- Assessing The Threat Of New Entrants In Business - Free Economics Essays Assessing The Threat Of New Entrants In Business

Essay Writing Service

Assessing The Threat Of New Entrants In Business

Incumbent’s wrath is the word coined to signify the leverage the players in the market commands. The existing players are well settled and entrenched in the market with an established network all over. The incumbents grow because of an established network presence, a brand that consumers are aware of and sheer economies of scale. By leveraging these points of strength, these players are able to fight late entrants and challengers more effectively. That is certainly what is happening between the incumbents (Airtel, Vodafone, Idea, Reliance Communication, and Aircel) and the challengers (Datacom, Unitech, Swan Telecom, Shyam, and Loop ). The piece under contention is the mobile termination charge which one operator pays to the other when the customer of the further uses the roaming charges of the later. This is 30 paise a minute charge as of today. This is charged to the consumer as the cost of roaming. With an all India footprint (or 80% coverage), the incumbents effectively donot have to pay termination charges. The full coverage ensures that calls are terminated within their network. The incumbents have either been pocketing the termination charges or passing them to consumers “no roaming charge” kind of schemes. This factor makes the industry unattractive for the new entrants and investors (a negative factor).

Get Help With Your Essay

If you need assistance with writing your essay, our professional essay writing service is here to help!

Find out more

Declining ARPU

Average revenue per user (ARPU) today is around the theoretical $5 break point. In mature markets an ARPU under $5, does serious harm to the bottom-line. In a growing market like India, the strain of a decreasing ARPU may not be significantly visible presently. However, with markets maturing, the focus will shift from growth to sustainability. The new classes of consumers are mostly rural and their ARPU would be well below $5 (probably $3-3.5). Managing bottom-lines at such low levels of Revenue per user and increasing costs of acquisition will prove to be a challenge for new entrant and investors (a negative factor).

Infrastructure tenancy cost

The high capex in towers is one scary part of the telecom business. The cost of active equipment is estimated to be 40 percent of the telecom operator’s total capex, while the balance is accounted for by passive infrastructure. For example, Bharti has invested close to Rs. 230 billion to create the cellular infrastructure with 45,000 towers across the country. Typically, a ground-based tower costs Rs. 25-30 lakh. A roof-based tower can be built for Rs.13-14 lakh. On having a look at the additional 1,10,000 towers that were installed from March 2007 to March 2008 at a conservative cost of Rs. 15 lakh per tower-some Rs. 16,500 crore would have been sunk into them as capex. Additionally, The cost of maintaining one tower (active + passive) is estimated at Rs. 60,000-65,000 per month. However, if a telecom service provider decides to rent the passive network from a tower company than the telecom service provider in that case would need to pay monthly rent of Rs. 40,000 per tower for passive network and operating expenses close to Rs. 40,000-45,000 for active network. The monthly outflow of a TSP would be close to Rs. 80,000-85,000 per tower per month. Furthermore, tower sharing among telecom service providers is just 25% as compared to 90% in the west and some operators are not even willing to share towers. However, BSNL has recently announced about leasing its towers which will help both the older and newer players to penetrate into new markets. This factor makes the telecom industry moderately attractive for the new players and investors (moderately positive factor).

Customer switching costs

The cost of new connection is very low, or one can say new connections are available for free. Moreover, the proposed mobile number portability will make switching all the more easy. TRAI expected that the subscriber has to pay not be more than Rs. 200, some operators have estimated the charges can be as low as Rs. 20. The TRAI statistics for May 2010 shows subscriber switching capacity of 20% with a yearly growth rate of 12.75%. This factor gives new entrant and investors a reason to entry this industry (positive factor).

Capital Requirement

Telecom is a highly capital intensive sectors with high fixed cost in terms of infrastructure cost and high sunk cost of licensing fees. This is a negative factor for a new entrant and investors.

Licensing policy

The government has provided six new 2G licenses to telecom operators at a fee of Rs. 1650 crore in 2008 on first come first serve basis. This distribution took place after seven years of the previous distribution. Later, some the players sold their licences instead of launching new services. In recently held 3G licences auction all the incumbent private players managed to get licenses for 9-13 circles. It has been evident that the delay in the 3G auction, auction procedure and the head start given to the incumbent public players has caused lot of unrest in the industry. Also, the auction considered to be as overpriced has left private players with a lot of debt in their kitty. Moreover, government has failed to implement number portability which has to be implemented in April 2009. Government liscensing policies, failure to implement number portability and a 74% FDI cap in telecom sector has made industry unattractive to new entrant and investors (negative factor).

In light of the above factor the overall threat of new entrant is low. Hence, the industry is unattractive for a corporate to enter into.

Power of buyers

Undifferentiated Products and Services

The product and services offered by telecom operators are relatively undifferentiated. Product, service, and technology innovations are easily copied by the competitors. This a negative factor for the industry.

