajectory. Yearwise Evolution of the telecom industry in India and Important Milestones/events happened are given in Table 4.5. 70

Telecommunication is important not only because of its role in bringing the benefits of communication to every corner of India but also in serving the new policy objectives of improving the global competitiveness of the Indian economy and stimulating and attracting foreign direct investment. Indian Telecom industry is one of the fastest growing telecom markets in the world. In telecom industry, service providers are the main drivers; whereas equipment manufacturers are witnessing growth and decline in successive quarters as sales is dependent on order undertaken by the companies. 4.4.2 Major Players in Indian mobile phone services There are three types of players in Indian telecom services: 1. State- owned companies (BSNL and MTNL) 2. Private Indian- owned companies (Reliance Infocomm, Tata Teleservices, Shyam) 3. Foreign invested companies (Vodafone, Aircel, Bharti Tele-Ventures, Idea Cellular, Spice Communications) 4.4.3 Policy Initiatives 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 is another policy. The DOT has plans to introduce mobile number portability in a phased manner. The government is also implementing a programme 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 71

telecom companies can bid for 3G spectrum without partnering with Indian companies. TABLE 4.5 MILESTONES IN TELECOM SECTOR DEVELOPMENT IN INDIA Year Event 1851 First operational land lines were laid by the government near Calcutta (seat of British power) 1881 Telephone service introduced in India 1883 Merger with the postal system 1923 1923 Formation of Indian Radio Telegraph Company (IRT) 1932 Merger of ETC and IRT into the Indian Radio and Cable Communication Company (IRCC) 1947 Nationalization of all foreign telecommunication companies to form the Posts, Telephone and Telegraph (PTT), a monopoly run by the government's Ministry of Communications 1985 Department of Telecommunications (DOT) established, an exclusive provider of domestic and long-distance service that would be its own regulator (separate from the postal system) 1986 Conversion of DOT into two wholly government-owned companies: the Videsh Sanchar Nigam Limited (VSNL) for international telecommunications and Mahanagar Telephone Nigam Limited (MTNL) for service in metropolitan areas. 1997 Telecom Regulatory Authority of India created. 1999 Cellular Services are launched in India. New National Telecom Policy is adopted. 2000 DoT becomes a corporation, BSNL 2000 TRAI Amendment Act to form a separate dispute settlement mechanism called Appellate tribunal 2000 August- National Long distance segment opened for competition 2001 A Fourth cellular operator permitted in each circle. 2001 Unrestricted entry in basic services WLL 2002 VSNL disinvested. Tata group buys stake. Guidelines for Universal Service Obligation announced, International Long distance communication opened for competition, Internet Telephony opened up. 2003 Guidelines for unified service access license issued 2004 Broadband Policy 2004, Government of India aims at 9 million broadband connections and 18 million internet connections by 2007. 2005 Bharath Nirman launched. Every village to have phones by 2007. 2006 One India plan launched to trigger off a price war 2007 2007: Roaming rental reduced to zero. Reduction of roaming tariffs to the extent of 22%-56% 2010 3G auction, Wi-Max announced, Smart phones and tablets in market, Number portability feature introduced. 72

2011 Corruption charges in 2G/3G licensing and a Cabinet minister goes to jail. Licenses cancelled and re-auction planned. 2012 Joint Parliamentary Committee set up for probe in to the 2G scam. Source: A decadal profile published by Telecom Regulatory Authority of India: 2012, September, page 56-68. From the beginning of telecom in India from 1851, the industry has progressed in leaps and bounds over the last two centuries. After the monopoly in the telecom sector was abolished by the new telecom policy in 1991, many of the Indian industrial houses and multinationals started investing in telecom products and services. All of them could achieve significant growth utilizing the huge untapped market. Increase in subscriber base for leading network providers is given in table 4.6. TABLE 4.6 SUBSCRIBER BASE OF WIRELESS [GSM AND CDMA] SERVICES FROM 2007 TO 2012 ( IN MILLION) 2006 2007 2008 2009 2010 2011 % growth Airtel 37 61 93 127 162 181 11.7 Reliance 28 46 72 102 135 153 12.7 Vodafone 26 44 68 100 134 150 11.8 Idea 14 24 38 63 89 112 25.9 BSNL 30 40 52 69 91 98 7.2 Tata 16 24 35 65 89 81-8.9 Source: Performance indicators published by Telecom Regulatory Authority of India, 2012, June, page no 1-6 Table 4.6 shows that all forms in Indian telecom service industry showed impressive growth in numbers during 2006 to 2011. One exception is Tata teleservices which had many operational issues due to restructuring and mergers. In terms of absolute numbers, Airtel, Vodafone and Reliance recorded higher growth 73

