Analysis of Competition and Market Structure of

Basic Telecommunication Services in India

Piyush JAIN & Varadharajan SRIDHAR

Information Technology & Systems Group
Indian Institute of Management

Telecommunication growth, being a complex and dynamic techno-

economic phenomenon, is the integrated interaction of a large number of
technical, social and economic forces (MIKEROV, 1998). CRONIN et al (1991)
confirmed the existence of a feedback process whereby economic activity
and growth stimulates demand for telecommunication services. Territories
vary greatly in their level and distribution of income and industrial structure,
especially in developing countries such as India. Income patterns decide
disposable income levels and hence purchasing power levels for
communication services. Population density, demographic shifts (joint to
nuclear families, rural/hills to urban/planes), customer behavior patterns and
network externalities have a significant influence over growth and demand
for services (DUTTA, 2001).

Since government or government owned monopolies previously catered

for telecommunication needs in most of the developing countries, the
telecom regulatory structure is relatively new. In India the Telecom
Regulatory Authority of India (TRAI) was only set up in 1996 after the
introduction of a National Telecom Policy in 1994 (NTP94). The licensing
mechanism, tariffs, tax structures and interconnection schemes are still
evolving and thus create uncertainty in terms of the evolution and growth of
various telecommunication services.

However, being green field projects, most of the new entrants in

developing countries are embracing the latest technologies, which have
reduced the cost of providing services while increasing the variety of
services on offer. For example, in India most Basic Telecom Operators
(BTOs) have started adopting wireless technologies as access solutions,
thus reducing the per line cost by almost 3 times that of wireline access
solutions.

COMMUNICATIONS & STRATEGIES, no. 52, 4th quarter 2003, p. 271.

272 COMMUNICATIONS & STRATEGIES no. 52

In this paper we analyse the evolving market structure and dynamics of

basic telecom services in India and build a techno-economic model
representing the various factors affecting basic telecom services. System
dynamics methodology is applied to this model to simulate growth in the
subscriber bases of various service providers in different service areas of the
country under duopoly competition. These techno-economic simulations
replicate the conditions of telecommunications technology and the economic
environment of the target market so that growth in telecom services can be
investigated and monitored by researchers, planners and service providers.
Once calibrated, such models can be used to determine the effect of
variations in model parameters on different outcome variables, especially
growth in the number of subscribers to basic telecom services.

The rest of the paper is structured as follows. We discuss the evolution of

basic telecom services in India, and examine the penetration of telecom
services and addresses universal access issues. Then we discuss the
movement from a tariff regime to competitive pricing, and we elaborate on
the factors affecting the oligopoly market in basic telecom services. We
present a causal model that describes the growth of basic telecom services
in India. We conclude by presenting simulation results generated by the
proposed model and draw general conclusions regarding the use of such
modelling exercises.

„ Basic telecom services in India:

an evolution from natural monopoly
The local telecommunication service (also referred to as the basic
telecom service) is the term used to describe the provision of local access
networks (normally referred to as the "last mile" connection) over relatively
short distances. Each customer of the Basic Telecom Operator (BTO)
normally has at least one last mile connection to the nearest exchange,
which is used to switch local, national long distance and international calls to
the appropriate networks.

The basic telecom service was always provided by a "natural monopoly"

operator in most countries until recently. The primary reasons for these
natural monopolies in telecommunication services were the huge fixed and
sunk costs associated with investment that make duplication of the local loop
uneconomical, the network harmonisation that is required for co-ordination
and optimal utilization of various resources at interconnection points and the
P. JAIN & V. SRIDHAR 273

obligation to provide universal services. There are also certain strategic

considerations such as the tendency of the governments to retain monopoly
control over their naional telecom infrastructure so that resources can be
mobilized against any threat to their sovereignty.

The natural monopoly factor is more pervasive and long lasting,

particularly in the rural telecom market due to its small size, low revenue
potential and slow growth prospects. Serving only limited rural localities may
not be economically feasible for service providers. Furthermore, a rural
population has a limited capacity to pay for services due to the economic
backwardness of rural areas. This results in a two way problem: since
economies of production are not fully realized, services cannot be provided
at the lowest cost, yet since the paying capacity of the target consumer
group is low, higher prices cannot be charged for services.

About 73% of the global basic telecom markets were monopolies at the
beginning of 1999 (Info Dev, 2000). Most nations followed a government
owned monopoly PTT (Post, Telephone & Telegraph) operator model to
start with. India continued to operate under the colonial legacy of the Indian
Telegraph Act 1885, with telecoms remaining the exclusive domain of the
state until the mid 1990s. Monopolies tend to restrict output, charge
unnecessarily high tariffs, operate with bureaucracy and inefficiency and
enjoy vast power. Liberalisation, on the other hand, can mitigate these
undesirable characteristics and if wide spread competition can be developed
and maintained, it can be expected to provide demonstrably superior results
(MELODY, 2000). The same reasons for turning to privatisation and
liberalisation apply to all countries. At the heart of the common ground is the
dawning realization that telecoms are not a luxury and that it is difficult to
conceive of such a vast infrastructure without private sector capital
(CHOWDARY, 1998).

