The telecommunications industry in Ghana exhibits characteristics of oligopolistic competition as well as monopolistic competition.

Transcription

1 The telecommunications industry in Ghana exhibits characteristics of oligopolistic competition as well as monopolistic competition. Discuss and draw conclusions 25th November, 2011

2 Table of Contents Table of Contents...1 Background...2 Mobile Subscription Trends...3 Mobile Penetration Rate...3 The Competitive Environment...3 Characteristics of the Firms in the Industry...5 Small Number of Large Firms...5 Differentiated Products...6 Mutual Interdependence...6 Price Wars...7 Promotions...8 Barriers to Entry...9 Similar Cost Structure...10 Conclusion...11 References

3 Background The telecommunications industry in Ghana has been on a very progressive journey and it has covered a great distance in a very short period of time. Not long ago very few people had private telephones that worked. As recently as 1996, the telephone density of Ghana was 0.26 meaning that there were 2.6 telephone lines for every 1,000 people including 35 payphones in the entire country out of which 32 were located in Accra. This was one of the lowest in Africa. Today there is one phone for every four Ghanaians! This tremendous increase in the tele-density has been a result of the establishment of the National Communications Authority (NCA) in 1997 and the subsequent deregulation of the telecom industry, which brought about the growth of wireless telephony as a result of significant investment by operators. Deregulation also meant opportunities for ambitious entrepreneurs and large telecom companies to establish operations in Ghana and participate in what was to become the biggest boom in Ghana s recent economic history. The industry since 1992 has attracted five major multinational companies which have primarily invested into mobile telephony plus data infrastructure with a sixth operator (Globalcom Mobile Ghana) set to roll out nationwide service before the end of This paper will concern itself with the provision of mobile telephony and internet services in its analysis. 2

4 Mobile Subscription Trends The number of mobile phone users in Ghana is fast growing by the day. Mobile phone users have increased tremendously over the last decade. The numbers grew from 218,000 in 2000 to 3 million in 2005 and 15.1 million by end of According to recent reports from National Communications Authority (NCA), mobile access lines have increased from 16,031,979 in January 2010 to 16,651,168 at the end of August This represents a rise of about 3.9 with an increase of 619,189 subscribers. Mobile Penetration Rate Mobile penetration has recorded an increase from 0.22 percent in 1998 to 71.6 percent in The Competitive Environment The industry currently has five operators namely Vodafone, MTN, Airtel, Tigo and Expresso who are engaged in the provision of mobile telephony and internet services. Vodafone and Airtel out of the five are involved in the provision of fixed landline services which represent a product differentiation from the other operators. Vodafone however controls about 96 of the fixed landline 3

5 market which is an evidence of the monopoly its former company (Ghana Telecom) enjoyed until the entry of Westel (Airtel) in A sixth mobile operator, Glo Mobile is yet to commerce business after it procured its license in The five mobile telephony operators over the past five years have undertaken various competitive strategies to consolidate and or grow their market share. The market share as at August 2011 shows in the table below that although MTN is losing subscribers to the competition, it still has the biggest share of MARKET SHARE 2011 Jan Feb Mar Apr May Jun Jul Aug EXPRESSO MILLICOM (TIGO) SCANCOM (MTN) GT/VODAFONE MOBILE AIRTEL -MOBILE TOTAL

6 Characteristics of the Firms in the Industry Small Number of Large Firms The most important characteristic of oligopoly is an industry dominated by a small number of large firms, each of which is relatively large compared to the overall size of the market. This characteristic gives each of the relatively large firm substantial market control. The five (5) firms providing services to over 24 million subscribers exhibit this characteristic. These are multinationals with offices and customers across various countries. Vodafone Group the parent company of Vodafone GH has more than 315 million customers and operational in 31 countries and is ranked among the top 10 global companies by market capitalization. MTN operates in are 21 countries with over 61.4 million subscribers whilst Expresso currently have over 800 employees across their five commercial operations in Senegal, Mauritania, Ghana, Nigeria and Guinea. TIGO on the other hand provides cellular telephony services to more than 30 million customers in 17 emerging markets in these continents. Airtel has operations in 16 African countries providing innovative services to about 230 million subscribers across 19 countries in the world. In a monopolistic market however, there must be a large number of firms competing in the market and each has only an insignificantly small share of the market. This means that each firm is a 'price taker', accepting the going market price set by market demand and supply. This does not apply to 5

7 the Ghanaian telecom industry as it has five operators all of whom are price setters for their respective telecom service offering. Differentiated Products Another characteristic of the oligopolistic market structure that is traceable to the firms in the telecommunications industry in Ghana. Operators are engaged in the provision of similar products which serve as substitute for each other. Differentiation in the industry is shifted towards nonpricing activities of consumer promotions, brand loyalty campaigns, branded devices improved service quality and wider network coverage. These products and services include voice and text messaging, data, fixed line solutions and devices to assist customers in meeting their total communications needs. A wide range of branded handsets which covers all customer segments and price points are made available to the subscriber in a variety of designs. This is also a characteristic of the monopolistic market. Mutual Interdependence There is a significant mutual interdependence among operators within the industry. Each operator in taking any decision regarding price or service offering take into account not only the relationship between supply and demand, but also the expected responses of rival firms to its own price or output decision This is evident for example in the on-going price war, fierce promotions and counter promotional activities not only to win customers and to get them to use more and more airtime but also to drive revenue upwards. 6

