Competition In Telecom Industry Of Pakistan, A Battle For Supermacy

COMPETITION & STRATEGY

(Group Assignment 1)

Competition In Telecom Industry Of Pakistan,

A Battle For Supermacy

(Porter’s Five Forces Model Analysis for the Industry)

Presented To: Brig. Khalid

Prepared By: Muhammad Zia Aslam (973596)

Sabeen Khan ()

National College of Business Administration &

Economics

Prepared by: Muhammad Zia & Sabeen Khan

 Competition in Telecom Industry of Pakistan, a Battle for Supermacy

Introduction / Background:

Telecom industry has contributed a great deal to Pakistan’s economy and has called for great
investments that lead to a new era of progress. Telecom sector is seeing extraordinary growth in
Pakistan. With increasing levels of mobile penetration Pakistan is fast evolving as one of the
telecom sector's key investment prospects. Continued market liberalization is reshaping the
regulatory environment, creating a more investment friendly climate in telecom sector of
Pakistan. The sector is said to be growing at a very fast pace on yearly basis. This growth rate of
telecom sector is mainly because of the mobile phone service providers’ entry in the industry for
the last few years. As of July 2009, the mobile phone subscribers are 95.54 million in Pakistan
and, in fact, still Pakistan has the highest mobile phone penetration rate in the South Asian
region. Hence, due to the huge potential in Pakistan’s mobile phone sector, the industry and
customers are experiencing an intense competition, a battle for supermacy in the mobile phone
industry, between all mobile phone service providers of Pakistan.

Pakistan telecommunication sector had remained a monopoly for a very long time. However, this
sector has been liberalized with the announcement of Deregulation Policy on 13th July 2003 and
exclusivity of PTCL in basic telephony has been abolished. With all this, telecom sector of
Pakistan is now open for competition. Impact of telecom liberalization has been tremendous.
Access to telecom facilities for common man has been increased dramatically, in addition to
improvement in quality of telecom services, prices of services has decreased tremendously. PTA
has always been ensuring that all the telecom operators should be provided with level playing
field. Number of incentives has been given by the government to further increase the investment.
In this regard the sector has been given the status of industry whereby subsidies and incentives
given to other industries are now available to telecom sector also. Taxes and duties have been
reduced to the minimum in order to make business viable for the operators for return on their
investments. PTA has reduced all the formalities for acquiring licenses for any services to its
minimum. In addition, PTA has also reduced royalties and fees of all the licensees and a simple
and liberal licensing regime has been adopted.

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 Competition in Telecom Industry of Pakistan, a Battle for Supermacy

Cell Phone Sector of the Industry:

Pakistan’s telecommunication market is one of the hottest in the emerging economies. However,
this report will briefly review the mobile phone sector of the country, its growth and future
prospects. Pakistan is still an unsaturated market and with the falling cost of handsets there are
plenty of new subscribers to go for. But eventually as in saturated markets, if mobile operators
want to avoid simply competing on price, they will have to compete on superior service,
innovative features and ease of use.

The Pakistan market has 95 million subscribers as of June 2009.The growth slowed down in
2008 but has picked up again gradually. Now let’s review some recent history of the cellular
sector. In end year 2006 the total subscribers were 48.2 million. In June 2007 the total mobile
users reached over 63 million. Based on numbers published at PTA website for 2007, the total
number of subscribers was 76.6 million. In 2007 the average growth rate was about 2.5
million new subscribers each month. After second half of 2007 it seemed as if the growth had
slowed down but overall it was fine. One remarkable achievement was by Zong (formerly
Paketl) which launched very successful campaigns towards 2007 end completed re-brand launch
in April of 2008.

Given below is the graphical presentation of the remarkable growth in the cell phone usage
during the last few years:

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 Competition in Telecom Industry of Pakistan, a Battle for Supermacy

Major competitors:

Here’s a brief description of the top mobile companies in Pakistan.

At the top is Mobilink, the Pakistani unit of Egypt-based telecom company Orascom. It has been
operating in Pakistan since 1994.
Ufone, a wholly owned subsidiary of Pakistan Telecommunication Co. Ltd (PTCL), is now
under the control of Etisalat group of UAE.
Warid, owned by the Abu Dhabi group of the United Arab Emirates and sister of Wateen group
is another cell phone service provider in the industry.
Norway’s Telenor, a recent entrant with about a billion US dollar investment in Pakistan has
been doing well, based on its recent earning report. Telenor stock is listed in the Oslo stock
market (TEL) and in US.
Zong, formerly Paktel, was the latest target of foreign acquisition. After it got acquired by China
Mobile it was rebranded as Zong and launched one of the most successful and aggressive
campaigns.

Given below is the market share of companies as of June 2009.

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 Competition in Telecom Industry of Pakistan, a Battle for Supermacy

Battle for supermacy (market share):

One sign of the growth burst of the sector in Pakistan and its self-confidence are the media ads of
the various companies. As they fight for market share, that battle is being conducted over the
airwaves and newsprint. It is hard not to notice the mobile phone advertising campaigns in
Pakistan. The mobile phone and services advertisements are in the media, on billboards and
everywhere else imaginable. The quality and aggressiveness of the advertising campaigns
indicates the level of effort to gain market share. It shows a fierce battle for supermacy going on
between the players of the cell phone sector in Pakistan.

