CHAPTER II ORIGIN AND GROWTH OF CELL PHONE INDUSTRY

CHAPTER II ORIGIN AND GROWTH OF CELL PHONE INDUSTRY 2.1 INTRODUCTION The basic concept of cell phones began in 1947, when researchers looked at mobile car phones and realized that by using small cells (range of service area) with frequency reuse, they could increase the traffic capacity of mobile phones substantially. However, at that time, the technology to do so was not available. Anything to do with broadcasting and sending a radio or television message over the airwaves comes under the control of Federal Communications Commission (FCC) Regulation of the United States. A cell phone is a type of twoway radio. In 1947, AT&T (American Telephone & Telegraph) proposed that the FCC allocates a large number of radio-spectrum frequencies so that widespread mobile telephone service would become feasible and AT&T would have an incentive to research the new technology. The FCC decided to limit the number of frequencies available in 1947, the limits made only twenty-three phone conversations possible simultaneously in the same service area. AT&T and Bell Laboratories proposed a cell phone system to the FCC of many small, low-powered, broadcast towers, each covering a 'cell' a few miles in radius and collectively covering a larger area. Each tower would use only a few of the total frequencies allocated to the system. As the phones travel across the area, calls would be passed from tower to tower. (Rastogi 2003)

2.2 HISTORY OF CELL PHONE Martin Cooper, a former general manager for the systems division at Motorola, is considered the inventor of the first modern portable handset. Bell Laboratories introduced the idea of cell phone communications in 1947 with the police car technology. However, Motorola was the first to incorporate the technology into a portable device that was designed for use outside an automobile. By 1977, AT&T and Bell Laboratories had constructed a prototype cellular system. A year later, public trials of the new system were started in Chicago with over 2000 trial customers. In 1979, in a separate venture, the first commercial cell phone system began its operation in Tokyo. In 1981, Motorola and American Radio Telephone started a second U.S. cell phone radio-telephone system test in the Washington/Baltimore area. By 1982, the slow-moving FCC finally authorized commercial cellular service for USA. A year later, the first American commercial analog cell phone service or AMPS (Advanced Mobile Phone Service) was made available in Chicago by Ameritech. Despite the incredible demand, it took 37 years for cell phone services to become commercially available in the United States. Consumer demand quickly outstripped the 1982 system standards. By 1987, cell phone subscribers exceeded one million and the airways were crowded. (COAI 2005) 2.3 CELL PHONE SUBSCRIBERS 15 TOP RANKING COUNTRIES The worldwide number of cell phone subscribers surpassed 2 billions in 2005 up from 11 millions in 1990 and 750 million in 2000. China led the cell phone

subscribers list with nearly 400 millions as at the end of 2005 nearly twice as many as in the USA. Russia has seen tremendous growth in the last few years and is projected to be running in third place by the year-end 2005. Rapid expansion of cell phones in India will see a future climb in the rankings to a possible number two in 2010. Worldwide cell phone subscribers are estimated to reach 3.2 billions by the end of the year 2010. Table 2.1 Top 15 Countries with the Number of Cell Phone Subscribers Year 2005 Cell phone subscribers (in millions) Share (Per cent) China 398 19.3 USA 202 9.9 Russia 115 5.6 Japan 95 4.6 Brazil 86 4.1 India 79 3.8 Germany 73 3.5 Italy 59 2.9 UK 58 2.8 France 47 2.3 Mexico 46 2.2 Turkey 40 1.9 Spain 39 1.9 South Korea 38 1.8 Indonesia 38 1.8 Top 15 countries 1,414 68.5 Worldwide Total 2,065 100 Source: Business Wire, Sep 26 2005