The Indian government also felt the need to include more operators,
especially in the basic telecom services marlet mainly due to two factors: (i)
the continuing increase in the waiting line of subscribers indicating a supply-
demand gap and (ii) the continued poor quality of the service provided by the
government operator. The trends in the above factors are illustrated in
table 1.

With the introduction of the National Telecom Policy in May 1994

(NTP94), basic telecom services were opened up as a duopoly market for
private operators. Twenty-one service areas known as "circles" were formed
for giving licenses. A map of the service areas is presented in the Appendix.
274 COMMUNICATIONS & STRATEGIES no. 52

Only six of the service areas were picked up by private operators, leaving 15
other circles under the monopoly regime due to the high bidding amounts,
uncertain market potential and certain legal issues.
Table 1: Waiting list and faults under monopoly regime in India (ITU, 2003)
Year Waiting list for main lines Faults per 100 lines
1985 976,155 382.08
1990 1,960,997 222.00
1995 2,277,000 195.60
1997 2,706,000 208.80
1999 3,681,000 186.00
2000 2,917,000 153.50
2001 1,649,000 150.00

The New Telecom Policy was announced by the Indian government in

1999 (NTP99) to rationalize certain expectations in industry growth and
services. In the second round of licensing during 2001, the government
decided to further open up basic services without any restrictions on the
number of operators following the recommendations of the New Telecom
Policy 1999 (NTP99). A total of 25 licenses were picked up by private
operators in 18 service areas, leading to an oligopoly in many service areas.

The subscriber base to basic services in the country has almost doubled
in the last 5 years to exceed 40 million subscribers. However, despite the
deregulation of the basic services industry described above, private
operators contribute to just about 3% of Direct Exchange Lines (DELs) in the
country compared to former government monopoly operators. The rest
belong to former government owned monopolies (TRAI,2003b).

While competition is intense, with up to four operators in the high revenue

areas of the country, there are 8 low revenue potential service areas that still
have just one private operator apart from the government operator. So far,
three of the service areas have not attracted even a single private operator.

„ Penetration of basic services

While teledensity is still low in the country as a whole (about 4.0), it is
abysmally low in the nation's villages. Out of a total of 607,491 villages,
99,000 are without a telephone. While certain states in the country have
100% of villages covered, the Village Public Telephone (VPT) coverage is
poor in certain other states despite the fact that private operators have been
P. JAIN & V. SRIDHAR 275

operating in these states for quite some time. While the government operator
continues to take responsibility for improving rural tele-density, contributing
11 million rural DELs, contributions from private operators stand at just about
3,400 DELs (TRAI, 2003b). Hence market competition and the entry of
private operators have not fulfilled the objective of universal access in India,
especially in rural and remote parts of the country.

Two solutions are emerging to address the problems evoked above: one
is a solution based on wireless local loop technology and the other is a
policy solution based on a Universal Service Obligation (USO) fund. We
describe the status of the implementation of these solutions and the
progress made with them below.

Technology convergence

Traditionally basic services were provided using the copper-based wired

local loop connecting the subscriber to the end office of the Public Switched
Telephone Network (PSTN). In India, the cost of the wired local loop is
estimated to be between Rs. 15,000 to Rs. 25,000 and is touted as one of
the main hurdles to implementing cost-effective local loop access, especially
in rural and remote areas. An indigenous cost-effective Wireless Local Loop
(WLL) technology called corDECT, an enhancement of Digital Enhanced
Cordless Telephony (DECT), has been developed by one of the premier
technology institutes in India (JHUNJHUNWALA, 2000). Apart from reducing
the per line cost to Rs. 12,000 – Rs. 15,000, corDECT has been recognized
as the most cost-effective technology for providing both voice and internet
connectivity in developing countries by the United Nations Development
Programme (Business Line,2001). corDECT was adopted by some telcos
including the former monopoly operator in India to provide connectivity in
certain rural areas of the country.

In the year 2000, BTOs approached the government with a proposal

suggesting that they could provide local access loop at much lower cost
using Code Division Multiple Access (CDMA) technology. CDMA, developed
as a competing technology to Global Systems for Mobile (GSM) for providing
cellular services by QualComm in the USA, has found acceptance in
emerging markets. BTOs argued that its quick deployment along with high
spectral efficiency and per line costs of less than Rs. 10,000 made CDMA a
far better alternative than wired access loop for certain areas of the country.
276 COMMUNICATIONS & STRATEGIES no. 52

The technology, which is mainly being developed for cellular services, also
offers subscriber mobility.