compared to Idea and BSNL. However, in terms of cumulative growth, Idea is clearly ahead with an impressive 25.9 % growth in subscriber base. Competition is much more in India as there is large number of firms in each circle or state, averaging six. Call rates is also considerably low in countries like India and China, two of the fast growing markets. The average revenue from customers of mobile phone service has been showing a falling trend for the past few years. This is due to the competition on one side and the new technology features which speed up communication and data transfer on the other. TABLE 4.7 COMPARISON OF AVERAGE REVENUE PER MOBILE PHONE USER IN VARIOUS COUNTRIES (IN US$) 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 USA 47 49 47 50 NA China 8 9 9 9 9 Russia 9 9 6 7 7 Brazil 19 21 17 NA NA Germany 31 28 29 27 27 Australia 31 29 28 27 25 India 5 4 3 2 2 Pakistan 3 2 2 2 2 Source: Key ICT indicators for developed and developing countries. Published by International Telecom Union, April, 2012, page143-145. Table 4.7 shows the trend in ARPU in various countries. Highest is the USA with $47 followed by Germany and Australia. India is having an ARPU of below $5, approximately Rs. 300. Pakistan is also similar with US$ 2 which is very low. Even China has per user of $9 which is almost double of that of India. 74

Dual SIM phones were introduced in 2011 which facilitated customers to pack two different telephone lines in one handset. Telecom subscriber base has recorded a steep growth due to the low call charges and falling price of handsets. Even the rural customers could afford a mobile phone connection in India. Increasing bargaining power of customers and price wars between firms has enabled all citizens to own one or more mobile phones. Millions of subscribers are being added to the network every month. 4.4.4 Indian Telecom Policy After 1991 s liberalization in Government s policies, the telecom sector has allowed various private players to enter into the Indian market. Earlier, the sector was operating under public sector giants like Bharat Sanchar Nigam Limited (BSNL), Mahanagar Telephone Nigam Limited (MTNL) and Videsh Sanchar Nigam Limited (VSNL) but after the National Telecom Policy (NTP) by Government in 1994 many private players entered in Indian telecommunication market. But this market is regulated by Telecommunication Regulatory Authority of India (TRAI). It acts as an independent regulator of the business of telecommunications in the country which was set up in 1997 by the government of India. Indian telecommunications today benefits from among the most enlightened regulation in the region, and arguably in the world. The sector, sometimes considered the poster-boy for economic reforms, has been among the chief beneficiaries of the post-1991 liberalization. While breaking the monopoly of Government over telecom sector, the new entrants were made to pay license fee and spectrum allocation charges to the Government. This provided a good source of income for the Government. Contribution from telecom sector to government finances over the past 7 years is shown in Table 4.8. 75

TABLE 4.8 CONTRIBUTION OF TELECOM SECTOR (IN INR BILLION) TO GOVERNMENT FINANCES 2004-2010. 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 License fee 84 68 66 70 89 95 98 Spectrum charges 7 10 14 21 31 35 38 Total 91 78 80 91 120 130 136 Source: Indian telecom services, a decade of growth. Published by Price Water Coopers, August, 2011, p 23-34. From table 4.8, it can be seen that the Government revenues from telecom license fee showed a steady increase from 84 billion rupees in 2004-05 to 98 billion in 2010-11. Similarly, Spectrum allocation charges also showed a steady increase from 7 billion to 38 billion during the same period. The income from spectrum and associated issues has now stalled the auction process. Unlike electricity, where reforms have been stalled, telecommunications has generally been seen as removed from mass concerns, and thus less subject to electoral calculations. Market -oriented reforms have also been facilitated by lobbying 76

