The telecommunication industry is considered a vital part of our everyday lives. Although it only represents about 2. 4 percen, the services it provides are important to other sectors in the economy. One of the most debatable topics in economics is the Telecommunication Act of 1996, and according to the Federal Communication Commission, “It is the first major overhaul of telecommunications law in almost 62 years. The goal of this new law is to let anyone enter any communications business — to let any communications business to compete in any market against any other”
In the old days, the telecom industry was viewed as an example of “natural monopoly. ” This was due to increasing returns to scale, where the telecom services could only be provided efficiently by a monopoly provider. In the U. S. , this pattern started many years ago when the American Bell Telephone purchased the Western Electric Company of Chicago. Alexander Graham Bell patented the telephone in 1876 and formed Bell Telephone. AT&T, which is today one of the leading company in the wireless telecommunication industry, was formed in 1885 to connect the Bell Companies.
In 1913, AT&T agreed to become a regulated monopoly. Although their monopoly was allowed, they were required to connect competing local companies and let the Federal Communication Commission to approve their prices and policies. In January of 1982, AT&T agreed to break itself into a national long-distance carrier and seven “baby bells” in order to end the long-running antitrust suit by the U. S. Department of Justice. The break occurred in 1984. At the time of the breakup of AT&T, almost all telephone companies were monopolies and the increased growth toward competition has been a steady trend.
Mobiles phone have grown rapidly since their introduction, and in the majority of nations there is competitio. Through the years, there have been many mergers and acquisitions in the industry that decreased the number of companies in the sector. As of 2008, the major four companies in the U. S. include Verizon, AT&T, Sprint, and T-Mobile. Today, this section of the telecommunication industry falls under the oligopoly market. The characteristics of an oligopoly consist of: (1) a market with a few large firms, (2) high barriers to entry, (3) oligopolistic firms may produce either differentiated or homogenous products, and (4) firms have control over price, but mutual interdependence.
BEHAVIORS OF THE MARKET MODEL Since there are few sellers in the oligopolistic market, the outcomes that follows from the decision of one firm, may affect the other firm. •Due to a few sellers, a key feature of oligopoly is the tension between cooperation and self-interest. •The characteristics of an oligopoly is the cooperation between firms acting as a monopolist and producing a small amount of product and charging a price above marginal cost.
•Although oligopolists would like to form cartels and obtain monopoly profits, often that is not possible. Antitrust laws prohibit explicit agreements among oligopolists. •A Nash equilibrium is where each player in the market has selected their best option given what the other players will do. •When firms in an oligopoly individually determine the amount to be produced to maximize their profits, they produce a quantity of goods greater than that produced by monopolists but less than that produced by competition. •The oligopoly price is less than the monopoly price but greater than the competitive price.
•Game Theory: oSince in an oligopoly the number of sellers is small, each firm must act strategically. oEach firm knows that its profits not only depend on how much they produce, but also on what other firms produce. TRANSACTION COSTS The telecommunication industry in the U. S. is a sector that has been going through significant changes. These changes include the new services that are available at reasonable prices due to the rapid technological changes in key inputs of telecommunications, computer-based services, and in complementary goods.
The cost reductions have made access to the Internet affordable to the general public. However, in the wireless market, while more people are able to get new devices, companies may try to cap their data usage. For example, at Verizon, they changed their data plans from unlimited usage to capped plans. This is “partially due to rising bandwidth costs from data-hungry subscribe, making the switch to tiered plans inevitable. Network expansion is another area of the wireless sector that can lead to transactions costs.
A good example is Sprint plans to expand its network from the WiMax to the LTE, which is expected to take place in 2013. All main competitors already are into the LTE network. This switch “is expected to cost Sprint $4 and $5 billion, though the investment could deliver over twice that in economic benefit to the company, if this bet pays off better than the money it put on WiMax did. ” Through this example we can see how there are most than just the cost of expanding the network itself, but anything else that is involved until its completion.
Nowadays the wireless companies are partnering with technology companies such as Google, Apple, and HTC, among others, to develop and improve current devices and services, in order to provide its customers a better product. These companies also offer a high end product at a lower initial cost to the customer, if the same chooses to enter into a contract. In order words, to offer a good-value product to the customer, the company covers many “hidden” costs.
The behavior associated with these transactions can result in small companies trying to enter the market to compete with large companies. To avoid these companies to enter the market or to maintain market share, larger companies needs to cope with these transaction costs. By offering bundle products, it can help the company to raise profits a lower cost to them. Also, these companies should consider changing manufactures, which offer the same quality product at lower cost to them. In addition, by offer good bundle plans, customer may feel that they are getting a much better deal.
The happier the customer, lesser the complaint RELEVANT DATA Looking at the total telecommunication industry revenue, although there has been a decrease in total revenues of mobile service in the carrier’s carrier revenues from 2000 to 2010, there have been an increase in the total revenue for the industry in the mobile service. Managers can use this information to predict how to approach future endeavor. They can see and compare the fluctuations that happened through these years and budget accordingly.
MAJOR FACTORS THAT AFFECT COMPETITIVENESS
Factors that affect competitiveness in the telecommunication/wireless industry include but are not limited to the following: •Cell phone cost: Customers wants better services and products at a lower cost. •Bundle functions into just one cell phone: For example E-mail, text messaging, internet •New technology improvement: For example camera phones •Better landline services Measures that could show how the telecommunication industry is evolving, includes the DuPoint Model, Porter’s Five Forces of Competition, and Profitability Ratios.
•The DuPoint Model: it is an expression that breaks the Return on Equity (ROE) into three parts: Profitability, Activity and ROCE (Return on Capital Employed). It separates finance from operations. This model enables the analyst to understand the source of superior (or inferior) return by comparison in similar industries (or between industries). •Porter’s Five Forces of Competition: It provides a framework that models an industry as being influenced by five forces. Managers can use this model to better understand the industry context in which the firm operates.
The five forces includes (Porter Five's Forces): oThe Threat of New Entry: The cell phone industry is highly concentrated. Only about four firms control a great majority of the current market. New entrance to this market is low since start-up costs for service provider is high. o The Power of Suppliers: Suppliers tend to be in the low bargaining position. oThe Power of Buyers: Many customers do not enjoy the early termination fee that many companies offer. They feel locked up to the company, only because they don’t want or cannot afford to pay about $150 to exit the contract.
Buyers have little power bargaining in this aspect. oProduct/Service Substitutes: Operators are upgrading their networks to advance wireless services and meet customer expectation so that they do not switch to substitute products/services. oThe Intensity of Rivalry among Competitors: Many companies have merged. These mergers lead to concentrated pricing power in the hands of fewer companies. •Profitability Ratios: These ratios help company to measure their bottom line. It helps to make future decisions about their business.