The market segments mobile companies are targeting include:

o Tech-savvy youth
o Business users (due to the their higher average revenue per user)
o First-time subscribers in remote and rural areas
o Previously ignored segments, for instance housewives and women

The ads are vibrant and colorful, conveying a sense of excitement and empowerment.
However, the pretty picture these ads paint is separated from the real world where poor cellular
service has led PTA to announce that punitive action will be taken if problems persist.

Industry Analysis:

Now we try to analyze and understand the cell phone sector of the telecommunication industry in
Pakistan by looking general industry conditions and applying Michael Porter’s five forces model.
Industry analysis requires to carefully examine four basic things i.e. Type of industry, nature of
the Technology, customer requirements and expectations, and product life cycle. The cell phone
sector of telecommunication industry is of high velocity, technology of the sector is rapidly
changing, customer expectations are high and fast evolving, and product life cycles are short in
terms of new packages and services.

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 Competition in Telecom Industry of Pakistan, a Battle for Supermacy

Porter’s Five forces model:

Bargaining power of customers: The bargaining power of customers in this case is very high
because of the low switching cost in the industry. There are attractive substitutes available to the
buyer even in the form of keeping the same cell phone number but changing the service provider.
It makes very difficult for the market players to retain their customers. I think the brand loyalty
can only be created through superior marketing campaigns and service.

Bargaining power of suppliers: This is a type of industry where, at least in present times, the
bargaining power of suppliers is at the low level because of the nature of inputs for the business.
Moreover, with the deregulated and friendly environment given by the government of Pakistan,
the industry has become more competitive and quality services driven.

Threat of substitute products: Although the cell phone subscribers are more than 95 million
now, still the threat of substitute products is high for the industry. Buyer inclination to substitute
and price-performance trade off are the most important to consider in determining the threat of
substitutes. Actually, just the subscription of cell phone service is not enough for a company to
get optimal profits but the real challenges is that how many existing customers are using the
service regularly for incoming as well as outgoing calls. The quality of service is the parameter

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 Competition in Telecom Industry of Pakistan, a Battle for Supermacy

for a customer to be loyal with the subscription otherwise fixed line and wireless fixed lines are
the better substitutes, as been experienced in festive times.

Threat of new entrants: It is not easy to enter in this capital intensive sector of the
telecommunication industry. So, the threat of new entrants is low. Though the growth and
potential of the sector look very attractive, still it is very difficult to take risk for a new investor
because the penetration in the market would be very difficult.

Competitive rivalry: When the competition is fierce, obviously the competitive rivalry will be
at the highest level. The very high level of competitive rivalry among the major players of the
cell phone sector is clearly observable. Just look at the advertisement campaigns of the rivals and
you can see how intense the competition is. It looks like a battle for supermacy going on between
the rivals. All means of attracting new and potential switching customers are being used by all
the competitors to gain as much market share as they can. Exit barriers, industry growth, product
differences, brand identity, and diversity of rivals are the main reasons of very high competitive
rivalry in this case.

Future of the industry and opportunities:

Keeping in view the above scenario, number of investment opportunities has been created in the
sector. The forward and backward linked businesses to telecom have become very lucrative from
investment point of view. Some of which are Call Centers, IT enabled services, outsourcing,
franchises by newly licensed operators, network solution providers to telecom operators etc. One
can expect more than these few pointed areas where investment opportunities have been created.
One can imagine that currently and in near future, opportunities from investment point of view in
the telecom sector are huge. However, it has put much responsibility on the regulator to keep
check on the sector to avoid the burst of bubble in telecom sector.

Let’s have a look, in general, on the factors in making choice If we decide to invest money in
one of the cell phone companies.

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 Competition in Telecom Industry of Pakistan, a Battle for Supermacy

When we look at the performance and results of the mobile companies, here are some
useful industry indicators to look out for (in addition to the financial results):

I) Growth rate: how many net subscribers has it added in the quarter/year?
II) What is the churn rate (customers who leave)? Low churn indicates customer
loyalty.
III) What is the average revenue per user ARPU (what does average subscriber
spends) and what is the profit margin per subscriber?
IV) What is the percentage of pre-paid subscribers (considered less loyal than
postpaid)?
V) How much does it cost to acquire a new subscriber?

The overall consensus of industry analysts is that Pakistan is one of the countries with a huge
untapped potential for telecom growth and an attractive investment environment. Recently
Business Monitor International (BMI) ranked Pakistan as a key destination for telecom growth.
The BMI rankings take into account a number of factors including industry situation, growth
potential, competitive landscape and economy and political risks etc.

However, there is still a long way to go for Pakistan telecom industry. Pakistan needs to increase
telecom research and development work within the country. China and India are in the process of
becoming world’s major R&D centers for technology and telecommunication. The goal of the
policy makers should be to increase the rate of transfer of technology from abroad, broaden the
pool of local skilled workforce and accelerate the local production of telecom equipment and
handset parts etc.

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 Competition in Telecom Industry of Pakistan, a Battle for Supermacy

References:

1. State of telecom industry in Pakistan (www.telecompk.net)

2. Wikipedia, the free encyclopedia (www.wikipedia.org)
3. Pakistan Telecommunication authority (www.pta.gov.pk)
4. www.pakistaniat.com

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