Journal of Asian and African Studies http://jas. sagepub. com/ The Mobile Phone Market in Bangladesh: Competition Matters Mohammad Abu Yusuf, Quamrul Alam and Ken Coghill Journal of Asian and African Studies 2010 45: 610 DOI: 10. 1177/0021909610373905 The online version of this article can be found at: http://jas. sagepub. com/content/45/6/610 Published by: http://www. sagepublications. com Additional services and information for Journal of Asian and African Studies can be found at: Email Alerts: http://jas. agepub. com/cgi/alerts Subscriptions: http://jas. sagepub. com/subscriptions Reprints: http://www. sagepub. com/journalsReprints. nav Permissions: http://www. sagepub. com/journalsPermissions. nav Citations: http://jas. sagepub. com/content/45/6/610. refs. html >> Version of Record – Dec 16, 2010 What is This? Downloaded from jas. sagepub. com by guest on November 21, 2011 Article The Mobile Phone Market in Bangladesh: Competition Matters
Mohammad Abu Yusuf, Quamrul Alam and Ken Coghill Monash University, Australia Journal of Asian and African Studies 45(6) 610–627 © The Author(s) 2010 Reprints and permissions: sagepub. co. uk/journalsPermissions. nav DOI: 10. 1177/0021909610373905 jas. sagepub. com Abstract This article examines the role of regulation, competition and market structure on the success of mobile phone sector liberalization. The findings of the study suggest that deregulation of the telecommunications sector has enerated competition and changed the market structure which has had a significant influence on mobile phone service pricing. However, limited liberalization, a concentrated market and a weak regulatory regime during 1997–2004 allowed mobile phone firms to keep mobile tariffs high. Since 2005, full liberalization of the mobile phone sector including the launching of a mobile phone service by a state-owned mobile firm and a strong rival as well as the emergence of an effective regulator brought stiff competition in the sector. Keywords ompetition, GrameenPhone (GP), liberalization, number portability, tacit collusion,Teletalk Bangladesh Ltd (TBL) Introduction Consistent with the global trend of exposing the telecommunications sector to competition during the last two decades and in an effort to improve service accessibility and affordability by adopting new technologies, Bangladesh opened up its telecommunications sector for mobile phone services during 1990s. The first mobile phone licence was issued in 1989 and five more licences were issued subsequently during 1996–2006.
Before the opening up of the sector for private and foreign investment, the telecommunication sector was served, like most other countries by the state-owned Bangladesh Telegraph and Telephone Board (BTTB), the sole provider of telecommunications services. During this period of state-owned monopoly, the sector was characterized by a very low level of penetration, a low level of investment, long waiting lists, limited capacity to meet growing demand, poor service quality and a high tariff (Khan, 2003).
After the liberalization of the mobile phone sector and launching of mobile services by four operators, consumers were deprived of the favourable consequences of liberalization. Tariffs for mobile phones ranged between US$0. 22 and US$0. 25 per minute until 2002–2003. It was even higher (US$0. 30 per minute) in the case of the GrameenPhone (GP) Nationwide call charge (Hossain, 2003). 1 Corresponding author: Mohammad Abu Yusuf, Department of Management, Monash University, Caulfield East,VIC 3145, Australia Email: mohammad. [email protected] monash. edu. au; [email protected] om Downloaded from jas. sagepub. com by guest on November 21, 2011 Yusuf et al. 611 Tariffs remained mostly stable with insignificant reductions. The price pattern of different operators indicates that probably the operators were engaged in some form of anti-competitive behaviour such as tacit collusion (a form of cartel) not to compete in price setting and they worked in unison to maximize their returns. A cartel is a group of two or more independent sellers who agree to fix or control prices in a given market (Dick, 1996 in Connor, 2006: 196–197).
We have adapted the definition of different degrees of liberalization given by Henten, Falch and Tadayoni (2004) in considering the period of 1997–2004 as the period of limited liberalization and competition. By ‘limited liberalization’, we mean that there were a number of operators but not a balanced distribution of market shares or a limited struggle between operators. The period of 2005 onwards has been taken as the period of the fully liberalized market since the sector observed a greater struggle between operators for market share and survival in a competitive environment and there existed an effective regulator.
This definition is consistent with the definition of a fully liberalized telecom sector given by Mattoo, Rathindran and Subramania (2001: 10). Since 2005, the mobile phone tariffs have been declining significantly due to intense competition among the operators. With the introduction of the mobile phone, the sector has been witnessing significant growth. Mobile phone subscribers had grown from only 7000 in 1997 to more than 43 million in 2008. This article examines how liberalization of the sector has influenced the mobile phone tariffs over the years since the opening up of the sector in 1989.
It also explores why the sector experienced two different regimes: an uncompetitive regime until 2004 and a competitive regime since 2005. It contributes to the knowledge and understanding of how consumers can be denied the beneficial consequences of liberalization by market structure and ineffective regulation. The second section reviews the literature on the effects liberalization of the mobile phone sector on mobile phone tariffs in different countries. The data and methods used for the empirical analysis are described in the third section.
