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The Privatization And Liberalization Of The Telecommunication Market Marketing Essay

After the privatization and liberalization of the telecommunication market, strategic alliances between major telecommunication firms are forming almost daily. This paper attempts to understand the strategic alliances in the telecommunication industry, their various forms and classifications, and the aims, objectives and drivers behind the formation of these alliances. The paper will also provide live examples from each form of the alliances, and its impact on the telecommunication market. Finally, the paper will summarize and conclude the main aspects governing the strategic alliances in the telecommunication market, and how it can be effectively utilized.

The global telecommunication sector is experiencing a tremendous change, due to the privatization and deregulation of the market. Where historically, telecommunication was considered a monopoly market, where the market players where wholly owned by the governments worldwide.

After the privatization and liberalization of the market, Europe and the United States have witnessed multiple mergers involving leading telecommunications companies, which moved the telecommunication market from being a local industry to be an international one, with very tough competition between market giants.

Also the evolving technological capabilities, increased competition, lead to creation of new rules of competition, and change of the customer demand towards more personalized media services and new types of services.

All these major changes in the telecommunication market, made the need for the firms to cooperate together to be able to compete in this hyper competition state, where sustaining the competitive advantage has become the main challenge in the telecommunication industry.

In this paper, we will try to investigate the main drivers behind the formation of the strategic alliances between firms in the telecommunication sector, and the different forms of alliances, aided by real life examples, aiming to evaluate the need of these forms of alliances and conclude their main benefits.

Key terms definition

Strategic Alliance

A strategic alliance is the combined effort of two or more entities, through establishment of a formal relationship to pursue a common goal. The objective of both parties is to meet critical business needs while maintaining their independent identities and the alliance product. The rationale of such mutual efforts is based on the belief that the sum is greater than its parts (Fede et al. 2009)

Varadarajan and Cunningham (1995) define strategic alliances as "the pooling of specific resources and skills by the cooperating organizations in order to achieve common goals, as well as goals specific to the individual partners".

Strategic Alliance Motives

Three theoretical approaches are especially relevant in explaining the motivations and choice of joint ventures (Kogut 1988). The first approach is derived from the theory of transaction costs as developed by Williamson (1975), which suggests that companies form alliances in order to minimize their costs and/or risks.

The second approach suggested by Kogut (1988) was the organization theory approach, where he stated that alliances are formed when one or both firms desire to acquire the other’s organizational knowhow; or one firm wishes to maintain an organizational capability while benefitting from another firm’s current knowledge or cost advantage.

The third approach to strategic alliances deals with competitive strategies of firms (Porter 1986), which focuses on strategic motivations and consists of a catalogue of formal and qualitative models describing competitive behavior. This approach states that alliances are formed as a defensive mechanism in order to hedge against strategic uncertainty (Kogut 1988)

Table 1 summarizes the classification of the main motives for strategic alliance formation

Source: Vaidya, S. (1999)

Table 1. Classifications of motives of formation of strategic alliances

Strategic Alliance forms

According to Vyas et al. (1995), there are two forms of strategic alliances; market related and technology related alliances.

Marketing Alliance

Marketing alliance is partnership on downstream business activities. Market related strategic alliances tend to be more profitable for firms in a mature industry (Vyas et al. 1995).

According to Ram Subramanian (2006), marketing alliance is generally considered as a defensive measure taken by firms and are perceived as a sign of weakness.

Technology (R&D) Alliance

Strategic technology partnering is the establishment of cooperative agreements aimed at joint innovative efforts or technology transfer that can have a lasting effect on the product-market positioning of participating companies. Technology alliance involves upstream activities such as R&D, Production Process, etc.

The enterprise that takes the lead in manufacturing new product will seize hold of big sharing of market, but it is hardly possible for any enterprise to keep technology lead status in all fields needed by new product research because of increase of technology desire in new product research and development.

Technology strategic alliances tend to benefit firms in high technology industries relatively more than firms in mature industries (Vyas et al. 1995)

Joint Ventures

Bruce Kogut (1988) stated that a joint venture occurs when two or more firms pool a portion of their resources within a common legal organization.

Joint ventures can be considered as an instrument of organizational learning. In this view a joint venture is used for the transfer of organizationally embedded knowledge which cannot be easily blueprinted or packaged through licensing or market transactions.

Conceptually, a joint venture is a selection among alternative modes by which two or more firms can transact. The main motives of selecting joint venture is the diseconomies of acquisition due to the costs of divesting or managing unrelated activities or the higher costs of internal development (Kogut 1988).