from India s booming technology sector, whose continued success of course depends on the quality of communications infrastructure. Growth figures in rural and urban sector in telecom is shown in table 4.9. Despite several hiccups along the way, the Telecom Regulatory Authority of India (TRAI), the independent regulator, has earned a reputation for transparency and competence. TABLE 4.9 RURAL-URBAN DIVIDE OF INDIAN TELECOM SUBSCRIBER BASE AS IN 2011. Particulars Wireless Wire line Total Total subscribers 811.59 34.73 846.32 Total net addition 20.21-0.14 20.07 % monthly growth 2.55-0.39 2.43 Urban subscribers 538.05 26.04 564.08 Net addition 12.88-0.06 12.81 % monthly growth 2.45-0.25 2.32 Rural subscribers 273.54 8.69 282.23 Net addition 7.33-0.07 7.26 % monthly growth 2.75-0.81 2.64 Source: Annual report 2011. Published by Telecom Regulatory Authority of India for the year 2011, June, page no 13-16. As shown in Table 4.9, wireless connections were growing steadily over the wire line connections. Out of total 846.32 million connections, contribution of landline is only 34.73 million. Rural subscriber base also shows a significant growth to 282.23 million lines. With the recent resolution of a major dispute between cellular and fixed operators, Indian telecommunications already among the most competitive markets in the world appears set to continue growing rapidly. Regulations also focused in broadening the subscriber base in to rural sector as well. The ratio between the Rural and Urban mobile phone lines is 34:66 today. 77

4.4.5 Government Initiatives for growth The India government has taken a number of significant proactive initiatives to encourage the rapid growth of the telecom industry in the country. In a historic move, the country has allowed 100 per cent foreign direct investment (FDI) in the tel ecom equipment manufacturing segment through the automatic route. In addition, the FDI ceiling in telecom services has been increased to 74 per cent. Some of the other notable measures by the government include launching of a unified access licensing regime for the telecom services industry on a pan-india basis and extending the mobile number portability in the nation in a phased manner, starting from the fourth quarter of 2008. The Bharat Nirman programme launched by the government is targeting to connect the remaining 66,822 uncovered villages within the very near future. 4.4.6 Stages of Telecom Regulations in India a) Liberalization: - The process of liberalization in India began with new economic policy in 1991. Telecom equipment manufacturing was de-licensed in 1991 and value added services were declared open to the private sector in 1992. Following this radio paging, cellular mobile and other value added services were gradually opened to the private sector. This has resulted in large number of manufacturing units being set up in the country. As a result most of the equipment used in telecom area is being manufactured within the country. b) National Telecom Policy 1994:- In 1994 Government announced the National telecom policy with important objectives, including availability of telephone on demand, provision of world-class services at reasonable prices, improving India s competitiveness in global market and promoting exports, FDI and domestic investment, ensuring India s emergence as major manufacturing/export base of telecom equipment and universal availability of basic telecom services to all villages. c) Telecom Regulatory Authority of India (TRAI) : - The Telecom Regulatory Authority of India (TRAI) was established with effect from 20th February 1997 by an 78

Act of Parliament, called the Telecom Regulatory Authority of India Act, 1997, to regulate telecom services, including fixation/revision of tariffs for telecom services which were earlier done by Central Government. TRAI s mission was to create an environment needed for the growth of telecommunication at a pace that will enable India to play a major role in emerging global information society. One of the main objectives is to provide a fair and transparent policy that facilitates fair competition. On 24 January 2000, TDSAT was set up to adjudicate any dispute between a licensor and a licensee, between two or more service providers, between a service provider and a group of consumers, and to hear and dispose of appeals against any direction, decision or order of TRAI. d) New Telecom Policy: - The most important milestone and instrument of telecom reforms in India is the New Telecom Policy, 1999 (NTP 99). The New Telecom Policy, 1999 (NTP-99) was approved on 26th March 1999, to become effective from 1st April 1999. NTP-99 laid down a clear roadmap for future reforms, thinking the opening up of all the segments of the telecom sector for private sector participation. Key features of NTP 99 include the Strengthening of Regulator, National long -distance services opened to private operators, International long -distance Services opened to private sectors, Private telecom operators licensed on a revenue sharing basis, plus a one-time entry fee. Resolution of problems of existing operators envisaged. Direct interconnectivity and sharing of network with other telecom operators within the service area was permitted. Department of Telecommunication Services (DTS) corporatized in 2000. Spectrum Management was made transparent and more efficient. 4.4.7 Service Provider- wise Market Share as on 31.03.2012 The Country is divided into 23 Service Areas consisting of 19 Telecom Circle Service Areas and 4 Metro Service Areas for providing Cellular Mobile Telephone Service (CMTS). In terms of National Telecom Policy (NTP)-1994, the first phase of liberalization in mobile telephone service started with issue of 8 licenses for CMTS in 79

