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ISSN: 2278-3369

International Journal of Advances in Management and Economics
Available online at www.managementjournal.info

RESEARCH ARTICLE

Factors Influencing the Degree of Competition in the Telecom Industry
Minov Stanimir L*

Dept. of Strategic Planning, D. A. Tsenov Academy of Economics, Bulgaria.

*Corresponding Author: E-mail: st_minov@yahoo.de

Abstract

Using real historical data from 30 European markets we test the empirical validity and applicability to telecom
markets of Porter’s degree of competition factors. The results from our analysis reveal that they fail to correctly
determine intensity of competition in telecom and have no predictive power when applied to telecom markets. We
propose a better metric for judging the likely degree of competition in any given telecom market.

Keywords: Competition, Telecom, Market share.

JEL Classification: L1

Introduction

The objective of this research is to identify which impact on the metric for measuring competition
of the Porter’s factors used to determine the specified in the first stage2. Last, derive and list
degree of competition in an industry are also the factors that determine the degree of
relevant to the sector of telecom. We use data competition in the telecom sector.
from 30 European telecom markets1 to find
empirical evidence for the validity of the factors Literature Review
that Porter defines in his five forces model.
Porter’s five forces analysis is a framework for
The research target is 103 telecom companies industry analysis and business strategy
from 30 European telecom markets. development. It draws upon industrial
organization economics to derive five forces that
The scope encompasses the market shares of the determine the competitive intensity and therefore
analyzed companies, the capacity of their attractiveness of a market. Attractiveness in this
networks, the growth of the telecom markets and context refers to the overall industry profitability.
the prices of telecommunication services in the An "unattractive" industry is one in which the
markets where the analyzed companies operate. combination of these five forces acts to drive down
overall profitability. A very unattractive industry
The research goes though the following stages: would be one approaching "pure competition", in
which available profits for all firms are driven to
First, a critical review and analysis of the existing normal profit. Porter's five forces include - three
methods and metrics for measuring competition forces from 'horizontal' competition: the threat of
and then selection of a metric that best fits the substitute products or services, the threat of
telecom industry. established rivals, and the threat of new entrants;
and two forces from 'vertical' competition: the
Second, a test by using real historical data of the
bargaining power of suppliers and the bargaining
validity of Porter’s factors used to determine the
power of customers [10].
degree of competition in an industry. This task is
achieved by specifying a metric for measuring Porter’s theory has attracted a lot of interest and
each of the Porter’s factors and then assessing its critical reviews throughout the years. Using game
theory Nalebuff in the mid-1990s has added the

1
2All calculations are available under the following
All EU-states (without Cyprus, Malta, Luxemburg) plus link:<https://www.dropbox.com/s/y52u9kbs6s9wvol/Factors%20Inten
Switzerland, Russia, Ukraine, Norway, Turkey. sity%20Competition.xlsx>