In January 2001, India's industry policy maker, the Department of

Telecommunications (DoT), released guidelines for offering licenses to
BTOs wishing to offer limited mobility. According to the guidelines: "A Basic
Service Operator shall be allowed to provide mobility to its subscribers with
Wireless Access Systems limited within the local area i.e. Short Distance
Charging Area (SDCA) in which the subscriber is registered (also known as
Wireless Local Loop with Mobility (WLL(M)). While deploying such systems,
the operator has to follow the numbering plan of the relevant Short Distance
Charging Area (SDCA) and should not be able to authenticate and work with
this subscriber terminal equipment in SDCAs where it is not registered. The
system should also be engineered so as to ensure that the handover of
subscriber does not take place from one SDCA to another SDCA while
communicating" (DoT, 2001). Subsequent to the above announcement,
BTOs have started deploying CDMA 2000 1X technology, which can provide
voice as well as high speed data connectivity. With these offerings the basic
service becomes very similar to the services being provided by cellular
operators. The subscriber base of wireless local loop services has already
exceeded 2 million in the country. The number of wireless subscribers
including cellular subscribers in certain metropolitan areas is almost equal to
wireline subscribers. It is expected that wireless subscribers will cross the
wireline subscribers in India by 2007 (ET, 2003a).

In view of the above developments resulting from technological

convergence, the telecom regulator TRAI has issued a discussion paper on
unified licensing for both basic and cellular services, to bring in competition
and reduced prices for the consumers (TRAI, 2003c). This may make it
possible to avoid the duplication of infrastructure and to build efficiencies
through the synergy of both basic and cellular networks in the country.

Universal service obligation fund

Although the license agreement specifies roll-out obligations for private

BTOs, in terms of the coverage of rural areas, these conditions have not
been met. The main reason for this is the high cost of providing access and
the low revenue potential in these areas of the country. Although the cost
per access line has been reduced by deploying wireless technologies as
mentioned, the lower level of disposable income in rural areas means that
P. JAIN & V. SRIDHAR 277

revenue potential remains low. Table 2 gives the annual household income
in rural areas of the country (BERRY & SHUKLA, 2003) and affordable telecom
expenditure, assuming that the rural households can spend a maximum of
6% of their income on telecom related services (JHUNJHUNWALA, 2000). The
existing average annual rentals fixed by the regulator TRAI for rural DELs is
about USD 28, which over 50% of households can afford. However, TRAI
has estimated that cost based monthly rental is more than USD 100 (TRAI,
2003a), and hence affordable by only less than 4% of rural households.

Thus to bring the standard price of basic services with in everyone's

reach, especially in rural areas, and to provide incentives for private BTOs to
fulfill their licensing obligations in covering rural areas, NTP99 envisaged
charging a Universal Service Levy (USL), at a prescribed percentage of the
revenue (5% currently) earned by the operators holding different types of
licenses as a contribution towards the Universal Service Obligation (USO)
fund. Basic service providers who fulfill their USO for rural and remote areas
will be reimbursed the net cost of providing the universal service from the
funds collected by way of USL. The USO fund is now worth over USD 350
million and the government is in the process of providing statutory status to
the USO fund for effective distribution amongst BTOs (ET, 2003b).
Table 2: Income and affordability of telecom services in rural India
Annual household income Affordable telecom expenditure % of households
(USD) (in USD)

>1920 >115 1.5

1440 - 1920 86 – 115 2
960 - 1440 58 - 86 7
480 – 960 29 – 58 24
360 – 480 22 - 29 21
240 – 360 15 – 22 18.5
<240 <15 26

„ Pricing of basic services

There are two possible alternatives for pricing any telecommunications
service: (i) socially desirable pricing and (ii) cost based pricing (SRIKUMAR et
al., 2001). The principle of socially desirable pricing, which forms the basis for
basic telecom pricing strategies in most developing countries, is to charge
customers only as much as they are able to pay. Such a strategy dictates
that the price of basic telephone services should be low and usually not
related to the cost of provisioning services. Rental and usage charges are
278 COMMUNICATIONS & STRATEGIES no. 52

normally cross-subsidised by the more expensive business, long distance

and international long distance services. In a cost-based pricing structure,
tariffs are based on the cost of the network elements in providing service.
Fixed charges, known as rentals, recover the capital costs of the
infrastructure required to build the network. Variable charges, known as
usage charges, recover operation, maintenance, administrative and
interconnection charges, distributed based on minutes of usage. Until
recently, Indian subscribers were paying very high long distance and
international call charges to cross subsidize basic services. Cross
subsidization was possible during the monopoly regime when the
government operator was providing local, national and international services.
With the entry of private operators and the incorporation of different licensing
schemes for different services, it has become increasingly difficult to sustain
the socially desirable pricing scheme.

In its recent Telecommunication Interconnection Usage Charges (IUC)

regulation, TRAI tried to marry the two pricing schemes mentioned above
(TRAI, 2003a). According to this regulation, an Access Deficit Charge (ADC)
of about USD 4.50 per DEL per month is computed that is to be paid to the
BTOs to cover the deficit between the cost based monthly rental and
average monthly rental tariff. ADC is applicable only for BSOs who offer
fixed line service and is charged only for long distance calls. As per TRAI
(2003a), the rental tariff for wireline services varies from USD 1.50 to 6 per
month depending on the capacity of the exchange to which a DEL is
connected. TRAI has recognized the long-term impact of cross subsidization
and has indicated that ADC will eventually be phased out.