the 4 metro cities of Delhi, Mumbai, Calcutta and Chennai to 8 private companies in November 1994. Subsequently, 34 licenses for 18 Territorial Telecom Circles were also issued to 14 private companies during 1995 to 1998. During this period a maximum of two licenses were granted for CMTS in each service area and these licensees were called 1st & 2nd cellular licensees. These licensees were to pay fixed amount of license fees annually based on the agreed amount during the bidding process. Subsequently, they were permitted to migrate to New Telecom Policy (NTP) 1999 regime wherein they are required to pay License fee based on revenue share, which is effective from 1st August, 1999. State- owned Public Sector Undertakings (PSUs) {Mahanager Telephone Nigam Limited (MTNL) and Bharat Sanchar Nigam Limited (BSNL)} were issued licenses for provision of CMTS as third operator in various parts of the country. Further, 17 fresh licenses have been issued to private companies as fourth cellular operator in September/ October, 2001, one each in 4 Metro cities and 13 Telecom Circles. As per conditions of the License Agreement, cellular operators are free to provide, within their area of operation, all types of mobile services including voice and non-voice messages, data services and Public Call Offices (PCOs) utilizing any type of network equipment, including circuit and/or package switches that meet the relevant International Telecommunication Union (ITU) /Telecom Engineering Centre (TEC) standards. The old cellular licensees (1st and 2nd CMTS licensees) in telecom circles have been given additional concession for a period of 4 years with effect from 1st April 2004 in the license fee. The license fee, excluding spectrum charges for old cellular licensees (1st and 2nd CMTS licensees) in telecom circles is 8% of "Adjusted Gross Revenue" (AGR) for category `A' circles, 6% of AGR for category `B' Circles and 5% of AGR for category `C' Circles for a period of 4 years with effect from 1st April 2004. In addition to license fees, the CMTS licensees pay spectrum charges on revenue share basis of 2% of AGR for spectrum up to 4.4 MHz. For spectrum 80

beyond 4.2 MHz up to 6.2 MHz, they are required to pay additional charges @1% of AGR. For spectrum beyond 6.2 MHz, which shall be given if the subscriber base is more than 0.5 million, they are required to pay additional 1% of AGR. Allocation of spectrum beyond 6.2 MHz is subject to availability; however, spectrum allocation would be limited to a maximum of 10MHz + 10MHz per operator in a service area. Such additional allocation could be considered only after a suitable subscriber base, as may be prescribed, is reached. The usage of mobile services in India has penetrated to almost all economic and social sectors. Penetration rate of mobile phones in India has reached a noteworthy level. According to the Department of Telecommunications of India, there were 346.9 million wireless telephones in India as of December 2008. With 35.53 million net additions during the quarter, total wireless (GSM + CDMA) subscriber base increased to 427.28 million at the end of June 2009, and wireless Tele-density reached 36.64. India's mobile subscriber base is expected to grow at a compound annual growth rate (CAGR) of 18.3% from 2007 to 2013, reaching a penetration rate of 53.4% by the end of 2013. 4.4.8 Segmentation of the Indian Telecom Consumer Market With the proliferation of mobile phone users, several micro segments have also emerged lately, each with their own specific needs. The rationale behind this segmentation is to identify customers on the basis of their stage in life and hence to tailor-make schemes for each customer segment. The different segments are explained as follows: a) Youth: Over the years, service providers have started giving greater attention to this segment, as it has emerged as one of the biggest users of mobile phones. For the youth, mobile phones are not just a necessity, but rather an indispensable accessory. This segment particularly values prepaid schemes with free SMS services. It is further differentiated into various micro-segments based on age and gender. For instance, youngsters in the age group of 19 to 23 years generally have a large circle of friends and more access to money. 81