Minov Stanimir L |March-April 2014 | Vol.3 | Issue 2|102-108 102

The last is characterized with large Wernerfelt argues that the analysis of one number of firms where each has relatively smaller industry cannot be complete without taking into market share. Also the evolve and what the likely outcomes will be [12]. distribution. and of its competitors constitute that is considered substantial. Many customers therefore prefer to the performances of companies. uncertainty is low. fixed-mobile way that elicits a counter-response by other firms. Porter’s famous factors determining degree of rivalry – number and size of market players. Coyne participating companies. competition. the largest of which predictor of competitive behavior. Minov Stanimir L |March-April 2014 | Vol. companies deploying them. helping to explain the oligopoly. and whose position about 75 % of the reasons for success or failure. In follows an overview of some related to this the traditional economic model. and the operating skill or luck of the management constitute about 25 %. what motivates the level of aggressiveness of the relationship with suppliers. of the they perceive less risk in dealing with a business business itself. Since the purpose of this paper is to identify the degree of product differentiation. On the other hand in oligopoly framework has been challenged also by other there is higher interdependence between the few scholars and strategists such as Kevin P. are actually a modification of telecom. in the industry appears to be secure. degree of rivalry (competition). predictive power as it can’t tell us which markets Achieving market share leadership in a product- under which conditions will show higher degree of market or segment can play a major role in rivalry. predict how the competition in an industry will and therefore become quite vulnerable. we examine only one of Porter’s five the theory of monopolistic competition as both forces i. According to Porter when a rival acts in a competition such as product bundles. offers. general industry research has low objectives also by Ansoff. Some European has no more than four times the market share of telecom markets have the characteristics of the smallest [6]. competition research scientific work on the subject of among rival firms drives profits to zero. or weak. Porter's market power [14]. Below theories use similar theoretical constructs [10]. but don’t seek to describe the characteristics commonly is referred to as being cutthroat. low cost brands. of the market motivating given competitive intense. factors determining the degree of competition in industry growth etc. On is considered one of the most important business this test. participants in a market to plan for and respond to competitive behavior [4]. and suppliers are structure different from monopoly and perfect unrelated and do not interact and collude. A business with a small market share A theoretical research done by Roberts tries to will ultimately become marginal in the market.e. other resemble more a monopolistic reasoning behind strategic alliances [3]. allowing to exercise market power. sales volume of a marginal supplier may be too He highlights the role of the marketplace claiming small to provide the level of service customers that it accounts for most of the variance between may expect.3 | Issue 2|102-108 103 . enhancing the long-term competitive advantage of a business. Drucker and Datta [5]. The means available to market choice between products and services of different players to materialize their aggressiveness are companies but they don’t tell us anything about prices. the competition [7]. moderate.info concept of "the 6th force". The deal with high-market share businesses because characteristics of the served market. product differentiation. fixed costs. But competition. Available online at www. In the light of the importance of market share the founder of BCG Bruce Henderson says that a General industry research gives a little stable competitive market never has more than consideration to the form of the market as a three significant competitors. The test of the validity of an economic theory lies in its power to predict The role of the market share or market standing the effect of changes in economic conditions. Rather. Research done on analyzing market performance firms strive for a competitive advantage over their of telecoms often describes the means of rivals. competitors. The theory of and Somu Subramaniam who have stated that monopolistic competition was introduced by three dubious assumptions underlie the five Chamberlin and it sought to analyze the market forces: that buyers. The means (basis) of competition are aggressiveness in attempting to gain an the most important determinants of customer advantage.managementjournal. competition is not perfect and firms are not unsophisticated passive price takers. The intensity of rivalry etc. The essence of his theory is not source of value is structural advantage (creating that much the number of players but their ability barriers to entry). based on the firms' behavior [9]. so no individual firm can exercise consideration company’s recourses [15]. increased size of bundles rivalry intensifies.

It is calculated by first pricing structure of their competitors’ products calculating the differences between the market and services [1]. the theoretical redistribution in Austria is 16.e.1%: foundations of PCM as a competition measure are not robust. This is an empirical observation. empirical study done by Schiersch in German manufacturing enterprises didn’t find empirical Characteristically. is called historic value differential i. Thus comparing the relative profits of a company from one industry deemed as efficient with a Any competitor with less than one quarter the company from another market deemed as less share of the largest competitor cannot be an efficient would give us an indication about the effective competitor. The formula is: The weakness of this approach is that its .info The conditions which create this rule are: models where more intense competition leads to higher PCM instead of lower margins [2]. half that of the next larger competitor with the smallest no less than one quarter the largest. The price cost margin (PCM) is widely used as a For example the degree of market share measure of competition. to which they can turn to offset the impact of that price increase. For the purposes of this paper we develop and use Mathematically. Such a move would be profitable shares each of the market players had in a base if the reaction of consumers to such a price (beginning) and end period. Second. i=(1. relevant competitors). given the specified period of time. estimates must be used with extreme care given the empirical difficulties surrounding it (such as where: MSR is the degree of market share defining the relevant market.9).30). how much value is getting the customer now in comparison Measuring the Degree of Competition in with the years before. incumbents if those incumbents would find unprofitable to implement a small but significant The second metric we call relative redistribution (typically 5%) and non transitory (typically for one of market shares between the main players over a year) increase in price for their services. measure to this notion is the price-cost margin. However an predictable from experience curve relationships. relevant choice set. Perf – product characteristics. this should eventually lead to evidence to support the robustness of the Boon a market share ranking of each competitor one indicator [13]. A main notion j= (1. competition leads to lower prices.9). However.P - prevent an undue exercise of market power by price. Boon points to researchers present Minov Stanimir L |March-April 2014 | Vol. Available online at www. that is. adding the increase for one year were relatively small and absolute value of the largest market share loss to limited. product characteristics or both. Value can be measured Telecom: Data and Methodology through product price. His approach is based on the either competitor to increase or decrease share. The first conditions with more than three competitors. existing ones are making profit [10].3 | Issue 2|102-108 104 . j=(1. to consider the level of competition as sufficient to . redistribution in any give market (country). we are going to measure degree of rivalry Higher competition would lead to lower prices and (intensity of competition). A related i= (1. This too is empirical but is level of competition in these markets. hence lower turnover or to higher volumes at the The standard approach of antitrust economics is same prices.managementjournal. if there were no close substitutes the largest market share gain. where: MT – market turnover. – is the market share of a company i on a In the microeconomic theory is implied that market j in the end of the analyzed period. it is impossible to meet both two metrics for measuring competition. A ratio of 2 to 1 in market share between any two competitors seems to be the equilibrium point at Boon suggests an indicator that relies on relative which it is neither practical nor advantageous for profit differences. assumption that competition increases efficiency. A proxy of this measure is the market Our goal can’t be achieved without knowing how turnover as a function of price and volume. of this theory is that in the long term economic profit under monopolistic competition is zero – is the market share of a company i on a because new firms will enter the market if market j in the beginning of the analyzed period.30).

