The Pakistan mobile telecommunication market and rivalry models

As already discussed above Pakistan nomadic telecommunication market consists of some of the largest and most experient telecom companies in the universe that includes Mobilink ( Orascom Group ) , Telenor ( Norway Mobile Company ) , Ufone ( PTML and partly owned by Etisalat ) , Warid Telecom ( Abu Dhabi Group ) , and eventually ZONG ( China Mobile Company ) . Recently on 3rd August 2010, the president of PTA Dr Muhammad Yaseen announced in seminar that 3G ( UMTS ) licenses will be auctioned in 3 to 4 months clip once the policy model has been finalized by ministry. He besides said that cellular operators have expressed apprehensiveness with respect to launch of 3G engineering. Furthermore it was more or less confirmed that 3G licences would be granted to merely 3 nomadic operators in Pakistan where the most favorite rivals to hold the 3G ( UMTS ) licenses seems to be Mobilink, Telenor and Ufone ( PTML ) due to their sheer size, market portion and handiness of significant financess.

The two theoretical accounts that we have taken into history are foremost “ Rivalry under monetary value and measure uncertainness ” and secondly “ Rivalry under gross and investing cost uncertainness ” which were both taken from an article by Paxson and Pinto ( 2004 ) “ Third GENERATION MOBILE GAMES – An application of existent competition games ” . One of import point that is required to be taken into history is that both these theoretical accounts were developed for duopoly market whereas in my research with regard to commercialisation of 3G ( UMTS ) engineering in Pakistan, I am sing the fact that 3G ( UMTS ) licence would be granted to merely 3 cellular operators in Pakistan. Therefore as a effect the following scenario is non ideal with regard to the application of these duopoly theoretical accounts because of which I have to see two companies as one either in the function of leader or follower in order to obtain practical and realistic consequences.

5.4.1 Market Share:

Based on the recent analysis of these cellular companies in Pakistan by PTA shows that in footings of Mobile endorsers as of May 2010, Mobilink remains to be the market leader with 33 % portion, followed by Telenor with 24 % of market portion and eventually Ufone which is the company of chief focal point for my research has 19 % of market portion which has been demonstrated in figure 5.4 shown below.

Therefore in order to analyze these 3 companies together with the application of duopoly theoretical accounts, I will analyse a scenario where Mobilink and Telenor will unify for the leader ‘s function whereas Ufone is considered entirely to hold follower ‘s function. Furthermore on the footing of theoretical accounts which are considered, none of the participant is certain of exact entry timing of other along with the fact that each of them is cognizant that others want to be the first to come in the market in order to accomplish the first mover advantage, which reflects that the environment is preemptive.

The chief aim of this research is to measure the optimum timing of Ufone to do its entry into 3G market and we assume that the leader ( Mobilink + Telenor ) has already entered the market. Therefore we will presume that these 3 companies will hold same proportion of endorsers with regard to 3G market similar to what they had in 2G market. As a effect because we assume that 3G licences will merely be granted to 3 cellular operators therefore they will get the entire market in proportion in which they had 2G endorsers. Keeping that in head we can recognize that entire 3G market will be divided among Mobilink, Telenor and Ufone which implies that the leader which would be ( Mobilink + Telenor ) will get a comparative proportion of ( 57 % /76 % = 75 % ) after entry of the follower which is Ufone in our instance and hence Ufone will be holding ( 19 % /76 % = 25 % ) of the endorsers in the 3G ( UMTS ) market after it makes its entry in the market which has been illustrated in figure 5.5 shown below.

5.4.2 Number Of Mobile Subscribers ( Customers ) :

Cellular Mobile is the lone sector within the Pakistan Telecommunication Industry that showed marks of an encouraging growing form during the tough fiscal period of 2008-2009 despite economic lag, impregnation in the market and heavy revenue enhancement load which intensified nomadic acquisition costs. Harmonizing to stats revealed by Pakistan Telecommunication Authority ( PTA ) in twelvemonth 2009 Pakistan added around 6.6 Million endorsers bespeaking a growing of 7.6 % where as it manage to pull farther 4.61 Million clients as of May 2010. Furthermore PTA besides announced that Pakistan has a sum of 98 Million Mobile endorsers as of May 2010 that indicates that Pakistan cellular industry in turning invariably which has been demonstrated in figure 5.6A shown below.