Privatization

In its widest context, privatization can refer to a range of policies to embrace private sector capital in the development of the industry, everything from outsourcing to full-blown market liberalization (Ure 2003).

Research Focus & purpose

Liberalization, privatization, and a series of international reciprocal agreements have unleashed the telecommunication industry, which had been held to traditional boundaries that were nearly 100 years old, and initiated new rules that have created a favorable environment for globalization.

Along with pricking up of economic globalization and advent of knowledge economics, enterprises production efficiencies are boosting quickly, and the proportion of technology in new production is more and more, and production lifecycle is shortened quickly, on the other hand, consumers. Individuation need is more and more (Yu et al. 2007). So, strategic partnering between firms has become a growing subject of interest to both companies experimenting with this mode of economic organization and researchers from a wide variety of academic discipline.

In this paper, I will introduce a deep study on the strategic alliance in the telecommunication industry to identify its objectives and rational behind such increase of alliance formation in the industry. Supported by real life cases, the research will try to answer the below questions:

What is the difference between Strategic Alliance and Joint Ventures?

What are the strategic alliance drivers in the telecommunication market?

What is the different form of strategic alliances in the telecommunication market?

What is the impact of the strategic alliances on the telecommunication market?

The research aims to confirm the need for strategic alliance in the telecommunication industry, introduce the reasons behind that and will suggest the factors in which telecom companies need to take into consideration in selecting the most appropriate strategy to meet their own operational objectives.

Literature review

Market Liberalization & Privatization of the telecommunication sector

Telecommunications, historically considered a natural monopoly and a domestic industry, is now bringing new opportunities for players in the international market, a trend which has been accelerated by the World Trade Organization (WTO) agreement, made in 1997, for the telecommunications sector (Kim et al. 2009).

After reviewing many papers and studies regarding the strategic alliances and partnerships generally, and strategic alliance in the telecommunication industry specifically, one can deduce that the liberalization of service markets and the privatization of many historically state-owned telecommunications systems are probably the two most significant changes in the global environment of the telecom industry in recent years (Chan et al. 2001). The first wave of rapid expansion of telecom operators in Western Europe happened during the 1990s following industry liberalization. An industry dominated by national monopolies was suddenly open to other players with access to technology and funding (Fede et al. 2009).

Liberalization, privatization, and a series of international reciprocal agreements have unleashed industries which had been held to traditional boundaries that were nearly 100 years old, and initiated new rules that have created a favorable environment for globalization. Technological development, customer demand, and multilateral competition (Jamison, 1999a) in the new converging market are pushing further the strategic importance of globalization.

Strategic alliance in the telecommuncation market

Since the early 1990s, Europe and the United States have witnessed multiple mergers involving leading telecommunications companies. The marriages of AT&T with TCI and Media One, MCI with WorldCom, and Vodafone with Mannesman set the stage of a rapidly changing global telecommunications market as players such as British Telecom (BT), AT&T, and DoCoMo acknowledged their plans to build competitive advantages in the world market through combinations with other companies. Other strategic partnerships between major telecommunications operators from North/South America, Europe, and Asia are forming almost daily (Chan et al. 2001).

The nature of competition today in the global telecommunications industry seems to center around market activities that aim at gaining competitive advantages through strategic combinations of resources and presence in multiple products and geographical areas (Chan et al. 2001).

There are different levels of collaboration between the telecommunication firms, as described in figure 1. In this report we will focus mainly on the strategic alliance structures.

Reasons of entering Strategic alliances & their forms

The main drivers of strategic alliances in the telecommunication industry can be classified into four main categories, which are:

Globalization & entering new markets

The Converging Telecommunications Industry

Technological demands & Time to market

Network CAPEX and OPEX Savings

We will discuss each category in details, along with the main forms of strategic alliances in each category.

Globalization & entering new markets

A telecommunications company may enter a new market through a strategic alliance with other firms. Growth through strategic alliances has become more relevant in the current economic conditions where debt is less available to fund other ways like merger, acquisitions and Greenfield rollouts.

So strategic alliances, if properly implemented, is considered an effective tool to gain access to new markets with limited cash commitment, compared to green field operations, whilst generating a positive impact on revenues with relevant cost optimization opportunities (Fede et al. 2009).