The rankings will change considerably by 2010 and will mainly consist of the large populous countries and they will surpass the smaller European countries that were early mobile phone adopters. The European countries will continue to lead cell phone subscribers per capita along with a few Asian countries such as Hong Kong and Taiwan. 2.4 WORLD WIDE MARKET SHARE OF MOBILE PHONES World wide market share of various mobile companies has been analysed by Gartner. Gartner is the world s leading information technology research and advisory company. The results of the analysis are presented in the table below. Table 2.2 WORLD WIDE MARKET SHARE OF CELL PHONES BETWEEN 2004 AND 2005 Company 2004 ( in thousands) Year Per cent 2005 ( in thousands) Per cent Increase per cent (2004-05) Nokia 46,368 29.6 60,794 31.9 2.3 Motorola 24,626 15.7 34,018 17.8 2.2 Samsung 18,981 12.1 24,479 12.8 0.7 LG 9,495 6.1 12,374 6.5 0.4 Sony Ericson 10,354 6.6 11,843 6.2-0.4 Seimens 10,823 6.9 8,895 4.7-2.2 Others 35,997 23.1 38,096 20 3.0 Total 1,56,643 100 190,499 100 Source: Gartner

From the table, it is inferred that Nokia had the highest market share of 29.6 per cent world wide during the year 2004 and Motorola 15.7 per cent. During 2005, Nokia expanded its market share to 31.9 per cent world wide, and Motorola s share increased to 17.8 per cent. The companies expect a greater increase in the near future in their market share. 2.5 HISTORY OF CELL PHONES IN INDIA A report of Cellular Operators Authority of India regarding the entry of cell phones into India is listed below. This shows the improvement in cell phone introduction over the years. 1992 Telecommunication sector in India was liberalized to bridge the gap through government spending and to provide additional resources for the nation s telecom target. Private sector was allowed participation. 1993 The telecom industry got an annual foreign investment Rs. 20.6 millions. 1994 License for providing cell phone services was granted by the government of India for the metropolitan cities of Delhi, Mumbai, Kolkata and Chennai. Cell phone service became duopoly (i.e. Not more than two cell phone operators could be licensed in each telecom circle) under a fixed license fee regime for 10 years. 1995 19 more telecom circles got mobile licences 1995 - (August) Kolkata became the first metro with a cell phone network.

1997- TRAI was set up. 1998 Annual foreign investment in telecom stood at Rs. 17,756.4 millions. 1999- FDI inflow into telecom sector fell by almost 90 per cent to Rs. 2126.7 millions. 1999 Tariff rebalancing exercise got initiated. 1999 (March) - National Telecom Policy was announced. 2000 (June) - FDI inflow dropped further down to Rs. 918 millions. 2000 (Jan) - Amendment of TRAI Act. Source: Cellular Operators Authority of India (COAI) 2.6 COMPARISON OF CELL PHONE AND FIXED TELEPHONE SUBSCRIBER BASE IN INDIA India s subscriber base for telephone services continued to maintain its general growth. There was an increase in the growth rate of both mobile as well as fixed telephone subscribers. During April 2005, 1.44 millions mobile subscribers were added raising the total number of mobile subscribers to around 53.65 millions.

Table 2.3 Comparison of Subscriber additions during April 2004 2005 Subscribers in Millions 2004 2005 Category March April Additions during the month March April Additions during the month Mobile 33.60 34.97 1.37 52.21 53.65 1.44 Fixed 42.58 42.98 0.40 45.91 46.50 0.59 Total Subscribers 76.18 77.95 1.77 98.12 100.15 2.03 Source: TRAI The table shows the comparison of the subscriber additions to mobile and fixed phones during the month of April for the years 2004-2005. At the end of April 2005, total fixed lines crossed 46 millions and mobiles reached around 54 millions making a total of telephone subscribers in the country to cross 100 millions. Tele density of the country had reached 9.26 per cent as compared to 9.08 per cent at the end of March, 2005. 2.7 GROWTH OF MOBILE SUBSCRIBERS The number of wireless subscribers grew to 97 per cent from 75.94 millions at the end of December 2005 to 149.5 million subscribers at the end of December 2006 according to TRAI in Delhi. The Indian government is targeting 500 million telephones both fixed and wireless by 2010. Based on current trends, most of the

demands for new connections are likely to come for mobile services. The large growth in mobile subscribers in India has attracted foreign companies to invest in mobile services in the country. A recent relaxation of government rules allows foreign companies to hold up to 74 per cent stake in mobile services operations. Multinational wireless equipment makers like Nokia, Sony Ericson and Motorola have set up manufacturing facilities in India. A large government owned service provider, BSNL, has started insisting that its suppliers manufacture a part of their products locally. The Indian government is keen on promoting local manufacturing in India as it finds that the business process outsourcing and software outsourcing boom in the country has not brought benefits to semi skilled workers. (Newswire 2005) India became third largest mobile population in the world by 2007 as middle classes went mobile. Data from Wireless World Forum s Indian Mobile Market 2006 Statistical Hand Book reveals that mobile ownership had crossed 100 million in 2007 as the largest middle class in the world took up ownership. With 124.6 million forecast mobile owners in 2007, India ranked third in the world behind only China and USA The number of cell phone subscribers has been growing from year to year and it is making explosive growth. The table describes this phenomenon.