Furthermore figure 5.6B gives the exact figure of entire cellular endorsers that were recorded in each fiscal twelvemonth during the period of 2006-2010.

It can be comprehended from the figure above that despite the fiscal crisis and economic lag, Pakistan has managed to prolong a changeless growing in cellular industry with holding a sum of 98 Million clients as of 2010. With consideration to those companies which I have analysed in my study, it is rather clear the Mobilink is the market leader with about 32 Million clients, followed by Telenor with 23.65 Million clients and last but non the least in Pakistan cellular industry Ufone possesses 19.16 Million clients in the 2G market.

Furthermore with the informations collected from PTA Annual studies I have managed to calculate the Average figure of cellular endorser that joined the cellular companies in Pakistan during the period of 2006-2010 which has been demonstrated in figure 5.7 shown below.

It can be comprehended from the figure that Mobilink managed to pull most clients with an norm of 4.9 million clients yearly throughout 2006-2010, followed by Telenor that engrossed about 4.5 million clients yearly whereas Ufone occupied around 3.3 million clients yearly during a span of 5 old ages. Additionally I have besides evaluated that on this footing about 3.46 million clients will fall in 3G market yearly sing the fact that clients will bit by bit switch from their current 2G web to 3G ( UMTS ) and bearing in head the disbursement power and demographics of Pakistan. Furthermore on the footing of Leader ‘s ( Mobilink & A ; Telenor ) and Follower ‘s ( UFONE ) market portion with regard to 3G market, it has been estimated that follower will see a net add-on of about 864,000 endorsers yearly in 3G market whereas due to the preemptive advantage, the leader will pull off to pull about 2.6 million cellular endorsers yearly.

Finally on the footing of anticipation made by PTA that about 25 % of cellular endorsers in Pakistan will switch from their 2G web to revolutionary 3G ( UMTS ) engineering followed by its launched, I have managed to calculate entire expected endorsers possessed by the 3G market of Pakistan from 2011-2020. Based on my analysis, it can be comprehended that if 3G is launched in 2011 so about 24.5 million clients will fall in in its opening twelvemonth switching from their 2G web and in ten old ages clip that is 2020, the 3G market will possess about 55.6 million clients which has been demonstrated in figure 5.8 shown below.

5.4.3 ARPU:

Earlier on the cellular companies in Pakistan managed to gain notable ARPU, nevertheless as the competition increased within the cellular industry, the cellular companies began to take down their duty drastically, which in bend resulted in ARPU worsening aggressively. The other ground for the autumn of ARPU was considered to be planetary tendency and fiscal crisis which became hinderance for cellular companies in Pakistan to raise important sum of grosss. Additionally based on the demographics of Pakistan it is non surprising that bulk of endorsers are low income users which chiefly utilize voice services instead than informations services which finally leads into lower ARPU for cellular companies. The tendency of falling ARPU during 2004-2009 has been demonstrated in figure 5.9 shown below.

It can be clearly comprehended from figure 5.9 that the ARPU has been invariably falling in Pakistan cellular industry. Based on the research carried by PTA it was revealed that despite the fact that cellular companies have to a great extent invested on their webs supplying high quality voice services, nevertheless merely concentrating on voice services is non sufficient for raising considerable grosss. PTA suggested that presently SMS and MMS are the lone information services provided by cellular companies in Pakistan and hence in order to better ARPU, cellular companies should concentrate on presenting more informations services like nomadic banking, picture conferencing and cultural based services like recitation of Quran. The dissolution of ARPU in 2G market of Pakistan as of 2009 has been demonstrated below in figure 5.10.

It can be comprehended from the figure above that cellular companies in Pakistan clearly lacked in footings of raising ARPU by agencies of supplying informations services. However they have realized that they need to hike informations services in order to heighten ARPU. As a effect the cellular companies in Pakistan are looking frontward towards the commercialisation of 3G which will let endorsers to use broad scope of informations services at progress velocity and therefore ensuing in higher ARPU. The figure 5.11 shown below illustrated the ARPU in the 2G market during 2007- 2009.

Finally by sing the fact that commercialisation of 3G will present broad scope of value added information services and taking into history the norm of Pakistan cellular industry ‘s ARPU during the period of 2004-2009, it has been estimated that the entire ARPU for the 3G market will be about $ 5.3.