b) Young Professionals: People entering the workforce and thus moving out of the dependent bracket constitute this market segment. They generally prefer using postpaid schemes with value added services like information about stock markets, news updates and so on. c) Micro Small and Medium Enterprises: This segment mainly consists of people who are switching over from landlines to mobile phones, seeking a cost advantage. The focus here is on economy-packages rather than value added services. d) Family: Family as a segment consists of more number of dependents. These dependants are serviced by prepaid schemes. Geographically dispersed families tied by the same cellular service providers may get cost advantages in terms of lower pulse rates. e) Special Categories: The Special category includes a small but growing segment which requires largely customized services sought by celebrities, politicians, CEOs and the super-rich. Tailor -made schemes for each segment have been a great success so far. This customization, however, has reached such a stage that every service provider has numerous schemes being provided at the same time. Being short- term schemes, they keep changing frequently and customers thus start switching from one service provider to another based on the attractiveness of the scheme. This has brought down customer loyalty and hence service providers are finding it difficult to retain existing customers. It is estimated that in the near future the plethora of schemes provided by the different service providers will stop being a differentiating factor. FDI plays an important role in telecom sector as well as an economy as a whole. Earlier, there were very few public players like BSNL, MTNL and VSNL in this sector but as the time progressed and competition increased, the private players like Airtel, Reliance, Tata, Vodafone and Idea came into play which changed whole scenario of telecom sector. FDIs are important because they not only bring capital and technology into the market but they also provide employment opportunities and effective productivity also. 82

The liberalization measures post-1990 have changed with foreign investments radically, now portfolio as well as Foreign Direct Investment are not only allowed but also actively encouraged. During the decade of the nineties, the 'ceilings' on FDI in different sectors were progressively raised. In 2001, 100 per cent foreign investments were allowed in several industrial sectors. Also, 100 per cent Foreign Direct Investment is allowed in almost all the infrastructure sectors. FDI policy provides the investor- friendly environment growth to the telecom sector. 4.5 TELECOM SERVICES IN KERALA Kerala is a costal state of south India having a full western coastal line of about 600 km and average width of 100 km. Its peculiar geography has enabled mobile phone forms to give complete coverage of the state in a short span of time. All the 14 districts of Kerala are sufficiently covered under GSM networks. Geographic map of Kerala showing the three districts under study is shown in Figure 1. Fig4..1: Political map of Kerala 83

Source: Political map of Kerala, published by Prokerala, January,2012 page 1, available at http://www.prokerala.com/kerala/maps/kerala-population-map.htm Key demographic statistics of the state of Kerala is given in Table 4.10. TABLE 4.10 A SNAPSHOT OF KERALA STATE Date of Formation 1 November 1956 Location Capital Area Principal Language Currency National Festival Geographical Data longitude Neighbouring States/ Union Territories South West tip of the India's main land Thiruvananthapuram 38,863 Sq.km. Malayalam Indian Rupee Onam North Latitude between 8 degree 18' and 12 degree 48' East between 74 degree 52' and 77 degree 22' Demography Population (2011) * 3,33,87,677 Male (2011)* 1,60,21,290 Female(2011)* 1,73,66,387 Sex Ratio (Females Per 1000 males)* 1,084 Population density (2011)* Total Fertility Rate (NFHS-111) 1.9 Infant Mortality Rate (SRS 2008) 12 Life expectancy 71 Male Life expectancy 71 Tamil Nadu, Karnataka and Lakshadeep 859/sq.km Female life expectancy 73.62 Percapita income Rs.27,048 Source: Department data, published by Kerala PR department, 2011 June, p 11-14. 84