8 Price Wars It begun with the entry of Zain Communications Ltd, a member of Bharti Airtel Group in the 4th quarter of They had already done their homework very well and launched a very sophisticated network. They had the financial muscle to announce their new brand loudly and they did that with maximum effect. Zain entered the market aggressively and introduced the Third-Generation (3.5G) network, which gives customers enhanced services including the ability to make video Calls. And then it appears as though in response to Zain's 3.5G technology, MTN in 2009 also launched the 3.5G technology onto the Ghanaian market to match the competition. Since that time, firms in the industry have engaged in several promotions and huge advertisement to win customers. The attention now turned to winning customers through cheaper call rates Vodafone was the first to reduce its prices by over 50 percent from 14Gp to 8 Gp through it 8080 promotion which probably may be a good successor for the 3030 promotion. It required customers to register once at a cost of 8Gp otherwise they will remain on the standard tariff of 14AGp. Zain drastically reduced their call rates to all networks by a staggering 33 from 12Gp to 8Gp. Both post and pre paid customers make huge savings on calls on the Zain network without having to register for the service. In addition to this, all customers will get their first eight Zain to Zain SMS' for free. MTN responded by introducing MTN Zone. With interconnection rate set at GHp 5 there is little room for mobile per minute rate to fall much further, and the growing use of mobile phone for data will result in increasing spending per subscriber. 7

9 MTN was charging 14Gp to all networks during peak time with variable discounts, depending on Which "MTN Zone" the caller is calling on. They reacted by reviewing downwards the pricing plan of the MTN Zone to between GHp 1.5 to GHp 10 per minute depending on the network traffic and congestion in the area Tigo reacted recently with the lowest on-net tariff of 3Gp per minute and 8Gp for off-net calls. It requires no subscription except that subscriber will have to dial a special combination on characters to enjoy the tariffs. Promotions It all started with Zain s Live Your Dream promotion, which was offering various cash rewards to subscribers. The objective is to reward Zain customers and would be customers the opportunity of winning GH 75,000 to live their dream and to thank customers for been part of Zain s achievements of 1, 0000,000 customer base of. Participation required either an airtime top up of GH 2 or the usage of 50GP of airtime. There was a weekly prize draw with the first winner rewarded with GH 2,500 cash. A whopping GH 75,000 cash was the reward for the winner of the final grand prize draw Vodafone launched what is believed to be the biggest promotion ever in the history of telecommunications in Ghana for its prepaid mobile and land line users. The promotion, called Vodafone Rewards, is Vodafone s way of saying thank you to all its valued customers for continuing to use its products and services. One cannot help but conclude that this is a direct response to Zain s Live Your Dream promo. Both promos are similar but that of Vodafone is on a much larger scale. 8

10 The 1 million dollar grand prize comprises of a 4-bedroom fully furnished Trasacco Valley house, a Mitsubishi Pajero 4X4 vehicle with a complimentary driver for 3 months and 12 months free high speed Vodafone Broadband internet connection plus land line. Vodafone customers also stand the chance of winning a Mitsubishi Pajero 4X4 vehicle, Yamaha DT 125 Motorcycles, 2-year educational scholarships, Dell Inspiron laptops, Vodafone branded ipod Shuffles, Vodafone branded phones and loads of bonus airtime. This mutual interdependence is again demonstrated through the agreement of existing operators to co-share each other s tower in an effort to save costs and reduce the duplication of such towers all over Ghana. Barriers to Entry There exist entry barriers to the industry. The initial set up cost remains extremely high in the same way as it was during the period prior to With the capital-intensive nature of the industry the biggest barrier to entry is access to finance. This continues even after entry with equally demanding regulatory requirements needed to commerce operations. These reasons may account for the delay of Glo Mobile not commencing operation although it acquired a license in There is also a finite amount of "good" radio spectrum that lends itself to mobile voice and data applications. In addition, it is important to remember that solid operating skills and management experience is fairly scarce, making entry even more difficult. Another entry barrier to the industry relates to Government legislation (licensing requirements). 9

11 The monopolistic condition of free entry and exit from the market does not apply to this industry largely because of huge entry and exit costs, government regulation and licensing requirements. Similar Cost Structure The telecom sector is characterized by very large investment costs. The precise percentage of total costs attributed to investments depends of course on the definition of investments and of telecom activities (e.g. whether research, marketing or similar activities). A notable part of the investments are what economists refer to as sunk costs. These are long term investments which can be used only for specific economic activities. An example is a fixed access network providing subscribers access to the local exchange. Investments in telecom networks are divided into the following functional elements: Terminal equipment Access Network Switching Transmission/Long line Other (buildings etc) The five operators within the industry have similar cost structure which is fixed in nature. Significant portion of their total cost incurred in the deployment of towers and the relevant technologies does not change with the volume of service provided and at least does not change in the short run. 10

12 Conclusion In the discussions above, it is evident that the telecommunications industry in Ghana exhibits more characteristic of the oligopolistic competition than the monopolistic competition. We therefore conclude that the firms in the telecommunications industry in Ghana operate in an oligopolistic competition. 11

13 References Kwesi Amoafo- Yeboah, 8 November 2007, General Business News Ayuure Kapini Atafori, 29/09/2006, The Stateman, Business News of Friday, 21 October 2011 Source: Daily Graphic World Wide Web Morten Falch, Cost and Demand Characteristics of Telecom Networks (Chapter 9) Evans Crentsil-Taylor, The Battle in Ghana's Telecommunication Sector, The Corporate Guardian National Communication Authority 12