„ Quality as a differentiator in an oligopoly market

In an oligopoly market, quality is a vital factor in determining the overall
competitive performance of service providers. Quality offers a strategic
advantage in a duopoly competitive situation. Rivals must offer better quality
than their competitors in the market place to gain a 'first mover advantage'
over rivals. One strategy that has been related to success in service
industries such as telecoms is the delivery of a high quality of service
(THOMPSON, DESOUZA et al., 1985).

Quality may be connected with a number of features of the firm and its
products and/or services. Quality products can be generally defined as those
that consistently meet the requirements of functionality, design, market price
P. JAIN & V. SRIDHAR 279

and availability to the customer and of lower costs to the firm with fewer
acceptable defects and with proper maintenance possibilities (SICE et al.,
2000). PARASURAMAN et al. (1988) suggests that customers do not perceive
quality as a one-dimensional concept. They stress that customers
assessment of quality include perception of multiple factors. Models
examining product differentiation in a quality conscious oligopoly market
have been developed by SHAKED & SUTTON (1981) and GABSZEWICZ et al.,
(1981).

ZEITHAML & BITNER (2000) illustrate that service quality is a part of overall
customer satisfaction and has the following six dimensions: reliability (ability
to perform the promised service dependably and accurately),
responsiveness (willingness to help customers and provide prompt service),
assurance (knowledge and courtesy of employees and their ability to inspire
trust and confidence), empathy (caring, individual attention to customers)
and tangibles (physical facilities, equipments). While some of the above
such as reliability and tangibles can be objectively measured,
responsiveness, assurance and empathy depend on customers' perceptions
and can be subjective. Since perceptions are always considered relative to
expectations and expectations are dynamic and ever changing, evaluation of
quality shifts over time even in the same cultural, economic and social
environment. What is considered as quality or satisfactory to customers
today may be different tomorrow.

Based on the theoretical framework measuring quality suggested above,

we propose that the customers of basic telecom service, experience different
levels of price, telecom service quality and customer service quality from
service providers. Features of telecom service quality include: the types and
variety of services being provided, call completion rate, call dropping
percentage, accumulated network down time, dial tone delay, reported fault
incidence rate, grade of service, coverage, network performance, reliability,
and availability. These features depend upon the quality and amount of
telecom infrastructure deployed by service providers and can be objectively
measured. Customer service quality, on the other hand, is based on
customers' perceptions regarding customer care, help services, billing and
supplementary services, experience with fault repairs, average time to
attend customer complaints, repair time taken, responsiveness, empathy,
assurance and the courtesy of service personnel. Hence we postulate that
the overall quality / satisfaction level is a function of price, telecom service
quality and customer service quality and is a determinant of competitiveness
in an oligopoly market.
280 COMMUNICATIONS & STRATEGIES no. 52

Table 3: Features of quality components

Price Telecom service Customer service quality
quality
Parameters Price Security, reliability, Responsiveness,
availability, communication, Credibility,
maintainability, metering & billing
competence credibility, curtsey,
assurance, empathy,
understanding customer
needs
Compete On price On infrastructure On customer relationship
strength management
Competitive Competition over Competitors will try to Competitors will always
behavior price can not sustain improve the strive to improve to gain
for long; competitors infrastructure over the first mover advantage to be
will settle and period to be quality Customer friendly.
stabilize at the price leader
near to cost plus
Availability of Available in open Based on customers' Based on customers'
comparative market experience perception
information
Time taken to Quicker in the High since the Low since resource
improve beginning when infrastructure mobilization for improving
prices are high; deployment takes time service is easier compared
slows down to infrastructure
considerably when
the price settles
down at cost plus
Improvement Firm reduces price; Efforts required to Efforts required to further
process revenue per further improve the improve the quality
subscriber reduces; quality increase with increases with the level of
subscription the level of quality. quality. However, resources
increases; final However, resources required at disposal to
outcome depends required at disposal to improve the quality
on price elasticity of improve the quality increase with quality
demand increase with quality leadership, as the quality
leadership, as the leader gets more
quality leader gets subscribers and hence
more subscribers and more revenue
hence more revenue

Different features of the three dimensions of quality are given in table 3.

SICE et al. (2000) discuss the quality improvement process. We extend these
theories to the three facets of quality. As noted in the above table, in cases
of price competition, firms will try to offer lower prices than their competitors
in order to be price leaders and to gain a low price advantage in the market.