The state is leading in many indicators like literacy rate, low infant mortality rate, low population growth, high life expectancy and so on. The mobile phone service is well established in the state today with all operators giving good service including number portability. The early entrants and market leaders in the industry are, Idea, BSNL, Vodafone and Airtel. Idea is enjoying the largest market share followed by BSNL, Vodafone, and Airtel. Idea was the first company to launch the services in Kerala in 1997. It was an Escorts company at that time and they captured market with aggressive selling strategies. BPL telecom was another licensee at the beginning and because of the local brand image for BPL Televisions, they also created a large customer base. However, later on BPL was acquired by Hutchinson Max and again it changed hands to Vodafone. Virgin, Etisalat and Uninor are new entrants without any significant market penetration. Kerala has diverse soil types, including red-loamy, lateritic, coastal alluvium, peaty and saline-peaty. These types of soils support a variety of agricultural crops such as rice, spices, coconut and rubber. Malayalam is the most commonly spoken language. Hindi, English and Tamil are the other languages used. Geographical area is (sq km) 38,863 Administrative districts (No) 14. Population density is (persons per sq km) 819. Total population is (million) 31.83. Male population (million) 15.47, Female population (million) 16.36. Population growth rate is (1991-2001) 9.4 % and Sex ratio (females per 1,000 males) 1,058. Table 4.10 gives the subscriber base of different firms operating mobile phone services in Kerala. TABLE 4.11 MOBILE PHONE CONNECTIONS OF MAJOR FIRMS IN KERALA Name of service provider Number of connections Airtel 34,24,958 Vodafone 52,46,322 Idea 65,86,675 BSNL 59,65,314 85

Reliance 43,34,654 Tata 32.45.678 Aircel 18,34,432 Source: Annual report,2011, published by Cellular Operators Association of India, 2012 August, p 34-45. From table 4.10, it is seen that Idea is the leader in Kerala with more than 6.5 million lines, followed by BSNL with 5.9 million and Vodafone with 5.2 million. Reliance and Tata are also major players, but they are in the CDMA technology sector. Aircel is a recent entrant having the lowest share of 1.8 million lines. Literacy rate of the state is 90.9%, Male 94.2%, Female 87.9%. Average life expectancy (years) 73.9. Kerala has a tele-density of 80 per cent as compared to an all-india average of 52.7 per cent as of March 2010. The state has 1,242 automatic telephonic exchanges. About 98 per cent of Kerala's telephone exchanges have Internet connectivity through the national Internet backbone. Kerala had nearly 24.2 million wireless subscribers and 3.5 million wire-line subscribers as of March 2010. The state is planning to build a telecom city near Techno park with an investment of around US$ 109 million. Other telecom service statistics for the state are, GSM cellular subscribers: 18,873,340; Internet/broadband subscribers: 1,059,800 ; Wireless subscribers: 24,194,621; Wire-line subscribers: 3,460,358 ; Number of Telephone exchanges: 1,242. 4.5.1 Major Mobile operators in Kerala There are many firms in the state including the public company BSNL. Some of them are existing from the beginning of mobile phone services, but some have entered the market recently through the merger/acquisition route. 1. BSNL 4. Vodafone Essar 2. Bharti Airtel 5. IDEA Cellular 3. Aircel Limited 6. Reliance Communications 86

7. Tata Indicom 9. Etisalat DB Telecom 8. Virgin Mobile 10. Aircel More details on the Mobile phone network companies under study are given below. a) Bharti Group( Airtel) is the largest private communication service provider in the country, across all types of licensed communication services. It focuses on different areas of business through independent joint venture companies: Bharti Cellular for cellular operations, Bharti Telenet for fixed services, Bharti-BT Internet for Internet services, Bharti BT for VSAT and WAN consultancy, Bharti Telesoft for telecom software development, Bharti International for joint ventures in global markets, Bharti Televentures for projects, and Bharti Telecom for telecom equipment development. Bharti Group has over USD 200 million of turnover and controls about 20 % of the total telecom market in India. It is the second largest player in terms of total number of subscribers from cellular and fixed services. b) Bharat Sanchar Nigam Limited (BSNL) was formed on October 1, 2000 by corporatization of the erstwhile Department of Telecom Services and Department of Telecom Operations. BSNL is a government of India-owned Public Sector Undertaking (PSU). It is the largest PSU in the country and serves the entire length and breadth of India. The main functions of BSNL include planning, engineering, installation, maintenance, management and operation of voice and non-voice telecommunications services all over the country. It has launched a nationwide mobile phone service under the brand CellOne and internet telephony services under the brand name Webfone. BSNL provides fixed, internet and cellular services in the country. c) Vodafone Essar in India is a subsidiary of Vodafone Group Plc and commenced operations in 1994 when its predecessor Hutchison Telecom acquired the cellular license for Mumbai. Vodafone Essar now has operations in 16 circles covering 86% of India's mobile customer base, with over 45.78 million customers. Vodafone Essar, 87

