The Threat That Substitute Products Pose To An Industry Marketing Essay
India’s move towards globalization by hiking FDI limits from 49 to 74 has enabled Indian players in telecom sector to spark off the competition and consolidation by offering shares to foreign companies to grab hold of telecom sector. This step towards globalization will help Airtel to invest more in efficient infrastructure and inflow of latest technology to provide better services to the subscribers. Airtel will also be able to modulate the foreign stakes in the company. At the same time Airtel will have to face increase in competition in already existing competitive market as this move by the government will attract foreign operators to enter into the Indian telecom sector. .
USO policy was laid by Department of Telecommunication to widen the reach of telephone services in rural area and to bridge the gap between urban and rural teledensity. In this policy, the telecom operators has to contribute 5 of their revenue to this fund. This policy affected Airtel by increasing the cost burden.
Introduction of Mobile Number Portability (MNP) regulation which allows the consumer to retain their existing mobile number, even when they change the service provider. This will increase the competition among the service providers as the subscribers can change their network if they are not happy with the services of the existing service provider. Airtel has the edge over his competitors as their services are much better than other service providers. (http://www.trai.gov.in/WriteReadData/trai/upload/TariffOrders/69/torder20nov09.pdf
In telecom budget 2008, raw material for the manufacture of specified electronic hardware items have been exempted from excise duty which lowers the network equipment costs. As the network equipments like router, switches, modems etc. are very costly so this exemption in excise duty will benefit Airtel to buy the hardware in much cheaper cost which overall lowers it network setup expenses and this will also promote them to expand their network coverage to more rural areas at much cheaper cost.
Even during the ongoing recession period, when most of the sectors grappled with the slowdown, only the Indian telecom sector continued to grow. The telecom sector contributed hugely to GDP growth rate. (http://economictimes.indiatimes.com/news/news-by-industry/telecom/Telecom-beats-slowdown-blues-contributes-big-to-GDP-growth/articleshow/3864667.cms).Though the growth has been beneficial economically to Airtel but this exponential growth of telecom sector has made the foreign operators to think more on getting into the Indian market which will further increase the competition.
Government policy to reduce the custom duty on convergence product from 10 to 5 helped in establishing parity devices used in communication sector, so this will help Airtel in lowering their cost for DTH expansion.( http://indiabudget.nic.in/ub2008-09/bh/bh1.pdf).
Government has announced per second billing tariff for the subscriber along with the per minute billing plan. Though the per second plan is not beneficial for Airtel as this could reduce the sector’s annual revenue by 10-15.Operators are already struggling with the low Average Revenue Per user (ARPUs) due to high taxes (http://www.ciol.com/Technology/Feature/Will-the-second-pulse-win-over-minutes/201009126573/0/) levied by government will now struggle more with this new plan. To overcome this situation Airtel has launched low tariff per minute plans along with per second plan. As majority of the subscribers make longer duration calls and the per second call could be detrimental for them with the new reduced per minute plan. Airtel could also launch pay per character for SMS services to increase the VAS revenue.
Government has hiked FDI limits which would lead to better infrastructure in telecom due to intake of more investment by the foreign investors. As 70 of Indian population still resides in rural areas, improvement in telecommunication infrastructure and services will reduce isolation, increase business viability, farming productivity and access to educational and medical services. Airtel already holds stake of foreign telecom company Singtel, (http://www.stockwatch.in/singtel-raises-stake-bharti-airtel-24004 )this will help Airtel to increase the capital investment by increasing the stakes of Singtel into the company.(http://siadipp.nic.in/policy/changes/pn3_2007.pdf).
Rollout of national rural employment scheme to all 596 districts in India with a provision of Rs.160 billion, to aid faster penetration of mobiles and consequently faster growth for Airtel as they hold major Indian telecom market with 24 growth at the end of 31st March 2009. (http://www.bharti.com/136.html?&tx_ttnews[tt_news]=317&tx_ttnews[backPid]=116&cHash=c9cb9d3479)
Government has announced the auction for 3G and BWA spectrum and Airtel is one of the qualified bidders for the same ( http://www.dot.gov.in/as/Auction20of20Spectrum20for3G20&20BWA/new/index.html) and Airtel has already signed a deal with Ericsson to upgrade their network for 3G (http://www.businessworld.in/bw/2010_04_05_DoT_Conducts_Mock_Auction_For_3G_Spectrum.html). It will help Airtel to undertake social initiatives of the government such as e-education, tele medicine, and e-health and e- governance, providing affordable broadband and mobile services to sub urban and rural areas. (http://www.dot.gov.in/osp/Brochure/Brochure.htm).