However, competition over prices will not continue for a long and both the
competitors will settle down near the cost plus reasonable markup level. The
competitive behavior of operators will be different for telecom service quality
and customer service quality. In the case of telecom service quality, the
realization of quality difference, both by operators and customers is a time-
consuming process. Furthermore, as the risks associated with capital
P. JAIN & V. SRIDHAR 281

investment and upgrading technology to improve telecom service quality are

higher, it will take firms longer to improve quality. Even after making
decisions to invest, the mobilisation of resources such as capital, manpower,
technology and equipment will be slower. However, customers' perception of
service quality is a relatively quicker process and hence will help firms in
making improvement decisions faster. As improvement in customer service
quality does not involve the amounts of effort and resources required by
infrastructure development, the mobilization of resources should be rapid
enough to jump ahead of others in a short period.

Quality levels of Indian basic telecom operators

In India, the telecom regulator, TRAI, has been conducting periodic

studies with the objective of evaluating customer satisfaction and telecom
service providers' performance levels (TRAI 2003d). The authority also
broadly uses some of the aspects we have outlined above in their study to
determine the quality of service offered by different service providers.

Selective objective parameters used for evaluating telecom service

quality are presented in table 4. Table 4 also gives the benchmark
performance level for each parameter set by the regulator and the number of
service providers who meet and fail to meet the specified benchmark levels.
In areas where only the government incumbent operator is providing
services, the number of service areas in which the incumbent is performing
better than the benchmark level is also indicated. An analysis of the table
reveals that the telecom service quality offered by BTOs is poor, even in
areas where there is competition. The only parameter in which competition
has brought about a substantial improvement is the percentage of fault
repairs by the next working day. The grade of service offered is still very
poor with only about half of the operators providing a grade of service of
99.8% at a local exchange level.

TRAI also conducted a questionnaire-based survey to assess the

perceptions of customer service quality of the various operators. A select set
of these subjective parameters along with performance benchmark and the
number of operators satisfying the benchmark levels are given below in
table 5.
282 COMMUNICATIONS & STRATEGIES no. 52

Table 4. Telecom service quality of Indian BTOs

Service
areas with Service areas with only
Benchmark per more than government operator
No. Objective parameters one operator
quarter

Percentage Percentage of Service

of operators Areas where the
performing incumbent is
above performing above
benchmark benchmark
1 Fault incidences per
100/sub/mth <7 16.67% 0.00%
2 Fault repair by next
working day >87% 41.67% 5.56%
3 Mean Time to Repair
(MTTR) <12 hrs 0.00% 11.11%
4 Percentage of repeat
faults <1.5% 16.67% 22.22%
5
Response to operator
assisted services (%
answered in 10 sec.) 90%, 8.33% 0.00%
6 Grade of service a) Junction
(calls per thousand) between local
exchange
(2/1000) 50.00% 38.89%
b) Outgoing
Junc. from TAX
to Local
(5/1000) 41.67% 38.89%
c) Incoming
junc. from local
to TAX (5/1000) 8.33% 33.33%
7 Call completion rate
in local network >60% 16.67% 5.56%
8 Metering & billing
credibility- % of bills
disputed <0.15% 41.67% 44.44%

Table 5 reveals that in areas where there is no competition, the

customers rated the incumbent government operator very poorly in all areas
of customer service. Competition seems to have improved customer service
quality in certain areas. Overall, the basic telecom operators still perform
very poorly in providing adequate telecom and customer service quality
levels.
P. JAIN & V. SRIDHAR 283

Table 5. Customer Service Quality Indian BTOs

Service areas Service areas with
with more than only government
Benchmark one operator operator
No. Subjective parameters
per quarter Percentage of Service
Percentage of
operators Areas where the
performing above incumbent is
benchmark performing above
benchmark
1 Satisfaction with
service provisioning >90% 18.18% 0.00%
2 Satisfaction with
Maintainability >90% 0.00% 0.00%
3 Satisfaction with
network performance,
reliability, and
availability >90% 9.09% 0.00%
4 Satisfaction with help
services >85% 45.45% 20.00%
5 Satisfaction with billing >85% 72.73% 33.33%
6 Satisfaction with
supplementary
services >85% 72.72% 46.67%
7 Overall Satisfaction >85% 45.45% 20.00%

The following section discusses the causal-model describing the growth

of basic telecom services, taking into account the fact that quality, with its
three dimensions, is the weapon for competitive advantage.