And since many of the new market opportunities are located in developing countries, which lack strong, stable legal and regulations in addition to the unfamiliar business practices compared to most developed countries; companies from developed countries need to adopt entry strategies that allow them to acquire local expertise and decrease the probability and cost of expropriation of investment. Such strategies include selecting projects with fast payback, carefully selecting well-connected local partners, and entering markets through strategic alliances rather than through direct investment. (Levy and Spiller, 1996)

An example of this is the entry of Hutchison into the Vietnamese market through a business cooperation contract (BCC) with Hanoi Telecom. Where the BCC is not a joint venture, Hutchison receives no equity for its investment. Instead, all operating profits are shared equally (Hutchison 2005).

Other alliances represents telecom operators whose strategic focus is mainly to create business synergies. Vodafone group is the most obvious model employing this strategy, by creating 24 partner networks in Europe, 4 in the Americas, and 16 in the rest of the world (Kim et al 2009, Vodafone 2010). This strategy enables Vodafone to implement services in new territories and to create additional value to their partners' customers and to Vodafone's travelling customers without the need for equity investment in these countries.

Figure 2 shows the Vodafone global footprint, classified as owned and partner networks.

In direct response to Vodafone’s dominance in Europe, an alliance with the brand name “FreeMove” was formed. It was established to enable members to compete effectively with Vodafone and create operational and marketing synergies, such as providing seamless roaming services to their customers and increasing their bargaining power with handset and equipment providers. Like that of Vodafone, the European MNOs including T-Mobile, Orange, and Telecom Italia Mobile do not incur any equity investment costs. The FreeMove brand is maintained as an add-on to the MNOs’ existing brands (Kim et al. 2009).

In the Asia-Pacific market, SingTel formed the “Bridge Mobile” alliance with seven other MNOs, among which SingTel has minor equity stakes in some of them. All the companies agreed on a “partnership of equals” so that benefits from the alliance are equally distributed. The objectives of this alliance are to develop a regional mobile infrastructure and common service platform and leverage economies of scale, particularly in handset procurement.

The alliance is expected to potentially reinforce SingTel’s regional presence in the Asia-Pacific market (Kim et al. 2009).

Hutchison also formed the “Asia-Pacific Mobile Alliance” with seven Asian telecom operators, including the japanese NTT DoCoMo and KTF, a Korean operator. It also joined the Emerging Market Handset program for joint handset procurement and roaming services among the GSM Association (GSMA) participants in developing countries (Kim et al. 2009).

Telecom operators also formed other strategic alliances to export their competitive services or technologies with or without an equity investment (Kim et al. 2009). An example of this, when NTT DoCoMo (Japan) changed its global expansion strategy in 2001 from equity investment to technology or service exports, using strategic alliances and license agreements with telecom operators in Europe and Middle East.

The Converging Global Telecommunications Industry

“The drivers of growth for the telecommunications industry are the expansions of both its products and geography. Once a geographically bound voice transmission service provided over specialized wire-based networks, telecommunications is now part of a worldwide, integrated communications system in which voice, data, and video are transmitted and transformed over integrated wire and wireless networks connected by network and customer devices. This integration redefines markets and products and changes how companies compete” (Chan et al. 2001, p3).

There are various drivers that have led to the industry convergence of telecommunication, media and information technology, or consumer electronic industries. Drivers for media and communication market convergence are presented in figure 3.

With the convergence of four previously distinct industries: telephone, mass media, including print, broadcast and cable, consumer electronics, and computing, the new ICT industry provides products that mix and match four basic components: customer devices, networks, network devices, and content/software (Chan et al. 2001).

Source: Wirtz, Bernd W. (2001). Reconfiguration of Value Chains in Converging Media and Communication Markets. Long Range Planning, 34, 489-506.

Figure 3. The Drivers of industry convergence

As a result, many cross-alliances were formed between the wireless operators, wired operators, internet service providers, content providers, broadcasting networks and device manufacturers.

Examples of these alliances include British Telecom’s (BT) agreement with Siemens and Research In Motion (RIM) to develop the ‘must have’ business accessory - the Siemens SK65 handset with BlackBerry Built-In™ technology, targeted to the UK corporate customers. Also it made another deal with Microsoft to create a series of products and services for third generation mobile devices. These products were based on the famous Windows Mobile operating system platform to form a direct competition to another alliance “Symbian”, comprising Ericsson, Nokia, Motorola, and Psion (Todeva 2001).

Another example from the Egyptian market is the Vodafone and Telecom Egypt strategic partnership, which was signed in 2006, that aimed to increase cooperation between both parties and to jointly develop a range of products and services for the Egyptian market. Under this agreement, Vodafone Egypt and Telecom Egypt will work together to develop service propositions for customers shared by TE Data (Telecom Egypt's retail Internet and Data arm) and Vodafone Egypt (Vodafone 2006).