The fourth section reviews changes in mobile phone tariffs from the opening up of the sector up to the present date. The fifth section analyses the reasons for insignificant tariff reductions during 1997–2004 and the significant tariff reductions since 2005. The main findings of the analysis along with the conclusions are presented in the final section. The Impact of Liberalization on Price – Review of Existing Literature The introduction of competition through liberalization of the telecom sector forced down telephone rates across the world.
For instance, the introduction of competition through market opening has led the incumbent operators (both fixed and mobile) to lower call charges in countries including in Morocco, Jordan, the Philippines, Germany, Brazil, Indonesia, Malaysia, Vietnam, Mexico, India, Sweden, and China (Bodammer et al. , 2005; Borsch, 2004; Cabanda and Ariff, 2002; Debnath and Shankar, 2008; Fink et al. , 2001 in Roseman, 2002; Lee, 2002; Lee and Findlay, 2005; Maciel et al. , 2006; Nemec et al. , 2004; Noam, 2006; Rossotto et al. , 2005; Salazar, 2006/2007; Theron and Boshoff, 2006; Xavier, 2006).
Similar effects are found in the US, Japan and Sweden. In Sweden, competition caused its telecom prices to be Europe’s lowest (Noam, 2006). The entry of new carriers contributed to a remarkable reduction of monthly cellular phone charges in Japan (reduced from ? 14500 in 1991 to ? 4300 in 1999) (Iimi, 2005). In the EU, liberalization and increased competition have resulted in telecom prices decreasing by 40–59 per cent. In a similar vein, competition and the expansion of digital networks in the US have resulted in significant declines in the cost of service to end users (Loomis and Swan, 2005: 101).
Liberalization and price competition resulted in a rapid reduction of the price of a three-minute call from over one US dollar to around 60 cents within a year. In addition to tariff reduction, in the Turkish mobile market, both the mobile phone operators Turkcel and Telsim started selling handsets at discounts (Atiyas and Dogan, 2007: 505). Downloaded from jas. sagepub. com by guest on November 21, 2011 612 Journal of Asian and African Studies 45(6) Methods of Data Collection In order to increase the authenticity of data and increase confidence in the findings, we have based our study on both primary and secondary data.
In collecting data from primary sources, we have used focus group interviews of different mobile phone users, in-depth interviews of mobile phone firms (two key informants from each firm) and face-to-face interviews with other stakeholders. Given the large numbers of mobile phone customers, the focus group interview method was preferred to other data collection techniques as it permitted the gathering of a large amount of information from potentially large groups of people in relatively short periods of time. It also did not require complex sampling strategies (Berg, 2007: 148).
Moreover, focus group discussion facilitated the drawing of some conclusions about the large population of interest (Stewart et al. , 2007: 54). The advantage of using focus group data collection is that important insights can be gained by paying detailed attention to the discussion, arguments and counter-arguments generated during the focus group meetings. Focus group meetings, due to the use of semi-structured and open-ended questions, have the capacity to reflect issues and concerns salient to participants rather than closely following the researcher’s agenda.
Focus group research also seeks to illuminate the insider’s (‘emic’) perspective (Barbour, 2007). Three focus group interviews (consisting of eight members in each group) were conducted with mobile phone users, and results were processed through content analysis. The reason for using three groups is that use of three sets of interviews on the same topic with different groups helps to ensure themes common across the groups emerge, although consensus is never a goal of focus groups (Myers, 2009). The groups consisted of: (1) household users; (2) business users; and (3) professional users.
As the need and usage patterns of mobile phones for household, business and professional users vary, the inclusion of different users under different groups was expected to help in drawing conclusions about the broader population of interest. Members in the group were chosen on the basis of customers’ willingness to participate. Customers’ volunteered in response to newspaper advertisements seeking participants. Focus group members were encouraged and facilitated to share their ideas and interact with each other. Focus group members were asked semi-structured and open-ended questions.
The following questions were asked: (1) (2) (3) (4) Do you think liberalization has impacted mobile phone pricing? If so was the impact similar for different degrees of liberalization Do you think there was any tacit collusion among the operators in pricing mobile services? What is your view about the role of the telecom regulator in creating a competitive environment in the mobile phone sector? These were used as prompts rather than stand-alone questions. Extra verbal explanation was provided by the moderator to stimulate discussions where necessary. Each focus group lasted about an hour.
Face-to-face interviews of 32 other stakeholders (such as policy makers, civil society members, academics and NGO officials who are also mobile phone users) were also conducted. NViVo 8. 0 software has been used in analysing the data. The use of varieties of the same method (such as the interviewing of stakeholders and combining the views of multiple stakeholders, case study, focus group meetings, interviews with mobile phone firms and use of secondary/archival data) helped to achieve within-method triangulation (Jick, 1979). Our aim of triangulation using different data sources was not to solely increase the reliability
Downloaded from jas. sagepub. com by guest on November 21, 2011 Yusuf et al. 613 or validity of the outcome of the research; rather, it was to gain a comprehensive picture of the situation as employed in Chernatony, Drury and Segal-Horn (2005). For the study, the total liberalization period since the first opening of the sector has been grouped under three different periods: (1) Before 1997 (monopoly period) (2) 1997–2004 (period of collusion, i. e. uncompetitive market) (3) 2005 onwards (period of competitive market). From Monopoly to Competition – How Did the Mobile Phone Tariffs Change?