„ A cause-effect model of oligopoly competition

Having analysed the various factors influencing basic telecom services in
the country, is it possible to predict the future of the market, subscriber base
and the financials of operators? The first in any such attempt is to build a
causal loop diagram (refer to Figure 1), that shows the existence of all major
cause-and-effect links, indicating the direction (cause -> effect) of each
linkage relationship. A link is positive (or negative) if a change in the causal
element produces a change in the same (or opposite) direction for the effect
element. A closed sequence of causal links represents a causal loop. An
even/odd number of negative polarity (i.e. direction of change) links in a loop
results in positive/negative feedback.
284 COMMUNICATIONS & STRATEGIES no. 52

Figure 1. Cause-Effect Diagram for Oligopoly Competition

(Using Vensim - www.vensim.com)

FCSQ/CCSQ: Firm/Competitor's Customer Service Quality

FTSQ/CTSQ: Firm/Competitor's Telecom Service Quality
DCSQ: Difference in Customer Service Quality
DTSQ: Difference in Telecom Service Quality
P. JAIN & V. SRIDHAR 285

To get an integrated view of the model, we start with the main variable -
Total Subscriber Base i.e. subscribers to the basic telecommunication
services in a circle/area, which represents growth in telecommunication
services. Potential subscribers are the households willing and capable of
subscribing to basic telecom services. An increase in the number of
households increases the number of potential subscribers. The relation has
been represented with the positive causal linkage. As potential subscribers
subscribe to the service there is a natural depletion of the potential
subscriber base. This bi-directional relationship forms a loop with negative
polarity i.e. a negative feedback loop. As the economic development of the
service area increases, the disposable income of the households increases
and hence more will subscribe to the telecom service. A reverse causality
also exists between economic development and telecommunication
penetration levels (HARDY, 1980). As the telecom subscriber base increases,
it boosts the economic development of the area. This bi-directional
relationship forms a positive feedback loop.

An increase in the number of subscribers causes a decline in the

customer services offered, leading to a decrease in customer service quality.
However, the customer service obtained by the subscriber is determined by
the best of the service offered by the firms in the market place. To attain a
competitive advantage, service providers will strive to improve their service
performance to keep pace with the increase in the subscriber base, by
improving customer interfaces, relationship management and metering and
billing standards. This bi-directional relationship forms the negative feedback
loop. Similarly, with increases in the subscriber base and hence a
corresponding increase in the amount of information traffic and the
frequency of requests for connection establishment, telecom service quality
deteriorates due to a congestion effect. However, as with customer service
quality, service providers will increase telecom service quality by setting up
more switching infrastructure and enhancing the quality of access loops and
trunks, which will, in turn, lead to growth in the subscriber base.

The price of services also plays an important role in determining the

growth of services especially in developing countries like India, where price
elasticity of demand for telecommunication services is very high. Increases
in rental and subscription charges shows its negative effect on subscriber
levels in the service area. However, as service providers gain experience
and pick up more and more subscribers, the prices for services in general
should decrease due to the effects of economies of scale. This bi-directional
relationship is represented by the positive feedback loop.
286 COMMUNICATIONS & STRATEGIES no. 52

In this model we have represented duopoly market conditions featuring a

firm, the incumbent and a competitor, the new entrant. The total subscriber
base in a service area is distributed between the firm and the competitor in
the market. However, the proportion of subscribers who opt for the
firm/competitor is determined by the level of price, customer service quality
and telecom service quality offered by the firm/competitor. While an increase
in the price of the service by the firm/competitor reduces the subscriber base
of firm/competitor, an increase in the customer and/or telecom service
quality provided by the firm/competitor increases the subscription base of the
firm/competitor. The above processes are represented in the causal loop
diagram with linkages of appropriate polarity.

In a competitive market, "churn" of subscribers amongst the service

providers happens. In an evolving market such as India, the churn rate is
very high (close to 4-6% per month), as witnessed for cellular services (ET,
2003c). Customers' perception of differences in price, customer service
quality and telecom service quality determines the churn rate between the
firm and the competitor. When churn is in favor of the firm/competitor,
firm's/competitor's subscriber base grows and there is a corresponding
decrease in the subscriber base of competitor/firm. To succeed in a duopoly,
service providers must continuously offer better quality than their
competitor(s).

The above model provides a synergistic view of the competitive basic

telecom services market. While the parameters of the model and the cause-
effect relationships are in general applicable to basic telecom services in any
country, the values and functional forms of the model parameters can vary
from country to country. For example, the growth in economic development
index, number of households and infrastructure development for India, rely
on data collected from various sources (Economic Survey, 2003; NATRAJAN,
1998) and incorporated in the simulation model. The relative market position
of the former monopoly government operator has been incorporated using
previous data. These differ across countries and hence the impact of the
various parameters on the final outcome variable, viz. growth in the
subscriber base, will be different across countries.

Techno-economic simulations of the above model can be used to

replicate the conditions of the telecommunications technology and the
economic environment of the target market so that growth in telecom
services can be investigated and monitored by researchers, planners and
managers. Once calibrated, such models can be used to determine the
effect of variation of model parameters on different outcome variables,
P. JAIN & V. SRIDHAR 287

especially growth in the subscriber base for basic telecom services. The
following section presents a simulation exercise we carried out with the
above model and its validity.

„ Simulation results and conclusions

The duopoly model based on the above cause-effect feedback model has
been developed using ithink® (http://www.hps-inc.com) system dynamics
software. The model was calibrated for one of the service areas (the "Andhra
Pradesh" circle) where a duopoly market has existed since 1999. DELs
(Direct Exchange Lines) details have been taken as an indicator for the
growth of basic telecommunication services.