3 | Issue 2|102-108 105 .6% -7. We ignore the market share redistribution by summing the number of competitors because in telecom biggest market share loss (abs. case of telecoms. Analysis of the data showed a The role of the independent variable will be correlation of 0.9% variables-independent and dependant. i=(1.6% 29.9). calculated by empirical evidence to support this theoretical subtracting the market share each market player construct. After performing the calculations we get values We will test this hypothesis by using two for the independent variable between 5. i=(1. other words this variable will be calculated as the sum of the market share differences between the Based on this we couldn’t find an empirical first and second player and between the second support of the Porter’s construct at least in the and third player.5% Austria 3 2. Then we (low end – competitors equal on size) and for the measure the correlation between these two. Number and Size of Competitors – is the market share of a company third The thinking of Porter presented in his five forces entrant i on a market j in the beginning of the model highlights the number of competitors and analyzed period. We will use real entrant i on a market j in the beginning of the historic data from 30 European telecom markets analyzed period.68 (R2 0. The following formula is applied: Minov Stanimir L |March-April 2014 | Vol.48) and a relationship played by a metric which we call size differential between the two variables that suggests that (measured as the absolute difference.9% 43. To validate the factors Porter considers – is the market share of a company first determinants of the degree of rivalry we will conduct an empirical experiment. and analyze with the goal to confirm/refute the – is the market share of a company second validity of Porter’s factors if they get applied to telecom markets.3% 16. or the sum intensity of competition is in a linear relationship of absolute differences. i=(1.1% -7.4% 8. j=(1. Our hypothesis would be that the in any given market had in the last observation markets where competitors are equal or almost year from the one it had in the first year of equal in size are more competitive than the observation and then calculate the magnitude of markets where the opposite is true.9).7-51. j=(1.2% 10.30). Determining the Intensity of Competition: Empirical Evidence where: SD is the size differential for any given market (country). their size as factors intensifying the degree of competition in the cases where there are either The role of the dependant variable will be taken many competitors in a market or they are equal in by the metric specified earlier and called degree of size [10].managementjournal. entrant i on a market j in the beginning of the analyzed period. dependant between 4.1% (low end – low competition).1% Austria T-Mobile 36.6% Validation of the Porters’ Factors . in main players.8% 8. Available online at www. value) and biggest regardless of the market we usually have 3-4 market share gain. players only. j=(1.2-81.7% -2. between the revenue with the size of the gap between the sizes of the shares of two or more players in a base period).30).30).3% 1.info Country Player 2004 2012 Change Degree of market magnitude share redistribution max min max+|min| Austria A1 Telekom Austria 41.5% Austria Orange 19.9).5% 16. We would like to see if we could find market share redistribution.

