Price wars in Indian telecom industry

Abstract

The Indian economy has transformed itself from a heavily regulated to market basedeconomy over the past two decades. The liberalization process was boosted in the 1990swith the creation of regulatory institutions to march towards a market based economy. Andas a result the economy witnessed a GDP growth of over 7% annually in the last decade.1The telecom sector is a major contributor to the Indian economy with a share of nearly 3.6%of the total GDP in FY102.The Indian Telecom industry has witnessed an impressive growth in the last decade as aresult of various policy initiatives. The Indian telecom continues to be one of the fastestgrowing telecom sectors in the world. It is currently the second largest in the world bysubscriber base. Positive regulatory changes, competition and rivalry among operators andlow tariffs has transformed the mobile phones from being a luxury that only the rich ownedto that of an essential devices necessary for the common man’s existence .The increase in number of subscribers was also accompanied by an increase in telecomoperators in the country. Consolidation in the industry would be inevitable in the currentmarket scenario with around15 players fighting for a share in a market that can optimallysupport only four to five players.The large number of operators in the sector, coupled with the new entrants pursuit for astronghold in the telecom market has led to a tariff based price war. The price war led bythe new entrants to attract new customers has resulted in a steep fall of the AverageRevenue Per Unit (ARPU). Though this has been a boon to the consumers resulting in animpressive growth in the subscriber base, has had an impact on the profitability of all theoperators. Almost all operators witnessed a sharp decline in profitability over the last fewyears. This trend of falling tariffs however is unsustainable in the long run. As a first sign ofan end to the price wars in India, Bharti Airtel last month raised call charges for some mobileschemes, a move which was followed by rivals Idea Cellular and Vodafone.In view of these recent developments, it is imperative to gain a better understanding of theimpact of price wars on the industry, especially with regard to consolidation of the industry.