The model has been calibrated using data from September 1999 until
December 2002. To examine predictive validity, the calibrated model was
then simulated to predict the total subscriber base and subscriber base of
both the incumbent government operator (Bharat Sanchar Nigam Limited –
BSNL) and the new private BTO (Tata Teleservices). Figure 2 depicts both
predicted and actual subscribers for the service area as a whole. Figures 3
and 4 show the actual and simulated subscriber base of the incumbent firm
and competitor respectively. Mean absolute percent error (MAPE) (defined
as ∑ (Absolute[Predicted – Actual]/Actual) * 100 / No of observations)
measure as suggested by DUTTA & ROY (2001) has been used to assess the
predictive ability of the model. MAPE for the calibrated model is 11.81% for
total subscriber base, 12.64% for BSNL subscriber base and 19.77% for
subscriber base of Tata Teleservices. Further fine tuning of the model
parameters might reduce the MAPE.

The validated model was also simulated to predict the future growth of
the subscriber base. It is found that Andhra Pradesh service area which has
about 3.4 million subscribers will cross the 11 million mark by March 2008.
The private competitor will have a market share of less than 10%.

An analysis of these graphs indicates that while the model predicts a

higher subscriber base for the incumbent, the actual subscriber base is
lower during the calibration period after February 2001. This may be
explained due to the corporatization of the government telecom department
into a BSNL as per NTP 99. After corporatization, the former government
department lost all the privileges of a government department. However, the
mindset of the employees and the work culture of the organisation did not
288 COMMUNICATIONS & STRATEGIES no. 52

change, leading to a drop in the subscriber growth pattern. The competitor

capitalized on this and hence increased the subscriber base. Since our
model does not take into account such India specific features, the simulated
results tend to deviate a bit from current results if an unmodeled event
occurs.

Figure 2: Simulated and actual total subscriber base in the service area

Total Subscriber Base

Simulated Total Subscriber

5000000
Base

4000000
Subscribers

3000000

2000000

1000000

Month

Figure 3: Simulated and actual subscriber base of the firm (BSNL)

Subscribers of Incumbent

Simulated Subscribers of
5000000
Incumbent

4000000
Subscribers

3000000

2000000

1000000

Month
P. JAIN & V. SRIDHAR 289

Figure 4: Simulated and actual subscriber base of the competitor (Tata Teleservices)

Subscribers of C ompetitor
300000
Simulated Subscribers of
C ompetitor

200000
Subscribers

100000

0
Sep-99 Jan-00 M ay-0 0 Sep-00 Jan-0 1 M ay-01 Sep-01 Jan-0 2 M ay-02 Sep -02
Month

Another important lesson from this growth model is that the incumbent
has a very large subscriber base and will continue to dominate the basic
telecom services in India. Service area specific licensing does not provide
sufficient scale economies for smaller operators to provide basic services
against the large government operator. Only private operators who have
nation-wide presence will be able to attain even financial closures of their
projects. Currently in India only one such private operator has got near
nation-wide basic telecom license, and even this service provider is finding it
tough to attract the limited potential subscriber base in the country.
Moreover, the government operator having over more than 40 million
subscribers could arm-twist the new entrants on interconnection issues. If
the government really wants to introduce sustainable competition, it may
have to resort to unified licensing as opposed to sector-specific licensing.
Recently the Indian government and the regulator have announced the
possibility of introducing unified licensing (TRAI, 2003c). Communications
Convergence Bill (CCBill, 2003), which is yet to be enacted in Indian
parliament, has also proposed a new unified licensing scheme to provide a
sustainable and competitive telecom environment in India.

Thus this model can be used to study the impact of variation of model
parameters on the growth of basic telecommunication services, market
share of both the operators in the service area. The same can be used as
policy debate and decision support tool for all the stakeholders (the
regulator, the incumbent, and the new entrants) to establish and oversee a
290 COMMUNICATIONS & STRATEGIES no. 52

healthy competitive operating environment, that can provide comprehensive

service offerings and optimal prices for consumers.

The Indian telecom industry is witnessing a shift from an era of total

monopoly to duopoly and even oligopoly in certain service areas.
Researchers, academicians, regulators and telecom managers need to
understand the complex dynamics of this transition phase of the Indian
telecom industry to make future investment and/or to make sound policy
decisions. The causal feedback model proposed in this research
encapsulates all of the relevant techno-economic variables affecting the
basic telecommunication industry. The model validates to reality and can be
used as a decision support tool to analyse the effect of different variables on
subscriber growth. We plan to calibrate the model for more service areas to
turn it into a robust decision/policy support tool.
P. JAIN & V. SRIDHAR 291

References

BERRY S. & SHUKLA R.K. (2003): "NCAER's Market Information Survey of

Households", Economic and Political Weekly, January 25th, 350-361.

Business Line (2001): UNDP pat for India's Tech Initative.