3: Relationship between price differential (X- very low 0. The more differentiated is the product the easier for competitors is to avoid price wars. We Another factor increasing the intensity of use data from 16 European markets and calculate competition is industry growth. Logically.e. After running the calculations we observe that 5 of the markets don’t grow. Selecting a proper independent variable is a bit challenging here because measuring product differentiation in a market where the product is seen often as commodity is difficult. Fig. Therefore we can’t consider exit barriers in telecoms as a factor increasing competition. similarly to the range 2-20. Based on McKinsey data the telecom industry has spent USD 1. Therefore we couldn’t find any axis) and degree of market share redistribution evidence suggesting that low growth markets are Exit Barriers also high competition markets. according to Porter’s thinking. 2: Relationship between industry growth (X. The higher Porter’s model lists degree of product the free capacity the higher would be the intensity differentiation as a factor decreasing competition of competition. Available online at www. Although it seems that exit barriers in telecoms are high due to heavy investments in network assets and spectrum in fact we assert that actually they are low due to the large M&A market for telecom assets in Europe. We again use two variables – independent and dependant. degree of market share redistribution but we change the independent one to the more logical – market growth. product differentiation can be the price axis) and degree of market share redistribution differential. Capacity axis) and degree of market share redistribution Porter describes a linear relationship between Product Differentiation & Diverse Strategies capacity and degree of competition. then companies will compete more fiercely to be able to stay in business.3 | Issue 2|102-108 106 . 10 are shrinking and 15 are growing. We will again use the same dependant variable. we would like to test if any strong relationship – 0. If barriers to exit the industry are high.5thrillion on M&A in the last decade with the bulk in Europe and US [8].15.29. Again. The last metric we measure by calculating CAGR (Compounded average growth rate) for the period 2004-2012 for each of the 30 markets. However the correlation coefficient we calculated between market growth and intensity of competition was Fig. The highest is the differential the higher the differentiation. our hypothesis should be that markets with high product differentiation also show lower degree of competition. The correlation coefficient didn’t show previous paragraph.managementjournal.info in the case where its value is high [10]. The dependant remains the same as before i. The slower the the correlation coefficient. The values we industry is growing the higher is the competition calculated for the independent variable fell in the between the players [10]. However a good proxy of Fig. markets with lower growth are more competitive than markets with higher growth. intrinsic to a given market and measured as the difference between the highest Industry Growth and lowest ARPU on the market. A study done by Arthur D Little Minov Stanimir L |March-April 2014 | Vol.1: Relationship between size differential (X.

40% being the norm) not to be a factor leading to Thus if we compare two markets one where the price cuts. This indicates that switching costs might matter to degree of competition. This finding has high practical significance as it allows If the customer is loyal to the brand he does his bettering gauging the profit potential of a telecom buying from then he would be less reluctant to market just by considering the relative market change players. in Eastern. experiment we were not able to prove or disapprove the role of brand loyalty we were able Switching Costs to demonstrate the validity of Henderson’s hypothesis that the market leader with the Switching costs are the costs that a customer passing of time tends to lose market share. smartphone subsidies. These observations suggest that in fact the misusing market power.info shows that capacity utilization of 3G networks in than not to lose market share and the bigger it is Europe has been below 100% (60% in 2013.managementjournal. In telecom a rise to switching costs is given by long term contracts. Available online at www. the bigger the differences industry are high enough (reaching 50% with 30. 25% the more likely is that it will lose. If the costs are high than the competition will be lower because customers will stick with the same products and companies [10]. 0. We would Porter’s claim that competition intensifies if ignore this factor in determining the degree of competitors are equal in size. Industry can be players (incumbent and closest competitors only) shrinking and competition lessening at the same and the degree of market share redistribution. bundled offers etc.3 | Issue 2|102-108 107 . Perhaps the reason is to fact that it was the first to enter the market. 16 are in Western Europe and 14 in Eastern. first and second market players have almost equal market shares to a market where the Brand Loyalty (Modified to Incumbent market shares gap between the first and second Advantage for the Purposes of this players is large then we would expect to see a Research) higher competition in the last case. Conclusion Fixed Costs By using real historical data we tested the empirical validity in the telecom industry of Fixed costs according to Porter are a factor that Porter’s factors determining the degree of can force companies to decrease prices in the competition. However a closer examination of the scatter plot suggests that the incumbent is more likely Minov Stanimir L |March-April 2014 | Vol. In the case in 2012) [11]. incurs when switching products or suppliers. 4: Relationship between size differential (X- redistribution is 19. Although with our availability of free capacity is driving competition. This volume) with decreasing price per unit (price per might be explained by the lacking ability of 1Gb).61. Thus high brand loyalty hampers share differences of the players presented. On average the degree of market share Fig. In our data set from 30 markets.6% in Western Europe and axis) and degree of market share redistribution 27.5%. Telecom markets in western Europe historically are more advanced than their Eastern European counterparts and therefore we would expect to see that Western European markets show lower level of market share redistribution than Eastern counterparts. loyalty programs. We found enough evidence to refute situation when they are high [10]. in size the more severe will be the competition. For the purposes of this research we will assume We were also not able to find a convincingly that the first player on the market enjoys higher strong relationship between industry growth and loyalty due to its incumbent advantage and mere intensity of competition. To be found in the desire of market players to avoid test our hypothesis we calculate the correlation increasing market share on the expense of the between the size differentials of the market overall market profitability. Measuring brand loyalty is difficult. time because it is better to have 1% of something The results show less than perfect correlation of than 100% of nothing.e. competition. At the same time they report in the when the incumbent is not radically bigger than same research rapid growth of traffic (product its closest competitor than it loses less. Our analysis found rivalry in telecom because margins in this exactly the opposite i.

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