The Monopoly Period The first mobile phone operator, Pacific Bangladesh Telecom Ltd (PBTL), started operation in 1993 (under the Citycell brand) and enjoyed a monopoly for five years. During this period, the monopoly provider aimed at the high end of the market and charged a very high price for its service (Yunus and Jolis, 1998). For every mobile connection, subscribers had to pay a connection fee of US$2000. Other sources report that the price of a mobile connection package was about US$3800 (39. 14Tk = 1 US dollar in 1993) when it first came onto the market (Alam, 2008; Bangladesh Bank, 2009; Gupta, 2005).
The high price was possible because government nepotism allowed one company to enjoy a monopoly for five years. The mobile phone became a sort of status symbol for the rich and famous and was beyond the reach of ordinary people as a communication tool (Islam, 1998; Rahman and Karim, 2007). The call rate of a mobile phone in Bangladesh in 1996 was the highest in the world (Alam, 2008). As is common in any monopoly, the tariffs were exorbitant at about US$0. 22– US$0. 25 per minute (Sullivan, 2007; Yusuf and Alam, 2007b). Moreover, the monopoly provider charged incoming calls at US$0. 5 per minute (AS Khan, 2003). This high cost resulted in the slow growth of the sector. Later, Bangladesh policy makers liberalized the mobile phone sector awarding three mobile phone licences to GrameenPhone (GP), AKTEL and Sheba Telecom. It seems that the belief in neo-liberal theory and a shift towards marketization were motivating forces in opening the market for foreign investment. The essence of neo-liberal theory is that government should adopt ‘free trade’ to allow the unregulated international movement of goods, services and capital (MacEwan, 1999: 31).
The objective of this ideological position was the promotion of general good by following the principles of the free market and open competition, limited state intervention and welfare. Neo-liberal beliefs in market principles are reflected in different policy preferences such as privatization of state enterprises, deregulation of state controls, liberalization of trade, encouragement of foreign investment, withdrawal of subsidies and reduction of welfare programmes. Neoliberal proponents focus on downsizing the state and expanding market forces in order to overcome inefficiency, stagnation and unemployment (Haque, 2004: 227).
The telecom sector is perhaps the sector that experienced most neo-liberal reforms in the last two decades. Jin (2005: 289) finds: ‘swift restructuring of the telecoms industries, which began in the early 1980s, was possible because governments around the world adopted neoliberal telecom policies’. Like many other countries, the global trend towards neo-liberal economic reforms has also affected Bangladesh (Haque, 1999). The liberalization of the telecom sector and the encouragement of foreign investment in the mobile phone sector demonstrate Bangladesh’s shift towards the neo-liberal policy stance.
With the launching of mobile phone services by GP, Telecom Malaysia (TMIB) (under the AKTEL brand) and Sheba telecom in 1997, the sector was theoretically liberalized but competition Downloaded from jas. sagepub. com by guest on November 21, 2011 614 Journal of Asian and African Studies 45(6) was not introduced (as no regulator or effective regulator existed). No significant change in mobile phone tariffs was seen to transform the mobile phone from a ‘luxury’ to a ‘necessary’ item. The result was, users benefited very little in enjoying competitive pricing.
Mobile operators kept their tariffs unchanged during the period 1997–2002 until the pre-paid service was launched in 2002/03. Moreover, operators imposed charges on incoming calls originating from BTTB (Khan, 2003; Sullivan, 2007: 95). Period of Tacit Collusion (Uncompetitive Market) During 1997–2004, although there were four players, mobile phone call rates were still very high and beyond the reach of the common man (Rahman and Karim, 2007). The outcome of the competition was suboptimal (Yusuf and Alam, 2007a). This was because of the dominance of GP and the coordinated behaviour of companies.
Xavier and Ypsilanti (2008) conclude that if firms coordinate their behaviour to keep prices high, the market cannot be competitive. More than threequarters of the mobile phone users and stakeholders claimed that mobile phone operators had decided not to compete in pricing and that the mutual understanding and tacit collusion among the mobile firms helped them to maintain almost identical mobile prices2 (with minor variations) during 1997/98–2003/04. The call rates of Sheba, PBTL and TMIB were almost identical, ranging between US$0. 22 and US$0. 24 per minute from 1998 to January 2002 (see Table 1).
GP, being the first mover, had charged premium prices as shown in Table 2. Subscribers were, perhaps, ready to pay a premium price for the dominant operator GP as it provided them with ‘network externality’ and ‘on-net discount’ benefits as discussed in Kim and Kwon (2003). Consumers consider network size in choosing mobile operators, ascribing intra-net call discounts and the quality of signalling effect to larger networks (Kim and Yoon, 2004: 753). Although there were some variations in the tariffs of GP and other operators (as evident from Table 1 and Table 2) during 1997–2002, there were reasons for GP’s higher call charges.
A majority of the users interviewed (65%) reported that wide network coverage, good voice quality and after sales service gave GP a competitive advantage in charging higher tariffs. The acquisition of Bangladesh Railway’s 1800km fibre-optic network essentially provided GP with a Table 1. Identical/similar tariffs – Sheba, PBTL and TMIB (peak) during 1998–2002 (tariffs in US$ per minute) Operator Grameen PBTL TMIB January 1998 0. 30 0. 22 0. 24 January 1999 0. 30 0. 22 0. 24 January 2000 0. 30 0. 22 0. 24 January 2001 0. 30 0. 22 0. 24 January 2002 0. 30 0. 22 0. 24 Table 2.