CHOWDARY T. H. (1998): "Telecom liberalization and competition in developing

countries", Telecommunications Policy, 22(4/5), 259-265.

Communication Convergence Bill (CCBill) (2003): Retrieved from:

http://164.100.24.208/ls/committeeR/Communication/39.pdf. On October 10th 2003.

CRONIN F.J., PARKER E.B., COLLERAN E.K. & GOLD M.A. (1991):
"Telecommunications infrastructure and economic growth: An analysis of causality",
Telecommunications Policy, 15(6), 529-535.

Department of Telecommunications (DoT) (2001): Guidelines for Issue of License for

Basic Service, Retrieved from http://www.dotindia.com on September 28th, 2003.

DUTTA A. (2001): "Business Planning for Network Services: A Systems Thinking

Approach", Information Systems Research, l2(3), 260-283.

DUTTA A. & ROY R. (2001): "The Mechanism of Internet Diffusion in India: Lessons
for Developing Countries", Proceedings of International Conference on Information
Systems-2001, New Orleans, USA.

Economic Survey (2003): Government of India Publication.

Economic Times (ET) :

- (2003a): "Cell Trumps Landlines in Delhi", August 4, Retrieved from:
http://www.economictimes.com/ on August 4th, 2003.
- (2003b): "Changes to Telegraph Act Cleared", July 11,Retrieved from:
http://www.economictimes.com/ on August 11th, 2003.
- (2003c): "Cellcos face the churn as competition intensifies", August 22nd, Retrieved
from: http://www.economictimes.com/ on August 22nd, 2003.

GABSZEWICZ J., SHAKED A., SUTTON J. & THISSE J. (1981): "International Trade
in Differentiated Products", International Economic Review, 22(3): 527-534.

HARDY & ANDREW (1980): "The role of the telephone in economic development",
Telecommunications Policy, 4(4): 278-286 (Abstract).

InfoDev (2000): Telecommunications Regulation Handbook, Retrieved from:

http://www.infodev.org/projects/314regulationhandbook/index.htm, on March 3rd,
2003.

International Telecommunications Union (ITU) (2003): Yearbook of Statistics, ITU,

Geneva, Switzerland, March.
292 COMMUNICATIONS & STRATEGIES no. 52

JHUNJHUNWALA A. (2000): "Unleashing Telecom and Internet in India", India

Telecom Conference, Asia/Pacific Research Center, Stanford University, Retrieved
from: http://www.tenet.res.in/papers/unleash.html, March 3rd, 2003.

MELODY W.H. (2000): "Shaping Liberalized Telecom Markets", Telecommunications

Policy, 24, 803-806.

MIKEROV I. & SOTO O.G.(1998): "Modeling And Selecting Best Access Networks",
Alcatel Telecommunication Review, Second Quarter, 144-145.

NATRAJAN I.(1998): Indian Market Demographics Report-1998, NCEAR.

PARASURAMAN A., V. A. ZEITHAML et al. (1988): "SERVQUAL: A Multiple-Item

Scale for Measuring Consumer Perceptions of Service Quality", Journal of Retailing,
64(Spring 1988): 5-17.

SHAKED A. & SUTTON J. (1981): "Heterogeneous Consumers and Product

Differentiation in a Market for Professional Services", European Economic Review,
16(2): 159-177.

SICE P., E. MOSEKILDE et al. (2000): "Using System Dynamics to analyze

interactions in duopoly competition", System Dynamics Review, 16: 2.113-133.

SRIKUMAR K., P. JAIN et al. (2001): "Cellular Pricing: Greener or Leaner", Voice &
Data, 8(5): 74-77.

Telecommunications Regulatory Authority of India:

- (2003a): "The Telecommunication Interconnection Usage Charges Regulation",
Retrieved from: http://www.trai.gov.in on April 29th, 2003.
- (2003b): "Indian Telecommunications Industry Performance Indicators 2002-2003",
Retrieved from: http://www.trai.gov.in on August 4th, 2003.
- (2003c): "Consultation paper on Unified Licensing for Basic and Cellular Services",
Retrieved from: http://www.trai.gov.in on August 1st, 2003.
- (2003d): "Survey Conducted by Telecommunication Regulatory Authority of India
to assess QoS provided by BSOs/CMSOs- Summarized results Oct-Dec 2001",
Retrieved from: http://www.trai.gov.in on August 4th, 2003.

THOMPSON P., G. DESOUZA et al. (1985): The Strategic Management of Service

Quality, Cambridge, MA: The Strategic Planning Institute.

ZEITHAML V. A. & M. J. BITNER (2000): Service Marketing: Integrating Customer

Focus Across the Firm, New Delhi, Tata McGraw-Hill Publishing Co Ltd.
P. JAIN & V. SRIDHAR 293

Appendix

Map of the basic telecom service areas in India

Note: The metro areas of Mumbai, Kolkata and Chennai are part of Maharashtra, West Bengal
(W.B.) and Tamil Nadu circles respectively.