under the Hutch brand, has been named the 'Most Respected Telecom Company', the 'Best Mobile Service in the country' and the 'Most Creative and Most Effective Advertiser of the Year'. Sales/Revenues/Turnover USD 69,378.08 million (Revenue) d) Idea Cellular Idea Cellular is part of the Aditya Birla Group, which is India's first truly multinational corporation. Aditya Birla Nuvo Ltd. holds 35.7 per cent, Birla TMT Holdings Ltd. 44.9 per cent, Grasim 7.5 per cent, and Hindalco 10.1 per cent in Idea. Sales/Revenues/Turnover is Rs. 24,005.50 million. Idea has a customer base of over 17 million, IDEA Cellular has operations in Delhi, Maharashtra, Goa, Gujarat, Andhra Pradesh, Madhya Pradesh, Chattisgarh, Uttaranchal, Haryana, UP-West, Himachal Pradesh and Kerala. Acquisitions / Strategic Alliances Merged with Tata Cellular Limited in 2001, thereby acquiring original license for the Andhra Pradesh Circle Acquired RPG Cellular Limited and consequently the license for the Madhya Pradesh (including Chattisgarh) Circle in 2001. In 2004 acquired Escotel, incumbent cellular service provider in Haryana, UP(W) & Kerala and new licensee in HP Acquired Escorts Telecommunications Limited (subsequently renamed as Idea Telecommunications Limited) in 2006 Merger of seven subsidiaries with Idea Cellular Limited in 2007. Future Prospect- Idea also plans to enter rural and neglected circles as a strategy to gain subscribers. Other advancements in the telecom industry will help it cut costs - use of e-mail to send bills to customers; sharing cell sites; smaller base transmission stations that will mean lesser infrastructure requirements and expenses and independent tower operators. Along with its plan to go for a national long- distance license, it will also look at international long-distance in the near future. 88

4.6 IMPORTANCE OF SERVICE QUALITY IN MOBILE PHONE NETWORKS Economists have sometimes treated quality as a linear function representing the amount of service provided by a unit of a given commodity, or as a scalar index representing several attributes. For a given price, it is assumed that consumers prefer more quality and that quality co-varies with price common sense notions. Schmalensee has pointed out that although price and quantity can be treated as scalars, "it is far from obvious that any single mathematical representation of 'quality' can serve for a broad spectrum of products." Instead, an understanding of the meaning of "quality" for any particular product or service requires an unbundling of quality attributes and elucidation of their applicability. Collier, in The Service/Quality Solution, views the many dimensions of quality as part of a "consumer benefits package." The consumer benefits package is "a clearly defined set of tangible (goods -content) and intangible (service -content) attributes (features) the customer recognizes, pays for, uses or experiences." Excellent service quality is "consistently meeting or exceeding customer expectations (external focus) and service delivery system performance criteria (internal focus) during all service encounters." Collier writes from the point of view of the profit-maximizing firm, for which "service/quality" (his term emphasizes that services are imbued with quality) is a means of gaining a competitive advantage. The company that can put together a more desirable consumer benefits package will have an edge on rivals. For telecommunications, service quality is a multitude of attributes that will allow providers to exploit their advantage to gain market share for their products and services, whether it is getting a consumer where he or she wants to go on the Internet faster than a rival, providing cellular service in formerly "dead" rural areas, or providing video that is full motion rather than freeze frame. State regulatory commissions, which represent the public, have a different orientation to the consumer benefits package in telecommunications than the firm attempting to maximize profits. 89

For their purposes, the package is made up of the array of characteristics that contribute to meeting or exceeding consumer expectations of the public- switched network, whether the network is based on a central platform or is formed by more or less equal interconnecting systems. 4.7 CHAPTER SUMMARY Mobile phone service with ever- increasing applications have changed the lifestyle and the way people work, function, and communicate. This is felt globally as well as in developing countries like India which is second only to China in terms of Mobile phone industry growth. This chapter presented the global trends, Indian growth story, historical milestones, as well as the structure of market in Kerala, the geographic area of study. The next chapter presents the analysis of demographic data of the respondents. 90