GP’s stable tariff 1998–2002 (tariffs in US$ per minute) Year/tariff rate GP January 1998 0. 30 Jan 1999 0. 30 Jan 2000 0. 30 Jan 2001 0. 30 Jan 2002 0. 30 Source: Government of Bangladesh, 2007. Note: Average exchange rate between US$ and Taka for the period 1998–2002 has been used. Downloaded from jas. sagepub. com by guest on November 21, 2011 Yusuf et al. 615 critical strategic competitive advantage over rival operators. GP has thus been able to expand rapidly its coverage throughout the country (Knight-John, 2007). Other operators’ networks were limited mainly to Dhaka and a few big cities.
GP quickly established itself as the market leader by dint of its countrywide network coverage, quality of network and after sales service. Moreover, GP launched its service before AKTEL and Sheba (Khan, 2003) which allowed it to reap first mover advantage. The charging of premium tariffs by GP was also possible because customers do not just care about price, they also care about coverage, reliability, data services and the speed at which they are delivered (Nicholas, 2008). GP, like other operators, also kept its tariffs stable and high during 1998–2002 (see Table 2)
Collusion in Mobile Phone Pricing! In an oligopoly market, coordination among the operators in shaping their behaviour is easier. Formation of a cartel also becomes easier if liberalization is done without a regulatory regime. Copeland (2002 in Konan and Assche, 2007) notes: If service liberalization only leads to partial market entry without pro-competitive regulatory reforms, then this entails a danger that the foreign firms form a cartel with domestic firms. In that case, monopoly mark-ups do not disappear, while rents might be transferred abroad. Copeland in Konan and Assche, 2007: 897) The absence of an effective regulator and the concentrated market structure contributed towards the formation of a cartel. Valletti and Cave (1998 in Stotyka, 2007) suggest that tacit collusion can explain stable and similar prices. The stable and similar call charges of mobile phone operators (Tables 1 and 2) demonstrate a clear indication of collusion in setting prices among the operators. A majority (four-fifths) of the mobile phone users interviewed indicated the existence of some form of tacit collusion among the operators.
In their view, during 1997–2004 collusion among the operators blocked price drops in the mobile phone sector so that no reduction in call rates was seen in the period. However, as cartels are formed and sustained clandestinely (Spratling, 1999 in Connor, 2004: 250), they could not provide any hard evidence to prove their claims. The mobile phone firms denied existence of any such collusion except the state-owned Teletalk Bangladesh Ltd (TBL). The CEO of one private telecom firm (who no longer serves any telecom firm), however, agreed that there was some form of unwritten mutual understanding in price setting and keeping prices stable.
He commented that lack of regulatory monitoring allowed the mobile phone firms to engage in anti-competitive behaviour. Newspaper reports revealed that subscribers had been subjected to high call charges because of a cartel of four private mobile phone operators (The Daily Star, 2005b). Kibria (2005) notes that the cell phone companies in Bangladesh have created another cartel driven mainly by the high rates of profit. Tahin (The Daily Star, 2008b) noted, ‘different cell phone operators cheated and exploited people by imposing abnormally high tariffs and doing illegal VoIP business’.
The newspaper reports lend support to the respondents’ claim that mobile phone operators had been involved in tacit collusion in keeping the tariffs high. Tariffs were lowered in 2003 when a pre-paid service was introduced in 2003. This is because serving pre-paid customers is less costly and there are no credit risks (Barrantes and Galperisn, 2007 in Mariscal, 2009). Pre-paid accounts do not require billing printing, transportation, warehousing and sales tracking costs. Moreover, pre-paid users pay the total cost in advance.
The advance payments help mobile firms to earn interest or invest the advance receipts elsewhere. If these factors are taken into account, the actual tariffs should have been lower than actually charged. Downloaded from jas. sagepub. com by guest on November 21, 2011 616 Journal of Asian and African Studies 45(6) Table 3. Stable tariff structure during 2003–2004 (tariffs are in US$ per minute) January 2003 GP PBTL TMIB Sheba (Banglalink) 0. 10 0. 10 0. 10 Not available January 2004 0. 10 0. 10 0. 10 0. 10 Source: Government of Bangladesh, 2007.
The pre-paid tariffs of the four operators were also kept identical and stable during 2003–2004, as exhibited in Table 3 until Banglalink’s commercial launching and TBL’s network expansion across the country. Tariffs were identical (US$0. 10 per minute) during 2003–2004 for all operators except Banglalink, the new entrant. The pre-paid tariffs remained stable until 2004–2005 and the entry of the stateowned TBL and Orascom (the Banglalink brand). Levenstein and Suslow (2006) observed that the most common cause of cartel failure (breakdown) is the entry of new (non-cartel) firms.