Technological demands & Time to market

A telecommunication company has two distinct alternatives to pursue growth and technological changes in the global market. By either entering directly and build the product/service offerings with its own resources, or by collaborating with other firms (Joshi, Kashlak, & Sherman, 1998).

However, the first alternatives results in a slower and more costly process, and increases the risk of expropriation of investment. So, this approach is especially undesirable where time and speed are critical and where resource commitments in a particular market, segment, or technology might be too risky a pursuit for a company by itself, as in the case of the global telecom market (Joshi et al. 1998). So, strategic alliances have become the preferred choice for most of the telecom companies nowadays.

By 1984, many electronics, information processing and telecommunications firms were teaming up to develop new technologies and products because no firm could develop in-house every product needed to compete effectively. Collaboration had become so important to the interface between communications and data-processing technologies that some companies were even investing in partners to cement their relationships and alleviate their fears of being left behind (Harrigan 1988).

As per Harrigan (1988: p155), “Many types of non-equity cooperative strategies were established between telecommunication manufacturing firms, because no firm could hope to exploit a position of advantage for long without help in the electronic components industry which faced (1) short product lives, (2) global competition, and (3) scanty patent protection.”

CAPEX and OPEX Savings

As the industry matures, the demand for mobile services soon reaches a saturation point and shows limited growth opportunities. At this point, telecommunication operators must look at new ways to reduce their expenditures on network rollout to enable more investment in developing innovative products and services, targeting different market segments.

Figure 3 shows how the legacy voice services are losing their attractiveness in the market, in terms of revenues, versus the fast growing revenues from the Value Added Services (VAS).

From the strategic alliance approaches used by the telecom operators to reduce expenditures are the infrastructure sharing, the Mobile Virtual Network Operators (MVNOs), and the National Roaming agreements.

Infrastructure sharing

Infrastructure sharing is relevant for fixed and mobile operators alike. Yet it was the mobile sector that paved the way toward mature infrastructure sharing models worldwide. Delta Partners (2009) estimated that in successful strategic alliances there is potential to achieve 4-6% OPEX reduction and 5-9% CAPEX optimization.

The most common infrastructure sharing in the telecommunication industry is the Radio Access Network (RAN) sharing between the mobile operators, which according to the TRAI report (2007) is driven by the below benefits:

Reduce the capital expenditure.

Quick rollout of the network and thereby inflow of revenue.

Reduce the operating cost.

Improve the city skyline and reduce environmental effects of the base stations.

Optimum utilization of national resources and hence improved economic efficiency.

In February 2007, VODAFONE UK and ORANGE UK announced their intention to share Radio Access Networks (RANs), delivering long-term benefits to customers. According to this agreement, each company will continue managing its own traffic independently, retain full responsibility for the quality of service offered to the customers and remain competitors in the UK mobile wholesale and retail markets. The project outlines plans for the two RANs to be combined over a number of years and covers both existing and new build of the companies’ 3G Network.

Nick Read, CEO of Vodafone UK, said: “This proposal is industry leading and will enable the two companies to remain vigorously competitive against each other and the market, while realizing the proven benefits of network sharing, notably faster roll out of high speed mobile services in the future

and the earlier introduction of innovative products” (Vodafone 2007).

Another example is the recently signed alliance between Etisalat and Reliance Communication ltd. In india on July 2009. The long term passive infrastructure sharing agreement came after etisalat’s acquisition of a mobile telecommunication operation license in india, to accelerate Etisalat roll-out of telecom services in India.

Under the terms of the agreement, Etisalat and its subsidiary would outsource their telecom infrastructure requirements, encompassing end-to-end tower and transmission infrastructure, to Reliance Infratel Limited and Reliance Communications Limited, respectively (Etisalat 2009).

This agreement presents large cost optimization benefits with an asset light model, improvement in capital productivity and enhances Reliance’s group revenues. This agreement is considered the first and the largest Telecom Infrastructure sharing of its kind in the Indian Telecom landscape and strongly complements Etisalat Telecom’s plans for India.

Table 2 shows other examples of network sharing worldwide

Mobile Virtual Network Operators (MVNO)

The International Telecommunications Union (ITU, n.d.), provides the following two-part definition of MVNOs:

“MVNOs offer mobile communications services to end users without having their own radio spectrum, that is, MVNOs do not own licenses and must lease network capacity or equipment from licensed operators.”

“An MVNO can be a provider of a mobile communication service or a value-added service and possess its own mobile network code (MNC) and SIM cards.”