Table 2.4 Cell Phone Subscribers in India Year Number of Subscribers 1997 7,94,232 1998 10,70603 1999 11,99,578 2000 31,07,449 2001 35,77,095 2002 64,30,814 2003 1,26,87,637 2004 2,61,54,405 2005 4,10,25,940 2006 6,91,93,321 2007 12,14,31,166 2008 22,18,36,758 Source: Cellular Operators Authority of India (COAI) Starting with just 7, 94,232 subscribers in the year 1997, the cell phone has shown a marvelous growth and during the year 2008 the subscribers growth was about 22,18,36,758. The reason for this increase is due to the high level of cell phone usage among customers and also its importance has been made known to all. 2.8 MOBILE SUBSCRIBER STATISTICS IN INDIA CIRCLE-WISE Telecom circles have been divided by the Telecommunications Department based on the subscribers available in each circle. The circle-wise mobile subscribers statistics in India is furnished in Table 2.5.

Table 2.5 Circle-wise Subscribers in India during 2004 Circle-wise Subscribers Circle Mobile subscriber base Gujarat 2584966 Karnataka 2308123 Maharashtra 2896007 Tamil Nadu 2044819 Haryana 675061 Kerala 1595985 Madhya Pradesh 1053848 Punjab 2433335 Rajasthan 864895 U.P. (E) 1109981 U.P. (W) 1218547 West Bengal 333122 Andaman & Nicobar 712 Assam 89234 Bihar 631809 Himachal Pradesh 170626 Jammu & Kashmir 42285 North East 30631 Orissa 347577 Calcutta 1235074 Chennai 1440513 Delhi 4236138 Mumbai 3637687 All India 33700599 Source: Kathuria (2004)

Delhi circle has the highest number of subscribers nearing 12.6 per cent, followed by Mumbai with 10.8 per cent and Maharashtra with 8.6 per cent, Tamil Nadu constitutes 6.1 per cent of total mobile phone subscribers in India. 2.9 NUMBER OF CIRCLES AND SUBSCRIBERS OF VARIOUS SERVICE PROVIDERS DURING THE YEAR 2005 Various service providers such as Aircel, Bharti Airtel, BSNL, Hutch and others in India and the number of circles available for them along with the number of subscribers on land line and mobile are presented below. Table 2.6 Number of Circles and Subscribers of Various Service Providers During the Year 2005 Service Provider Number of Circles Number of subscribers (Fixed and Mobile) Aircel 2 1.7 million Bharti Televentures 23 11.4 million BPL Mobile 4 2 million BSNL 21 43.8 million HFCL Infotel 1(Punjab) 2,25,000 Hutchison Essar 13 7.6 million Idea Cellular 8 5.15 million MTNL 2 5.1 million Reliance Infocomm 21 10.6 million Spice Telecom 2 1.4 million Tata Teleservices 20 4 million Source: Business Today, June 2005

From the table, it is seen that BSNL has 43.8 million subscribers at the national level during the year 2005, followed by 11.4 millions for Airtel and 1.7 millions for Aircel. 2.10 GROWTH OF MOBILE SUBSCRIBERS IN TAMIL NADU In Tamil Nadu, the mobile subscribers growth has increased drastically over the years. There are various players in the market using GSM, CDMA technology. Vodafone Essar, Aircel, BSNL, and Airtel use GSM technology whereas Tata Indicom and Reliance use CDMA technology. GSM technology has easy accessibility. The following table explains the subscribers to GSM technology using various service providers. Table 2.7 Growth of Cell Phone Subscribers in Tamil Nadu Operators 2001 2002 2003 2004 2005 2006 2007 March 2008 Vodafone Essar 1397631 1685843 2044523 3908279 5158159 7440040 19663254 9102720 Aircel 1541921 2190665 3605695 10286233 16162232 23986849 42652655 14608396 BSNL Nil 310038 3099552 5979016 11447947 19983331 25014874 7091948 Bharti Airtel Source: COAI Nil 59193 1098948 3267270 5610398 14383439 30944341 11483001 The table describes that the growth of service providers has been increasing from 2001 to 2008. As far as Tamil Nadu is concerned, Aircel holds the highest number of subscribers closely followed by Airtel and Vodafone.