It seems the coordination among the operators in maintaining price broke down after new entries in 2004–2005. A price war was started and tariffs went down from US$0. 10 to US$0. 004 per minute in two to three years, providing an indication of the markets where firms behaved collusively (Stigler 1964 in Fershtman and Pakes, 2000). Charging higher tariffs and maintaining the same tariff for six to seven years and then engaging in price wars (i. e. price pattern) after the entry of new operators lends some support to the claims of the respondents that the operators had collusively kept the price high.
However, as the article offers an exploratory view of the mobile phone market, it is unclear how far the existence of collusion among the operators, as complained of by the respondents and mentioned in press reports, are true. Although the existence of collusion among the operators was widely perceived by the respondents, no investigation was carried out by any regulator to detect if there was any collusion. In the absence of a telecom regulator until 2002, the market was driven by operators’ coordinated pricing strategy.
Even after the enactment of the National Telecommunications Policy 1998, the Bangladesh Telecommunications Act, 2001 and the creation of the Bangladesh Telecommunications Regulatory Commission (BTRC) in 2002, the mobile phone market remained a captive one until 2003/2004 (Al Bawaba, 2006). The failure to implement telecommunications policy in its spirit of bringing competition into the sector and discouraging the dominance of a single firm rendered the market uncompetitive. Number portability allows subscribers to move easily to an alternative operator with better pricing or quality of service (Grzybowski, 2008).
Non-introduction of number portability was perceived by the respondents to be another reason for not having enough competition in the sector. Over 50 per cent of the respondents made clear their view that the lack of an organized consumer body to raise concern about higher tariffs through collusive arrangements was another factor that facilitated higher tariffs charges. Mobile phone operators (except the government-owned Teletalk), however, denied the charge of collusion in price fixing. They stated that it was the demand–supply gap that helped them to maintain higher tariffs.
There were immense demand for mobile phone and they were getting customers even without lowering their tariffs. Of the four operators, only GP had abcountrywide network. For instance, during 1997–1998, PBTL’s (Citycell brand) network coverage was limited within Dhaka city while GP had coverage in most major districts. Similarly, while other operators kept their service limited only to major city dwellers, GP expanded its coverage outside major cities and Downloaded from jas. sagepub. com by guest on November 21, 2011 Yusuf et al. 617 widened coverage to almost all districts of the country by 2003 (Amin and Hussain, 2004).
The private operators were unable to meet pent up and growing telecom demand (Ali, 2005). Period of Stiff Competition – Price War after Teletalk and Banglalink’s Arrival The entrance of TBL and Banglalink in 2004–2005 created a more competitive market. The launching of mobile services by the state-owned TBL put the private operators under tremendous pressure. TBL, being a public sector provider had no incentive to engage in price collusion. Moreover, TBL being in public ownership had the objective of looking after public interest through provision of telecoms services at affordable prices.
When TBL launched its service in 2005, the cost of a Teletalk SIM was only US$30 which was nearly less than half the price charged by other private operators. The monthly fixed charge was only US$5, compared to US$8. 15 for private operators. The maximum call charges of TBL were much lower (US$. 0. 06 per minute against US$0. 08) than private operators. Moreover, unlike private mobile operators, TBL had no incoming call charges (Ali, 2005). TBL has effectively played its role in lowering mobile tariffs and keeping them affordable to people at large (Rahman, 2006).
The launching of Teletalk created a sense of competition among operators to lower their call rates (Alam, 2008). When the government launched its mobile phone operation in 2004/2005, multinational mobile phone companies in the country were forced to slash their tariff from US$0. 10 to US$. 0. 004 per minute (The Daily Star, 2008b). The launching of Banglalink mobile phones (through the acquisition of Sheba Telecom) in 2005 brought about the most significant change in the competitive landscape of the sector. Banglalink was determined to establish its position and gain market share.
In a bid to establish its position in the market, it quickly extended its network around the country. Banglalink, from the very first day of its launch successfully challenged the market leader (GP) by offering customers low cost access and free SMS. The SIM card was one of the main switching costs for the users. It successfully removed switching costs by offering subsidised handsets with a low SIM card price (US$55 only) to mobile phone users (Khan, 2005). Following Banglalink, three other operators – GP, AKTEL and CityCell – have also come up with various attractive packages such as peak, off-peak, FNF, free SMS, etc. resulting in cut-throat price competition since 2004/2005. The improved interconnection agreements between operators also contributed to tariff reduction during this period. As a result, mobile phone tariffs came down as low as US$0. 004 per minute in 2008 (Hasan, 2009a). The significant reduction in call rates resulted in a massive increase in mobile phone penetration in Bangladesh. Bangladesh’s mobile penetration as of May 2009 was 30 per cent compared to 13. 25 per cent in 2008 and only 0. 48 per cent in 2001/2002 (As-Saber and Hossain, 2008; BTRC, 2006; Hasan, 2009b).