MVNOs do not possess their own networks and need to lease equipment and radio bandwidth from Mobile Network Operators (MNOs) so that they can provide mobile communication services for customers. An MVNO has its own trademark and resells the products and services of MNOs through its marketing strategies.

The core competence of MVNOs consists of partnerships, trademarks, diversified services, and distribution channels. Through their trademark advantage, MVNOs form a partnership with MNOs, retailers, application software suppliers, and content providers to develop new products due to popular demand (Secker, 2002).

In describing the relationship between MVNOs and MNOs, Yang et al. (2005) stated that when a company does not have machines and equipment, its business should focus on its own expertise in value-added services and distribution channels. In other words, MVNOs naturally favor the notion that non-telecommunications businesses and telecom operators are complementary to each other in terms of running an MVNO.

Yang et al. (2005) also related the success of the MVNO to the ability of the MVNOs and MNOs to create a win-win based natural agreement. And only if both MVNOs and MNOs become winners the customers will be winners as well.

Virgin Mobile is an example of a successful MVNO. Through a long term alliance agreement, Virgin Mobile uses the existing network of T-Mobile in UK. It officially started its business in the UK in November 1999 and within one year it had 500,000 subscribers. In 2000, it was ranked number one in terms of consumer satisfaction in the UK. The following conditions contributed to the success of Virgin Mobile (Smith, 2005): (a) the market size was large enough to support it; (b) support of MNOs to MVNOs' cost structure was in place; (c) the power of channels made the consumers accessible; and (d) trademark advantages provided a quality brand image.

National Roaming

National roaming is a form of infrastructure sharing that allows new operators, while their networks are still being deployed, to provide national service coverage by means of sharing incumbents’ networks in specific areas. For commercial and license reasons, this type of roaming is not allowed unless under very specific circumstances and under regulatory scrutiny.

National roaming accelerates competition by allowing new players to launch their services within shorter time frames (Booz Allen 2007).

While national roaming is generally introduced with the intention to be closed, it could be made permanent in specific locations as the case in the United States and India, due to the massive geographical area of both countries, which makes it hard for one operator to cover it all by its own.

Upon Etisalat won the bid of the third mobile operator license in Egypt, the National Telecommunication Regulation Authority (NTRA), successfully managed to devise a fair national roaming agreement that works for the benefit of all the stakeholders and that is in alignment with the fair competition concept sought after by the NTRA.

As the NTRA stated (2007), the reason for this agreement is to:

Achieve the concept of free & fair competition in the telecommunications market, as it allows the new service provider to generate a greater geographical coverage area from the starting date of operation until it completely assembles its network, hence achieving the complete network coverage of Egypt.

Allow for increased coverage of rural and deprived areas in Egypt

Increase the quality of service provided to the consumer as a direct effect of the increase in the levels of competition between the operators

Create a positive cooperative environment between the three operators in a framework of transparency and discipline.

Conclusion

From all the literature discussed in the paper, here are the main points, and recommendations that we can deduce:

The telecommunication industry worldwide is experiencing a tremendous change due to privatization and deregulation, which lead to increased competition. And due to the fast technological changes and changes in customer needs, competitive boundaries are shifting in service provision. So firms need to acquire new skills to succeed in the future; and a major avenue for a firm to acquire new capabilities is through the formation of strategic alliances.

As the telecommunication market is reaching the saturation, customer growth fades out and ARPU (average revenue per user) flattens out or even declines. The cost for acquiring new subscribers is getting higher, while churn rates is increasing and subscriber loyalty is decreasing.

Thus, telecommunication firms need to aggressively cut their costs of operations, especially on operations that are no more considered as the main competitive advantage, to focus more on the new value added service development, to sustain its competitive position in the market. The best way to achieve this is through network sharing related strategic alliances.

Infrastructure-sharing, as a way to reduce the required capital expenditures, has proven to have a crucial contribution to the growth of the telecommunication sector. So, telecom operators need to closely examine its economic benefits and develop their internal positions towards it. On the other hand, telecommunication regulators need to encourage the infrastructure sharing agreements and issue the necessary related policies and procedures to ensure effective adoption and alignment by competing telecom operators.

In most countries, the commercial separation of telecommunications and broadcast media has been mirrored with different regulatory authorities, but with the convergence, the commercial distinctions are being eroded and the justification for multiple regulations is questioned. So the relevant regulators need to be merged, to form a single communications regulator, which will ease the formation of alliances between the market players from both industries, resulting in more market opportunities for both parties.

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