2.11 TARIFF WARS The healthy growth in mobile subscriber additions by BSNL is noteworthy, as this precedes its move to trigger the second round of the tariff war. When Reliance launched its Independence Day Special plan for its prepaid subscribers at Ps. 0.99 per minute, it may not have bargained for BSNL s stunning response. BSNL not only set its prepaid tariffs 10 per cent lower than Reliance, but also opened another front, by slashing its postpaid tariffs. By doing this, it wanted to retain its stature as the most competitive mobile service operator. It was a rude shock to the other GSM operators, who thought that the tariffs suit to counter the effect of BSNL s price cuts. Announcing price cuts to shake up the mobile market was easy for BSNL, but to achieve resurgence in its core mobile operations is not that easy and turns out to be tough. Both Bharti and Hutch continue to pose a challenge to BSNL. Bharti has maintained its lead in GSM market share over BSNL at 25.8 per cent. The recent acquisition of Aircel has given Hutch a higher market share of 23.6 per cent compared to BSNL s 21.5 per cent. BSNL appears to have lost the ground between December 2003 and May 2004, when it added an average of only 1.5 lakh subscribers per month compared to three lakh subscribers added by Bharti. If BSNL is to sustain its pace in mobile additions and enhance its market share, it will have to work on many fronts. BSNL s plain price cuts in pre and postpaid segments may not be sufficient to keep its mobile addition momentum intact. To

defend their subscriber base, private GSM operators have introduced innovation in their tariff plans. For instance, Bharti has offered separate packs for STD and local calls based on the subscriber calling pattern. BPL mobile has introduced a one-second billing pulse for its pre and post paid customers. Reliance has introduced Joy 499 for post-paid customers with charges of 40 paise per minute on intra-circle calls within its network. The ability of BSNL to pick and choose its premium customers and offer them special packages in future will perhaps augment its tariff advantage. The shortage of mobile lines has been BSNL s bugbear. Unless BSNL sticks to its plan of rolling out 15 million lines in phases over the next 18 months, it may fall behind in the decisive race for market share. As Bharti had an operating margin of 35 per cent in its integrated telecom operations, it has comfortable squeeze in expenses and plays the tariff game over a longer period. Even Reliance and Hutch are unlikely to back out in the battle for market share. The ability of BSNL to sustain the competition will be put to a litmus test. As the telecom market matures over the year 2008 or so, the strategic focus, which has shifted to minutes of usage from Average Revenue per User (ARPU), may revert to the latter. The tough battle may also shift towards premium value-added services such as multimedia messaging service or stock market quotes and transactions. Unless BSNL offers a portfolio of such feature-rich services and use these as selling points, it may yield to Reliance, Bharti or Hutch, at least in the metros and lucrative states such as Gujarat, Maharashtra, Andhra Pradesh and Karnataka. (Thiagarajan 2004) A merger of BSNL with Mahanagar Telephone Nigam Limited (MTNL) would also provide an edge for cell phone customers. First, MTNLs

subscriber additions in Mumbai and Delhi are insignificant. This has continued for several months now. On a stand-alone basis, it was never able to compete with the private players. Secondly, Reliance, Bharti and Hutch are likely to turn the heat on the consolidation front. The latest tariff war may usher in the final round of consolidation in the mobile sector sooner than expected. The larger players will be able to leverage on economies of scale as the mobile subscriber base increases, and raise finance for incremental capital expenditure at finer rates. It may not be surprising if the cell phone companies advance their IPO (Initial Public Offering) plans to finance acquisitions and broaden their foot prints.