5.4.4 RISK FREE RATE, DISCOUNT RATE and DRIFT Ratess:

I have considered the hazard free rate to be 11.88 % which is the 3 month T-bill rate in Pakistan as of 2010. Furthermore price reduction rate is considered to be 13 % which is the official involvement rate by province bank of Pakistan as of June 2010. The hazard free rate was taken into history in both the theoretical accounts where as price reduction rate was specially used in theoretical account 2 “ RIVALRY UNDER NET REVENUE & A ; INVESTMENT COST UNCERTAINTY ” in order to calculate the present value of watercourse of future hard currency flows. Additionally, the impetus rate were required every bit good for theoretical account 2 that refers to the mean addition per unit of clip in a stochastic procedure which is considered as 0.03 or 3 % for both Value impetus and Investment cost impetus.

5.4.5 Value/Return Volatility:

Value volatility or in other words Return volatility is an indispensable variable which is required for analysis of my both pre-emption theoretical accounts. Compared to fiscal options it is hard to calculate the volatility of existent R & A ; D options. Due to the fact that even trade goods like oil, Ag and gold are traded on exchange, it is easier to cipher their value volatility or in other words volatility of their return by agencies of their stock monetary values. However with regard to my research, the traditional attack of calculating volatility by agencies of historic stock monetary values was non possible and hence an alternate method is used. In order to calculate value volatility or in other words the gross volatility without handiness of stock monetary values, I have used the ARPU figures for cellular industry of Pakistan during the period of 2004-2009 which are demonstrated in figure 5.12 shown below.

Furthermore I have computed the Natural log of ARPU which was necessary measure in order to cipher the discrepancy and standard divergence of ARPU. Due to the fact that volatility is one of the most critical variables in existent options, hence standard divergence of ARPU which seems to be a realistic representation is considered as value volatility for the 3G market. Based on my analysis, the annualized standard divergence of ARPU turns out to be about 0.223 or 22.3 % whereas the annualized discrepancy turns out to be about 0.050 or 5 % .

5.4.6 QUANTITY VOLATILITY:

The analysis of my first preemption theoretical account “ RIVALRY UNDER PRICE AND QUANTITY UNCERTAINITY ” required a step of measure volatility. In order to cipher the measure volatility or in other words the volatility of endorsers with regard to my research, the first measure was geting the net add-on in cellular endorsers of Pakistan yearly during the period of 2006 and 2010. The undermentioned information was obtained from assorted PTA one-year studies and it is demonstrated below in figure 5.13.

It can be grasped from the figure above that I have besides computed the norm of extra cellular endorser that joined 2G market during 2006-2010. Furthermore the following measure towards the computation of measure volatility required the calculation of Natural Log of mean figure of endorsers in order to obtain precise annualized volatility which has been illustrated in figure 5.14 shown below.

Finally by agencies of utilizing Natural Log of subscriber, I managed to calculate the annualized standard divergence of endorsers which turned out to be about 0.693 or 69.3 % , where as the annualized discrepancy of endorsers ( measure ) was estimated to be about 0.481 or 48.1 % .

5.4.7 INVESTMENT Cost VOLATILITY:

Investing cost volatility is an indispensable variable for the analysis of my 2nd preemption theoretical account “ RIVALRY UNDER NET REVENUE & A ; INVESTMENT COST UNCERTAINTY ” . In Paxson and Pinto ( 2004 ) “ Third GENERATION MOBILE GAMES – An application of existent competition games ” , the standard divergence of day-to-day returns of Ericsson and Nokia were taken into history in order to calculate investing volatility. The ground being that the standard divergence of returns of these companies was an appropriate placeholder for investing volatility since these companies were the providers of equipment and therefore their concern was associated with investing cost.

However the scenario is different with regard to my research and the ground being that unlike UK and USA, in Pakistan the cellular companies chiefly provide cellular services that include voice and information services though they do non offer one-year contracts to clients that include nomadic French telephone which is the typical instance in UK and USA. Generally in Pakistan cellular companies like Mobilink, Ufone and Telenor provide cellular services whereas companies like Mobile Zone and Advance Telecom are responsible for selling and administering nomadic French telephones throughout the state. Knowing the fact that unlike cellular companies in UK and USA, the cellular companies in Pakistan that is Mobilink, Telenor and UFONE do non sell nomadic French telephone, hence in order to calculate investing cost volatility I have taken into history investings made in Pakistan cellular industry during 2005-2009 which is an appropriate step for the calculation of investing cost volatility with regard to Pakistan cellular industry. The investings made in Pakistan cellular industry during 2005-2010 has been demonstrated in figure 5.15 shown below.