The Bangladesh mobile tariff rate is even lower than that in neighbouring India which boasts of its very low mobile tariff and having the second largest telecom network in the world after China. It is also the fastest growing mobile market in the world (The Times of India, 2008). Competition has resulted in significant fall in mobile tariffs and spectacular growth in mobile subscription in India. Mobile phone tariffs for local calls in India went down from US$0. 36 (Rs16) per minute in 2000 to US$0. 010 (Rs0. 50) in 2008 (Singh, 2008). The state-owned operators, namely Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL) launched the ‘One-India Plan’ package from March 2006. With this new plan, customers of BSNL and MTNL are now able to call from one part of India to another at the cost of R1. 00 per minute. Private operators have also introduced similar tariff plans (Singh, 2008: 643) Call rates as low as US$0. 010– US$0. 020 (Rs0. 50–R1) a minute and network expansion to smaller towns and rural areas have helped Indian operators to attract eight to nine million new subscribers a month (The Times of Downloaded from jas. sagepub. om by guest on November 21, 2011 618 Journal of Asian and African Studies 45(6) India, 2008). Since mobile phone services were made available in 1994, subscriptions increased at a compound annual growth rate of 95 per cent. Mobile subscribers in India have increased 25 times between 2002 and 2007. The current mobile phone penetration stands at 22 per cent, which was 14. 83 per cent a year ago and only 0. 4 per cent in 2000 (As-Saber and Hossain, 2008; Lee, 2009; The Times of India, 2008). But there is still huge potential for growth in the sector in India, as only just over one-fifth of the billion-plus population now has a mobile phone.
The Average Revenue Per User (ARPU) of the Bangladesh mobile phone sector (GSM prepaid) is also lower than that of India. The ARPU of Bangladesh is US$2. 13 (Tk146 per user per month) compared to India’s ARPU of US$7. 40 (Rs 357) in the March quarter 2008 (Hasan, 2008b; The Times of India 2008). The lower ARPU in Bangladesh than India might be due to lower minutes of usage or lower tariffs in Bangladesh. The mobile tariffs and ARPU of Bangladesh compared to India clearly indicate that the Bangladesh mobile phone market is more fiercely competitive than that of India.
That perhaps explains why the mobile tariffs and ARPU in Bangladesh are much lower for Bangladeshi than for Indian operators in the mobile segment. The drastic reduction in mobile phone tariffs in Bangladesh since 2005 (compared to earlier periods) are shown in Table 4 The competitive pressure also compelled the operators to introduce per second billing (also called ‘one second pulse’). The introduction of per second billing saves users’ costs as they pay for the time they actually talk. Aggressive marketing and promotions (free SMN, FNF number, reduced rate for off-peak calls, bonus talk time, etc. , the introduction of pre-paid packages and cards, a pre-paid refilling system, subsidized handsets/reduction in handset price and discounts in fees for corporate clients increased the number of mobile users significantly. Different Tariff Regimes An Ineffective Regulator and Inadequate Regulation The majority of respondents observed that mobile phone operators were unrestrained in setting up their tariffs as there was no effective regulator to oversee their tariff plans. The sector was also lacking tariff experts and cost data to challenge the rationality of the tariffs imposed by the operators.
The telecom regulator was largely ineffective. Mobile phone operators took advantage of the lack of Table 4. Average price statistics showing drastic reduction in pre-paid tariffs (per minute) since 2004/2005 Year 2002 2005 2006 2007 2008 Rates (GP, AKTEL, Banglalink, Citycell) US$0. 22–0. 30/minute (GP rate was US$0. 30 per minute) US$0. 09 per minute US$0. 07 (GP); US$0. 067(Sheba); US$0. 06(Citycell) US$0. 036/minute (GP, Citycell), US$0. 028(Banglalink) US$0. 004/minute Comments There was variation in mobile tariffs among the operators.
Insignificant differences in pricing by all operators. Little differences in pricing among the operators Mobile tariffs are similar with minor variations. Banglalink offers the lowest price Almost similar prices with minor variations Source: Government of Bangladesh, 2007. Downloaded from jas. sagepub. com by guest on November 21, 2011 Yusuf et al. 619 competition law and the poor implementation of the public (telecommunications) policy by the ineffective regulator. Before 2007 BTRC observed its regulatory role by sounding some warnings which were in ‘best endeavour’ forms (e. . mobile phone firms should reduce mobile tariffs) and not meant for implementation. BTRC’s warning of severe punishment if the telecom operators failed to resolve interconnection problems bilaterally (The Daily Star, 2005a) seems like mere rhetoric. Interconnection problems persisted long after this warning as the regulator did not implement its direction. The then BTRC lacked enforcement power. It was unable to govern the industry. The BTRC did not resolve the fixed-to-mobile and mobile-to-mobile interconnection problems.
Rather it allowed the industry to violate telecom law and hamper consumers’ interests. Taking advantage of the situation, GP overcharged its customers when they made calls to the rival networks (Khan, 2004). The telecom regulator failed completely in controlling mobile phone tariffs. One interviewee observed, ‘The then chairman of the BTRC could not convince mobile operators to reduce tariffs’. Rather, in one instance, the BTRC chairman remarked, ‘if mobile tariffs are reduced, it will not be profitable for the operators’.
Two-tenths of the respondents noted that there was regulatory capture by the private sector and the BTRC leadership (2002–2005) was influenced by the private operators to remain an inactive and silent spectator. Two-thirds of consumers (67%) claimed that BTRC was totally ineffective and inefficient until 2006 and that the BTRC leadership failed to demonstrate their monitoring and facilitation role to see telecom users’ interests are not hurt. Until 2007, the telecom regulator failed to specify or implement any price cap for mobile operators.
