Cost Structure of a Telecom Company and

Estimate Various Cost Functions For The Same

Presented By
Group 3
Section F

Pranav Upadhyay 10FN-080

Prashant Pandey 10FN-083
Praveer Phatnani 10IT- 022
Rohit Mantri 10DM-126
Saswata Banerjee 10FN-136
Sharad Bajaj 10IB-054

Under the guidance of our respected Professor

Dr. V J Sebastian
 Cost Structure of a Telecom Company and Estimation of Various Cost Functions

1. Problem Statement
Analyse the cost structure of a Telecom Company and estimate various cost functions
for the same.

2. Executive Summary
The project encompasses process of identifying independent variables like the number
of mobile subscribers of the telecom company in order to estimate the total cost that will
be incurred. We will be doing an analysis of Bharti Airtel. The data under consideration is
for the years 2004-05 to 2009-10. We shall use the cost and subscriber base data for
these last six years and analyse the cost structure of the company. We will also use this
data to perform regression and form a cost function to estimate future costs. Thus,
based on the expected increase in the number of mobile subscribers, we can estimate
the costs the company will incur in the year 2010-11.

3. Brief History of the Industry

The Indian Telecommunications network with 203 million connections is the third largest
in the world and the second largest among the emerging economies of Asia. Today, it is
the fastest growing market in the world. The telecommunication sector continued to
register significant success during the year and has emerged as one of the key sectors
responsible for India’s resurgent India’s economic growth.

The sector, which was growing in the range of 20 to 25 per cent up to the year 2002-03,
has moved to a higher growth path of an average rate of 40-45 per cent during the last
two years.

• Telecom sector accounts for 1 percent of India’s GDP. Likely to double in 2-3 years
• Telecom services contribute 30 percent to India’s total service tax revenue
• The Indian telecom sector gives direct employment to more than 4,00,000 people,
compared to about 6,00,000 people in China
• Not just the enabler of software, BPO and ITeS companies, it is also the lifeline of a
fast growing E-commerce space
• State-of-the-art telecom infrastructure has led to the rise of cities like Mysore,
Mangalore, Jaipur, Ahmedabad, Kochi on the software services map
• This has helped spread the benefits of a booming Indian economy to beyond metros
and large cities, and wealth creation is happening in tier-2 cities

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 Cost Structure of a Telecom Company and Estimation of Various Cost Functions

4. Profile of the Company

Bharti Tele-Ventures Ltd, owned by the Bharti Telecom group, was incorporated in the
year 1995. The economic activities of the company consist of mobile, fixed line, long
distance (national and international), VSAT and Internet services and providing of
network solution.

The promoters of the company M/S Bharti Telecom Ltd. hold over 45 percent of the
equity capital and foreign companies hold around 22 percent, while the public holds an
insignificant share. The company is headed by Mr. Sunil Bharti Mittal, as its Chairman
and Managing Director.

The business at Bharti Tele-Ventures is divided into three main business units viz:
mobile services, broadband & telephone services and enterprise services. The mobile
services unit offers GSM mobile services across India while the broadband & telephone
services provide services in most major cities. The Enterprise services unit provides
carriers (long distance services) and services to corporates. All these services are
provided under the Airtel brand.

The company has entered into technical alliance and regional mobile service
agreements with major global companies like Singtel, etc. The company's mobile
network equipment partners include Ericsson and Nokia. In the case of the broadband
and telephone services and enterprise services (carriers), equipment suppliers include
Siemens, Nortel, Corning, among others. The Company also has an information
technology alliance with IBM for its group-wide information technology requirements and
with Nortel for call center technology requirements. The call center operations for the
mobile services have been outsourced to IBM Daksh, Hinduja TMT, Teletech & Mphasis.

The registered office of the company is situated in New Delhi and it operates its GSM
mobile services in 23 telecom circles and provides broadband and telephone services in
90 cities.

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 Cost Structure of a Telecom Company and Estimation of Various Cost Functions

5. Analysis of Cost Structure

The telecom sector is characterised by very large investment costs. The precise
percentage of total costs attributed to investments depends of course on the definition of
investments and of telecom activities (e.g. whether research, marketing or similar
activities are included). Although some sources claim investment, and investment-
related costs to be as much as 90 percent of the costs of production, most estimates
based on financial data, however, vary between 60 and 75 percent.

Thus, by all measures the telecom sector is comparatively capital intensive. For an
assessment of the cost structure’s impact on market conditions, more than the level of
investments in telecom is relevant the type of investments. A notable part of the
investments are what economists refer to as “sunk costs”.

These are long term investments which can be used only for specific economic activities.
An example is a fixed access network providing subscribers’ access to the local
exchange. This investment only has value for the supply of telecom services in this
particular local area. Once the investment is made the operator can only exit this
particular market at considerable costs. Other investments have a shorter time horizon
and/or can more easily be applied for other activities.

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 Cost Structure of a Telecom Company and Estimation of Various Cost Functions

6. Estimation of Cost Function

Using the time series data 2005- 2010 from CMIE database about the total cost
and total subscribers:

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 Cost Structure of a Telecom Company and Estimation of Various Cost Functions

Cost
120000

100000

80000
Cost
Polynomial (Cost)
60000

40000

20000

0
0 20 40 60 80 100 120 140

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 Cost Structure of a Telecom Company and Estimation of Various Cost Functions

TC = 1444.578+685.5346*Q+1.04*Q^2
Fixed Cost = 1444.578
TVC = 685.5346Q+1.04Q^2
AVC = 685.5346+1.04Q
MC = 685.5346+2.08Q

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 Cost Structure of a Telecom Company and Estimation of Various Cost Functions

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 Cost Structure of a Telecom Company and Estimation of Various Cost Functions

Thus, based on the expected number of subscribers of 173 million, the estimated cost
incurred by Bharti Airtel in the year 2010-11 will be Rs. 151259.917 crore.

7. Conclusion
Thus, we used the cost data of Bharti Airtel along with its number of mobile subscriber to
determine the cost function with 99.36% explanatory power. Using this cost function, we
estimated the cost that will be incurred by Bharti Airtel in the year 2010-11 based on
their expected mobile subscribers for the coming year.

8. References
1. http://www.trai.gov.in/Default.asp
2. http://en.wikipedia.org
3. CMIE database

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