As demand for the value added services and high speed broadband is increasing among the youth. Airtel being the leading private broad band service provider in the country has introduced the ultra fast speed of 50 Mbps for the broadband users on next generation VDSL2 technology which will allow users, the convenience to download a full feature film in less than 3 minutes. Along with it is providing free value add services like parallel ringing, website builder (Basic), PC secure (Anti-Virus software), online storage, unlimited gaming on games on demand. (http://www.airtel.in/wps/wcm/connect/About20Bharti20Airtel/bharti+airtel/media+centre/bharti+airtel+news/telemedia/pg-airtel-introduces-fastest-ever-speed-for-broadband-users-in-india).
Increasing competition with the entry of many new operators in the telecom industry has forced in reduction of tariffs. So consumers get more options and can change their network operator according to their need.In this Airtel has introduced many low tariff plans like youth Plan for young people, ladies special, and friend’s prepaid plan, family celebration plan according to the requirements of the different customer segments. Segmentation strategy aims towards understanding the need gaps of specific consumer segments and creating special segmented products for them. (http://www.thehindu.com/2004/12/22/stories/2004122202441700.htm)
Increase in FDI limits also benefited inflow of latest technology with improved infrastructure, as AIRTEL is well established with better infrastructure so it can provide better services to its customers in urban and can expand its network in more rural areas.( http://siadipp.nic.in/policy/changes/pn3_2007.pdf)
Government has announced the auction for 3G and BWA spectrum which will allow telecom companies to offer additional valued services like high resolution video and multimedia services with high data rate transmission capabilities. Airtel has already qualified to bid for the auction ( http://www.dot.gov.in/as/Auction20of20Spectrum20for3G20&20BWA/new/index.html) .Also Airtel has signed a 1.3 billion deal with Ericsson to expand and upgrade its network for 3G services in 15 of India’s 22 telecom circles which is beneficial for Airtel has they will be well prepared to introduce 3G services through their upgraded network by the time auction is made.(http://www.businessworld.in/bw/2010_04_05_DoT_Conducts_Mock_Auction_For_3G_Spectrum.html)( http://www.telecomasia.net/content/ericsson-inks-13b-bharti-deal?src=related)
With the increase in use of cell Phones and advancement in telecommunication industry , heath hazards is also increasing as high exposure to radiations from mobile phones and communication towers to operate the network can lead to cancer and can also affect brain functions. Though the use of cell phones cannot be stopped as it has become the necessity to everyone and will not affect much to the telecom operators but Airtel can campaign against the use of illegal towers and transmitters by the operators which can act as the marketing strategy.
Unsolicited commercials communication though SMS and calls by the mobile service provider has been
Porter’s 5 forces Analysis
Threat from competition
High Fixed Cost: The industry also suffers from high fixed cost which makes the entry barrier also very high for the industry. It comes as no surprise that in the capital-intensive telecom industry the biggest barrier to entry is access to finance. To cover high fixed costs, serious contenders typically require a lot of cash. When capital markets are generous, the threat of competitive entrants escalates. When financing opportunities are less readily available, the pace of entry slows. Meanwhile, ownership of a telecom license can represent a huge barrier to entry. There is already 6-7 players in each region excluding 3 -4 big players like Bharti Airtel, reliance, Vodafone and BSNL.
Very less time to gain advantage by an innovation: Every company in this industrial sector in investing a huge amount in research and development and marketing strategy. That is why we see when any offer launched by any company is always counter attacked by other companies very soon. This makes the industry rivalry most prominent. E.g. Caller tunes, Life time cards.
Price wars: The price war is really very fierce in this industry. Price war in telecom industry has commoditized the market that branding has taken a backseat. New players are reducing their tariffs to get better hold in the market and in turn the existing big players like Airtel, reliance etc. also have to compete by introducing low tariff new plans such as youth plan for younger generation, ladies special etc.