Price sensitivity of Buyers

Undifferentiated offering makes buyers price sensitive. Price sensitivity of the buyers induces a constant threat of price war in the industry. Hence, this factor is negative for the industry.

Buyer Concentration

Most of the buyers are concentrated in urban India. The teledensity in urban area is about 119% and that in the ruler area is 26% with an overall teledensity of 53%. The urban area having high ARPU potential is already saturated and ruler areas are unattractive for the industry. This is a negative factor.

Considering the factors above the overall bargaining power of the buyers are high, hence, the industry is unattractive for a corporate to enter into.

Supplier bargaining power

Supplier Concentration

There are large numbers of suppliers in the telecom industry. Suppliers are handset manufactures like, Nokia, Sony Ericson, Samsung, LG, Motorola, etc. Further, other suppliers are fibre optics and aluminium cable providers; tower infrastructure providers such as GTL Infrastructure Ltd., ATC India,etc.; and software solution providers such as TCS, Infosis, Wipro, Mahindra Satyam. There are sufficient numbers of suppliers in the market providing lesser bargaining power to suppliers in the industry and hence this factor is positive.

Substitute Inputs

Substitution of input is cost intensive as hardware or software changes demand a change in the architecture. This gives buyers a little power making is factor moderately negative.

Backward and Forward Integration

Telecom service providers have backward integration in tower business, handset business and software development. For example, Bharti and Reliance have their own subsidiaries in tower business; Reliance and TATA provide their own handsets, Reliance and TATA have their own software development facilities. Changes of forward intergradation for the suppliers are close of zero. As a result bargaining power of the suppliers is less, hence, the factor is positive for the industry.

Switching Costs

Infrastructure suppliers have higher switching cost due to specific nature of the equipments and software providers generally enter annual maintenance agreement. Hence, customer switching cost of the suppliers is high making this factor positive for the industry.

Impact of Supplier Prices, Quality, and Service

Supplier prices have a great impact on the cost structure and profitability of the telecom industry. Also, the quality and service provided by the suppliers impacts overall customer satisfaction and reputation of the industry as a whole. Hence, this factor is a negative factor.

After analysing the factors above it can be concluded that the bargaining power of suppliers is low, this increases the attractiveness of the industry for a corporate to enter into.

Rivalry among existing competitors

High exit barriers

Telecom industry is a capital intensive industry with high sunk and fixed cost due to specialised equipment, spectrum cost, etc. This raised the exit barrier for an existing player to a very high level. As a result, in order to sustain in the market the players compete and fight up to the bleeding point. This makes industry unattractive (negative factor ) for the industry.

Short lived advantage of innovation

In order to differentiate form competitors the industry players are investing heavily in technical innovation and marketing strategies. But, due very nature of the industry the technology readily becomes obsolete. Moreover, the product and service innovations are easily imitated by the competitors due not to lack of mature intellectual property protection laws. This factor fuels the competition in the industry (negative factor) and makes the industry unattractive.

Price wars

The price war between the major players and the new entrants has made the competition fiercer. Market competition accelerates the pace of development and technological advancements but cut throat competition is detrimental for the health of the industry. Had TRAI made per second billing a compulsion it would have introduced a necessary evil with no competitive dimension but its decision to make per second billing voluntary in nature offshoots one more variable that will lead to the emergence of new permutations of tariff offers, limited only by operator`s marketing prowess. The primary concern of all stakeholders in Telecom sector right now is the adverse effect of the price war on EPS and net profit (negative factor).

All the above factors are negative and hence the rivalry among the existing players is very high making the industry highly competitive. Hence, the industry is unattractive for a corporate to enter into.

Threat of Substitutes

The threat that substitute products pose to an industry’s profitability depends on the relative price-to-performance ratios of the different types of products or services to which customers can turn to satisfy the same basic need. The threat of substitution is also affected by switching costs – that is, the costs in areas such as retraining, retooling and redesigning that are incurred when a customer switches to a different type of product or service. The potential major substitutes for telecom industry are voice over internet protocol (VOIP), emails, satellite phones, instant messaging, etc. Among the several substitutes VOIP has emerged as the biggest threat. Applications like Skype and Google voice chat have been extremely popular among younger generation users and are fast emerging as preferred means of communication. However, considering the current penetration of the substitutes and spread of the telecom industry these substitutes does not pose any major threat providing a mildly positive outlook to the investors.

The threat of substitute products is low, this factor makes the industry attractive for a corporate to enter into.

Most Used Categories

EssayHub’s Community of Professional Tutors & Editors
Tutoring Service, EssayHub
Professional Essay Writers for Hire
Essay Writing Service, EssayPro
Professional Custom
Professional Custom Essay Writing Services
In need of qualified essay help online or professional assistance with your research paper?
Browsing the web for a reliable custom writing service to give you a hand with college assignment?
Out of time and require quick and moreover effective support with your term paper or dissertation?