In July 2007, the telecommunications watchdog asked the operators to keep call charges between US$0. 03 and US$. 0. 004 a minute. This initiative by the telecom regulator has been a welcome decision by the users (80% of users interviewed appreciated the regulators’ direction) although operators have criticized it saying, ‘the tariff should be determined by the market. It is unfortunate that authorities set tariff ceiling [sic] in the age of free market economy’ (The Daily Star, 2007a). Setting a price cap, however, is not unusual and this practice is applied in other countries such s Australia – see, for example, telecommunications services provided by Telstra such as line rentals, local, trunk and international calls, and cellular mobile telephone services are subject to the main price cap (ACCC, 2000). The Chilean regulator had a rate-setting formula to set a price cap from 1987 to 1994. Price caps are fully consistent with a competitive regime as these caps are maximum prices only and leave the operators flexibility to change/vary their price bands within the given range.
Price caps also provide strong incentives to the operators to reduce costs and enjoy higher than expected profits until the next rate setting (Kerf and Geradin, 2000: 60). Price capping is also necessary to ensure consumers are not hurt by the tacit collusion of operators. Despite a substantial increase in the number of mobile users in 1997–2003, producing ‘economies of scale’ benefits (due to spreading fixed costs over a large volume and utilizing production facilities more intensively), operators continued to charge almost identical tariffs (see Table 1).
In the absence of competition policies in Bangladesh, trade practices that created scope for price manipulation were not always fair. Mobile phone operators were subject to criticism for their higher call rates (Hoque, 2005). Findlay and Sidorenko (2007: 131) claim that ‘effective competition policies implemented in domestic markets are essential to ensure that liberalization of market access does not result in foreign service providers capturing monopoly rents and impeding entry of other players’.
Although there were four mobile phone operators, it was GP who virtually controlled the mobile market with others being marginal players. This is not unexpected because in a oligopoly market structure with three or four operators in the market, operators have little incentive to reduce prices or to innovate their business model to profitably serve lower and lower income consumers (Anderson and Kupp, 2008). The mobile operators are engaged in a capitalistic mode of production and naturally had not embraced policies that subordinated their profit-making to larger Downloaded from jas. sagepub. om by guest on November 21, 2011 620 Journal of Asian and African Studies 45(6) social interests. During 1997–2004, private mobile phone operators continued to impose a charge on incoming calls. The charge on incoming calls was a burden for telecom users and it certainly went against the rapid expansion of the sector. In this regard, the following quote from the demands of the Bangladesh Telecom Business Association seems relevant: ‘We call upon the mobile phone operators to totally remove charges on incoming calls and decrease call charges to boost the telecoms sector’ (The Daily Star, 2005c).
Mobile phone operators, however, argued that they were forced to impose incoming call charges on calls originating from the BTTB as the BTTB refused to sign internationally standard revenue-sharing agreements with them (Interview with mobile phone operators, 2008; Sullivan, 2007; The New Age, 2005a). Industry Structure and Impact on Price Competition Until 2003–2004, the mobile phone tariffs were very high compared to tariffs in 2006–2009. One reason for the high tariffs is the nature of the market structure. The market was a ‘concentrated market’ as the following calculation of market concentration ratio reveals.
The market shares of the market leader GP and other operators are used to measure the market concentration (industry structure) with a view to assessing the intensity of competition in the sector (see Table 5 for market shares) We have used the Herfindahl-Hirschman Index (HHI) for measuring and analysing market concentration. HHI is the sum of the squares of the market shares of all firms (Noam, 2006). HHI is a commonly accepted measure of market concentration and is used as a proxy for effectiveness of competition in the markets (Henten et al. , 2004).
The HHI considers the relative size and distribution of firms in a defined market sector. A HHI score closer to 0 implies increasing competition with a large number of firms competing for relatively small and equal proportions of the market. In contrast, a higher HHI score implies a concentrated market where one or a small number of firms dominate the market. The US Department of Justice defines the nature of markets in terms of HHI scores (Noam, 2006; Spectrum Strategy Consultants, 2003) as follows: HHI is less than 1000 = un-concentrated market HHI between 1000 to 1800 = moderately concentrated market HHI above 1800 = highly oncentrated market. The Bangladesh mobile phone sector had four firms with market shares of 63 per cent, 25 per cent, 2 per cent and 10 per cent in 2004. The HHI Index for 2002 and 2004 was found to be 5510 (i. e. highly concentrated market) and 4698 (highly concentrated market) respectively. Table 5. Market share of mobile phone operators (end of year) Year 2002 2003 2004 2005 GP 73% 70% 63% 61% AKTEL 11% 25% Sheba (from 2005 Banglalink) 4% 2% 15. 6% Citycell 12% 10% Teletalk (started in 2005) N/A N/A Not found Warid (started in 2007) N/A N/A N/A
Sources: BTRC, 2006; IFC, 2003; Khan, 2003; The Daily Star, 2008a; Sobhan et al. , 2002; Spectrum, 2007 Downloaded from jas. sagepub. com by guest on November 21, 2011 Yusuf et al. Table 6. Mobile sector concentration ratio, as measured by HHI Country Bangladesh Japan 4492 South Korea 4075 Sweden Singapore Australia 3764 3736 3487 UK 621 HK Market concentration 4698 as measured by HHI 2504 1936 Source: Spectrum Strategy Consultants, 2003. The HHI index demonstrates that the Bangladesh mobile phone market was a highly concentrated market.