Threat of New Entrant
Both potential and existing competitors influence average industry profitability. The threat of new entrants is usually based on the market entry barriers. They can take diverse forms and are used to prevent an influx of firms into an industry whenever profits, adjusted for the cost of capital, rise above zero. In contrast, entry barriers exist whenever it is difficult or not economically feasible for an outsider to replicate the incumbents’ position. The most common forms of entry barriers, except intrinsic physical or legal obstacles, are as follows:
Economies of scale: In telecom industry the economies of scale exists from the supplier side. That is why companies try to increase their subscriber base at drastic rate.
Distribution channels: Distribution channels are also providing a major determining factor. These channels are not loyal to any company and competitors can easily access them and make out work for them.
Though huge licence fee to be paid upfront and high gestation period reduces the threat of new entrant and discourages investment and infrastructure in the telecom sector.
Limited Spectrum availability, Regulatory issue which again leads to high licence fee also restrict new players from entering into the market.
Rapidly changing technology and setup the efficient Infrastructure for the same accordingly is also the major factor which stops new player to enter into the telecom sector.
New entrants are ready to enter huge capital considering the attractiveness of the market.
Increase in FDI limits to 74 is bringing competition from foreign players. Huge investments are being made by the foreign companies to setup better infrastructure and getting latest technology into the country.
Threat from the non telecom background brand which could foray into the telecom industry by the ease of outsoucing.
Customer switching cost is very low, as cost of new connection is really low. And new connection offers more benefits to the customers
Threat of substitute
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. It also involves:
The potential major substitutes for telecom industry are as follows:
Products and services from non-traditional telecom industries pose serious substitution threats. Cable TV and satellite operators now compete for buyers. The cable guys, with their own direct lines into homes, offer broadband internet services, and satellite links can substitute for high-speed business networking needs.
Wireless phones are also getting cheaper each year over the last decade; this has provided consumers with more convenience and mobility, to the extent that the younger demographic now considers a fixed line phone redundant.
Just as worrying for telecom operators is the internet: VOIP i.e voice over ip telephony is becoming a viable vehicle for cut-rate voice calls. Delivered by ISPs - not telecom operators - "internet telephony" could take a big bite out of telecom companies' core voice revenues. Applications like Skype have been extremely popular among younger generation users and are fast emerging as preferred means of communication.
Buyer power is one of forces that influence the appropriation of the value created by an industry. The most important determinants of buyer power are the size and the concentration of customers. Other factors are the extent to which the buyers are informed and the concentration or differentiation of the competitors. Kippenberger (1998) states that it is often useful to distinguish potential buyer power from the buyer's willingness or incentive to use that power, willingness that derives mainly from the “risk of failure” associated with a product's use
The following points influence the buyer power:
Lack of differentiation among the service provider: As telephone and data services does not vary much regardless of which companies are selling them.
Cut throat competition: Competition level has increased a lot with increase in new foreign as well as domestic players in the industry. Operators are engaging in an intense price war which is benefitting to the buyers in every way.
Customer is price sensitive: Every operator is offering low tariffs with better services due to high level of competition among the operators which has made customer more sensitive to price.
Low switching costs from one operator to other operator.
The consumer now has access to several means of communication like email, instant messaging which are diminishing the importance voice services
Attractive Schemes for new connections.
Availability of all operators everywhere.
Supplier power is a mirror image of the buyer power. As a result, the analysis of supplier power typically focuses first on the relative size and concentration of suppliers relative to industry participants and second on the degree of differentiation in the inputs supplied. The ability to charge customers different prices in line with differences in the value created for each of those buyers usually indicates that the market is characterized by high supplier power and at the same time by low buyer power. In the drawback of Indian telecom industry the following should be kept in mind:
Large number of suppliers: The industry basically has a large number of suppliers, which helps them to choose from a lot of options. So they try to select the best option to deliver the value to the customers and to have a competitive advantage from their competitor.
Shared tower infrastructure: Technology has helped them to share the tower infrastructure. This basically helps them to reduce the initial investment a lot.
Limited pool of skilled managers and engineers especially those well versed in the latest technologies which put companies into weaker side in terms of hiring and salaries.
Medium cost of switching since changing their hardware would lead to additional cost in modifying the architecture.
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