Furthermore I have computed the Natural Log of entire investings made in 2G Industry which is the following measure towards the computation of investing cost volatility. The figures for Natural Log of industry investings are shown below.

Finally utilizing the figures above, I managed to calculate the annualized standard divergence of investing cost which turned out to be about 0.537 or 53.7 % whereas the annualized discrepancy was estimated to be 0.289 or 28.9 % .

5.4.8 Net income per Unit ( P ) and Quantity sold by the follower ( Q ) :

The net income per unit ( P ) every bit good as measure sold by the follower ( Q ) were required as input with regard to my first theoretical account which is “ RIVALRY UNDER NET REVENUE & A ; INVESTMENT COST UNCERTAINTY ” .

In order to obtain a realistic step for net income per unit with regard to 3G market, an estimation of Average Revenue per Usage ( ARPU ) in the 3G market was taken into consideration. As far the computation of ARPU for 3G market is concerned it is already explained in item in subdivision 5.4.3. Basically the ARPU for 3G was computed by agencies of sing the norm of Pakistan cellular industry ‘s ARPU during the period of 2004-2009. It has been estimated that the entire ARPU for the 3G market will be about $ 5.3 which has been considered as net income per unit in theoretical account 1.

Furthermore in order to account for measure sold by follower, I have estimated the figure of endorsers that the follower will possess in the first twelvemonth followed by commercialisation of 3G. The computation has been explained in item in subdivision 5.4.2. By and large on the footing of anticipation made by PTA that about 25 % of cellular endorsers in Pakistan will switch from their 2G web to revolutionary 3G ( UMTS ) engineering followed by its launched, I have managed to calculate entire expected endorsers possessed by the 3G market of Pakistan from 2011-2020. Based on my analysis, it can be comprehended that if 3G is commercialized in 2011 so about 24.5 million clients ( 25 % of bing 2G clients ) will fall in 3G in its opening twelvemonth switching from their 2G web. Additionally as shown above in figure 5.7 ( subdivision 5.4.2 ) , about 3.46 million clients will come in the 3G market yearly. Finally the figures obtained for entire expected endorsers in 3G market are divided between leader ( 75 % ) and follower ( 25 % ) based on their 3G market portion which has been demonstrated in figure 5.8 shown below.

It can be comprehended from the figure above that in the first twelvemonth of commercialisation of 3G ( 2011 ) there would be about 24.5 million clients. Therefore harmonizing to the several 3G market portion, leader will obtain about 28.375 million clients whereas follower will pull off to obtain around 6.125 million clients which have been used as input for theoretical account 1.

Furthermore the theoretical account besides required the correlativity between P and Q as an Input. However based on past tendencies and historical information, it has been found that there is no correlativity between these two variables. The ground being that in this peculiar scenario the construct of Economies of Scale ( EOS ) is invalid. By and large with regard to EOS, net income per unit is reduced when larger measures are sold but in my survey ARPU is non dependent on figure of endorsers due to the fact that each client is charge separately for the service provided.

5.4.9 CORRELATION BETWEEN RETURNS AND INVESTMENTS:

In order to cipher the correlativity coefficient between Returns ( ARPU ) and investing cost I have taken into history the information provided by PTA for ARPU of Pakistan cellular industry during 2005-2009 along with Investings made in Pakistan cellular industry during the period of 2005-2009. Furthermore I have computed the Natural log of both ARPU and Investments in order to obtain precise bing correlativity between them. Based on my analysis, the correlativity between these two variables turns out to be -0.703 which has been demonstrated in figures shown below.

5.4.10 THE PRESENT VALUE OF CASHFLOW:

The 2nd preemption theoretical account “ ” RIVALRY UNDER NET REVENUE & A ; INVESTMENT COST UNCERTAINTY ” that I have taken into history requires the present value of future watercourses of hard currency flow as an input variable. Based on the theory provided by Majd and Pindyck ( 1987 ) , it emphasizes that in order to obtain appropriate present values, the hereafter hard currency flow should be discounted at appropriate hazard adjusted price reduction rate which I have taken into consideration in my farther computation.