It is also evident that the mobile phone market was less competitive due to the control of the market by a single operator. Limited liberalization and the dominance of GP due to the relatively small size, capacity and clout of other operators helped the market to be uncompetitive and near to monopoly for a long six to seven years. Although mobile phone markets are all very concentrated, involving two, three or five operators only in most cases (because of scarce spectrum resources), the Bangladesh market is more concentrated than many other countries.
Table 6 demonstrates this. The high market concentration has a bearing on the competitive behaviour of actors in an industry. According to the structure–conduct–performance (SCP) paradigm, industry structure, particularly market concentration, is a critical determinant of competitive behaviour that reduces industry rivalry (Porter 1980 in Fjeldstad et al. , 2004). Concentration reduces overall rivalry while facilitating coordination and even collusion rather than competition with other firms in the industry (Smith et al. , 1992 in Fjeldstad et al. , 2004).
The effect of concentration on the probability of collaborative actions (versus competitive moves) is even stronger in the case of network industries. The concentrated mobile phone market, among others, contributed to the high cost of mobile services in Bangladesh. Other Issues Relating to Mobile Phone Pricing Falling capital expenditure, economies of scale and economies of time are obvious in a telecommunications sector that allows firms to reduce mobile tariffs (Buerkler, 2005). Capital expenditure has come down from US$500 per line (for the industry) in 1995 to US$220 in 2002 (Rahman, 2006).
Similarly, it could be reasonably argued that the mobile operators enjoyed significant economies of scale given the large increase in their subscriber base over the years from a low subscriber base in 1997–98. For instance, in 1998, GP’s customer base was only 0. 03 million but by 2002 the number of its customers had increased to 0. 775 million (The Daily Star, 2007b). Hence, GP’s subscriber base was about 26 times higher in 2002 than what it was in 1998. GP however, did not reduce its tariff during 1997–2002 even by a single penny.
The significant reduction in capital expenditure and cost savings due to economies of scale had no influence on mobile operators in reducing their tariffs in the period 1997–2004. Conclusion and Policy Implications This study has revealed that the introduction of private ownership by allowing a number of mobile operators to operate without an effective regulator failed to bring the favourable consequences of liberalization to the users. The mobile phone was a luxury gadget in the monopoly period. Tariffs of mobile phone usage remained very high and stable for about six years despite the presence of multiple operators.
The absence of an effective regulatory regime, lack of competition policy, and the lack of a strong rival having equal or comparable clout were largely responsible for uncompetitive markets and high tariffs. Regarding the significant role of a regulatory body in mobile phone competitiveness, Grzybowski (2008: 113) suggests that the ‘competitiveness of the mobile industry Downloaded from jas. sagepub. com by guest on November 21, 2011 622 Journal of Asian and African Studies 45(6) varies over time due to differences in the implementation of regulation’.
The operators had enjoyed ‘free rein’ over the subscribers as they were not subject to any monitoring or compliance with any standards or price caps. Mobile tariffs started plummeting from 2005 when the largest operator lost its dominance with the entrance of the rival Banglalink, a UAE-based telecom giant capable of successfully challenging GP. The launching of mobile phone services by the state-owned TBL also contributed towards the creation of a competitive environment resulting in intense competition and deeper price cuts.
The Bangladesh experience suggests that the introduction of private and foreign ownership through liberalization without creating a competitive environment per se cannot provide competitive benefits to users. It would simply transfer monopoly rents from the government to private hands, as pointed out by Mattoo et al. (2001). It appears poor public policy that liberalization without any pre-established liberalization and telecommunications policy allowed firms to exploit the users by charging higher prices in 1997–2004.
Moreover, the government policy of sequential entry instead of simultaneous entry seems to have allowed the early entrant to capture a large market share. The sequential entry strategy followed by Bangladesh disadvantaged new entrants in getting a sizeable customer base. Consumers take into account the ‘network size’ in choosing operators. They choose large operators as it helps them enjoy ‘network externality’ benefits and on-net (intra-net) call discounts. Bangladesh policy makers could have followed a simultaneous instead of sequential entry strategy to create a level playing field for all operators.
Moreover, the absence of an operator with similar or comparable clout to that of the dominant operator resulted in an uncompetitive market. The policy implications are that the success of telecom sector liberalization depends to a large extent on the timing, entry and relative size of the operators, anti-trust regulations and the efficacy of the regulatory regime. Moreover, the presence of at least two operators of equal/similar clout is necessary to ensure a competitive market in the mobile phone sector.
The existence of an effective regulatory regime, pro-competitive regulations and anti-trust authority can contribute to creating a competitive market. Otherwise, private operators may turn the market into a private oligopoly where there is every risk that consumer welfare will be severely hampered. Notes 1. GrameenPhone had two tariff rates: GP Regular phone and GP Nationwide phone. The Nationwide call charges were US$0. 30 per minute previously (Hossain, 2003). 2. The prices are average prices per minute for mobile phone service.
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