MICROECONOMICS

TELECOM DATA SERVICES INDUSTRY
An Economic Analysis of the Market Structure

Submitted by:
Group 1
Tushar Agarwal (H002)
Charu Gupta (H016)
Rohit Prakash (H044)
Kanwar Singh (H059)
Kushagra Vekaria (H066)

Introduction

Evolution of the industry

Videsh Sanchar Nigam Ltd (now Tata Communications) launched internet services in India in August 1995. The Industry has evolved over the years in phases since then and has displayed majorly the characteristics of an Oligopolistic Market Structure in varied forms. The study touches upon the same by taking up those phases and explaining in detail the current industry scenario.

Phase I: 1995 – 1998: MONOPOLY

By definition, Monopoly is a situation in which a single company or
Oligopoly is often referred to as “competition among the few". In brief oligopoly is a kind of imperfect market where there are a few firm in the market, producing either and homogeneous product or producing product which are close but not perfect substitutes of each other.
It is a market structure where a few number of sellers control the majority of the market. There is a good amount of barrier to entry making it difficult for new players to enter and sustain. Also, in this market there is very less differentiation in the prices offered by various players however there exists competition in non-price related areas, like advertising. Therefore, the Indian Telecom Data Services industry qualifies as an Oligopolistic competition.

The government opened the market in November 1998 to private Internet providers, thereby paving the way for free and unlimited competition in the sector. After the liberalization, the government issued around 700 licenses under various categories. The global technology boom, widespread optimism about the adoption of Internet services and liberal licensing conditions encouraged companies to apply for Internet service provider (ISP) licenses. After growing phenomenally post liberalization, the Internet subscriber base slowed down dramatically between 2001-02 and 2002-03 as the dot-com bubble burst. Nevertheless,
The brand image of current cash-rich incumbents and their economies of scale make it difficult for a new entrant to compete with them.

2) High License fees
Due to the mess created by the 2G scam, the entire industry is on a downward spiral and the scrapping of licenses by the Supreme Court made the auction of new spectrum very high, thus increasing the cost for a new entrant.

3) Limited Spectrum
The scarcity of the spectrum offered by the Govt. for commercial use is also a major barrier – increasing competition for a very limited resource.

4) Unclear Regulations
Due to non-clarity of government policies and regulations this sector was most affected. Retrospective amendment in case of Vodafone is a recent example of govt.’s hara-kiri which added fuel to already turbulent industry.

5) Undifferentiated product
The products and technology innovations are undifferentiated with a high chance of being replicated by competitors. This leads to high price sensitivity of buyers and poses a constant price war threat to the industry.
Imperfect dissemination of