The first measure towards the computation of Present value requires the estimation of ARPU in 3G market along with prognosis of endorsers in 3G market ( Table 5.8 ) which has been already demonstrated above. Furthermore utilizing these figures, I have forecasted the expected 3G ( UMTS ) grosss during 2011-2020 which have been demonstrated in figure 5.18 shown below.

It can besides been grasped from the figure that I have divided the 3G grosss within the leader and follower based on their 3G market portion. . Additionally by agencies of utilizing the present value expression that is where “ ” is the hard currency flow, “ T ” is clip in old ages and “ I ” refers to dismiss rate which is 13 % ( the official involvement rate by province bank of Pakistan as of June 2010 ) , I have managed to obtain the present values of future hard currency flow that are expected to be received during 2011-2020. The figures for present values of hard currency flows are demonstrated below in figure 5.19.

Finally I have computed the amount of PV of all hard currency flows that are expected during 2011-2020, which turn out to be $ 1190.385 Million. Therefore the amount of present value of all hard currency flows that are expected to be received has been taken as an input for theoretical account 2.

5.4.11 FISRT MOVER ( PRE-EMPTIVE ) ADVANTAGE MULTIPLICATIVE FACTOR:

Due to the fact that both the theoretical account which I have taken into history for my research are within the category of preemption theoretical accounts, they have a default premise that leader will ever hold an advantage over the follower which is known as first mover advantages. Before the follower enters the market, the leader tends to possess a pre=emptive by agencies of having Rm* , where m* refers to value which is larger than 1 and when multiplied by Q consequences in figure of units sold by leader when it is entirely in the market. As we know that leader ‘s 3G market portion is 75 % ( 3/4 ) , m* turns out to be 4.

Additionally sing the fact that in the undermentioned theoretical accounts the preemptive advantage tends to be lasting, hence even after follower enters the market, leader tends to posses preemptive advantage m which refers to value which is larger than 1 and when multiplied by Q consequences in figure of units sold by leader when follower enters the market. As we know that leader ‘s 3G market portion is 75 % ( 3/4 ) , m turns out to be 3.

5.4.12 CAPEX / INVESTMENT COSTS:

The surveies from past show that when companies are upgrading from 2G to 3G ( UMTS ) engineering there are three imperative constituents of capital outgos or investing costs that are required to be taken into history. These investing cost includes the licence cost for 3G spectrum, the cost of upgrading substructure and last but non the least investing with regard to buying 3G nomadic French telephones. As far the former two CAPEX ( 3G licence and substructure ) are concerned they have been taken into consideration based on figures provided by PTA. However, as mentioned earlier on that unlike UK and USA, cellular companies in Pakistan are non responsible for selling nomadic French telephones and nomadic French telephones are by and large sold and distributed by traders such as Mobile Zone and Advance Telecom throughout the state, the investing cost sing nomadic French telephones were non taken into history due to irrelevance.

Based on the figures provided by PTA it was estimated that 3G licence fees will be about $ 1 billion whereas the investing cost with regard to setup for 3G ( UMTS ) substructure that involves upgrading old base Stationss ( apparatus for 2G substructure ) and sender are estimated to be about $ 200 million.

With respects to investing cost for my first theoretical account, I have spread the 3G licence fees within a clip frame of 10 old ages as it would be hard for telecommunication companies in Pakistan to pay full licence fees at one time due to the fiscal load. As a effect the authorities will supply them with the option to pay in stages within 10 old ages clip frame. Payment in stages with regard to telecommunication industry can besides be seen in past as authorities of Pakistan sold 26 % portions of UFONE to Etisalat in 2006 for $ 2.6 billion nevertheless Etisalat still has to pay about $ 1billion. However the CAPEX of upgrading the substructure would be required to put ab initio ( $ 200 million ) . Therefore with regard to pattern 1 the investing cost incurred in initial twelvemonth would be $ 300 million which has been demonstrated in figure 5.20 shown below.

However, as oppose to the first theoretical account where I have analysed the commercialisation of 3G ( UMTS ) by sing Investment cost as $ 300 million, in the 2nd theoretical account I have applied a different attack with regard to investing cost for fluctuation in the scenario. Therefore, in order to analyse the fortunes from a different position, in 2nd theoretical account I have assumed that the full investing cost for 3G is incurred ab initio which means that $ 1 billion ( 3G licence fee ) plus $ 200 Million ( CAPEX for upgrading substructure ) that is $ 1.2 billion are considered as Investing cost in 2nd theoretical account.