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13-08-2022

Network Investment as Drivers of Mobile Subscription – A Firm-level Analysis

Authors: Ashutosh Jha, Manisha Chakrabarty, Debashis Saha

Published in: Information Systems Frontiers | Issue 5/2023

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Abstract

Globally, Mobile Network Operators (MNOs) incur considerable capital investments towards the acquisition of spectrum, deployment of mobile networks, and marketing and advertising of their mobile services to potential mobile subscribers. The extant literature, which is mainly conceptual, suggests that such capital investments impact the individual mobile subscriber base of MNOs. However, the extant literature lacks in quantitative explanation of such impacts. We address this lacuna by proposing an empirical framework using a novel panel dataset of the four largest MNOs of India, during the years 2009–2017. We find that capital investments in the spectrum (both contemporaneous and lagged) and mobile networks (lagged) positively impact the mobile subscriber base of MNOs in India. We observe that a “triggering effect,” such as the market rollout of 4G (fourth generation) services, leads to an initial slump in the mobile subscriber base of MNOs, which is counterintuitive and signifies the importance of early network-preparedness on the part of MNOs. We also find that, in the event of the aforementioned market triggers, MNOs’ firm-size and potential to invest in the spectrum, in addition to network-preparedness, are crucial for its survival.

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The International Telecommunications Union (ITU) defines mobile service as “a type of telecommunication service between a mobile device (e.g., smartphones) and the mobile network.” Mobile network refers to the physical network infrastructure, which comprises cell-towers, base transceiver stations (BTSs), and optical fiber cables, etc. Mobile services include both “voice” and “non-voice” service, such as short message service (SMS) and mobile data service, respectively.

MNOs undertake the deployment of mobile networks and the subsequent provisioning of mobile services. MNOs first acquire suitable spectrum bands from the government. This is followed by the deployment of mobile network in the target market. MNOs then roll out their services in the market by allowing users access to their individual mobile networks through subscriber identity modules (SIM), more commonly known as the “SIM-cards.” We must note that, the Mobile Virtual Network Operators (MVNOs), as opposite to MNOs, do not deploy their own infrastructure or acquire radio spectrum licenses from the government, but rather lease it from the MNOs for retailing the mobile services.

Network capacity mainly refers to the traffic (voice plus data) carrying capability of the mobile network.

“Diffusion of innovations is a theory propounded by Everett Rogers that seeks to explain how, why, and at what rate new ideas and technology spread in a given social system” (Rogers, 2010).

Source: https://www.livemint.com/Industry/2We3x084sh5ER83bYbxp7I/Airtel-to-invest-Rs25000-crore-in-201718-to-boost-4G-netwo.html. Date of Access: 28/01/2019.

Source: https://e4mevents.com/pitch-madison-advertising-report-2018/public/img/Pitch_Madison_Adveritisng_Report_2018.pdf. Date of Access: 02/12/2019.

Source: https://economictimes.indiatimes.com/industry/telecom/telecom-news/vodafone-idea-airtel-lose-over-49-lakh-users-in-sep-jio-and-bsnl-gain-trai/articleshow/72131335.cms. Date of Access: 02/12/2019.

Our dataset is quarterly in nature, so one-year lag spans the first four quarters.

In many countries, in addition to MNOs, Mobile Virtual Network Operators (MVNOs) also retail the various mobile services. However, in contrast to MNOs, MVNOs do not own the mobile network or spectrum. MVNOs lease such resources from MNOs on a contractual basis. At the time of writing this paper, MVNOs did not have much presence in India. As such, the retailing activity for mobile services was undertaken by the MNOs themselves.

Wi-max is a 4G standard, which stands for Wireless Interoperability for Microwave access.

Source: https://www.livemint.com/Industry/2We3x084sh5ER83bYbxp7I/Airtel-to-invest-Rs25000-crore-in-201718-to-boost-4G-netwo.html. Date of Access: 28/01/2019.

We do not include the two state-run MNOs in our analysis, since they do not participate in market auctions of spectrum; spectrum is allocated to these state-run MNOs depending on the discretion of the government.

The choice of time span is mainly driven by availability of continuous data on all variables for our study.

For examples, MNOs, such as Videocon, Quadrant, BPL, HFCL, Telenor, Uninor, etc., could not survive for long in the market in India.

We have amortized the capital investments in spectrum figures over various quarters. SUC and LF are already reported quarterly and have been extracted from the Financial Reports of TRAI and DOT. For MNOs, who choose to exercise the deferred payment option after winning the bid, we incorporate both the upfront investment and the deferred payment to arrive at our final spectrum investment figures, which we then amortize over the period of our study (years 2009–2017).

While MNOs in India utilize the services of Managed Service Providers (MSPs) in their operations, however, as mandated by the Department of Telecom (TRAI, 2019), the role of such MSPs in India is only limited to network installation, maintenance, and service provisioning activities, etc. Notably, the ownership of all the network equipment needs to solely reside with the MNOs themselves. MNOs, therefore, need to incur considerable capital investment to procure such network equipment from the vendors, in addition to various operational expenditures incurred through the MSPs.

We consider the one-year lag to be sufficient for observing the impacts due to physical network infrastructures and spectrum, which are supposed to be fully deployed and integrated within that duration (starting from the time the investments were incurred). Notably, deployment of physical network infrastructure on the ground takes a longer time due to hurdles such as “obtaining rights-of-way” with the governments, and various “tower sharing agreements” with third parties, etc. In our analysis, all such network deployment and spectrum integration is expected to complete within a year.

We note that, higher HHI indicates lower degree of market competition, and vice-versa. Therefore, the negative coefficient of the Competition ^T variable means: an increase in HHI (lower degree of market competition) leads to a decrease in the outcome variable (mobile subscriber base of MNOs). Thus, greater market competition (lower HHI) leads to a healthier mobile subscriber base for MNOs, in this particular case.

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Title: Network Investment as Drivers of Mobile Subscription – A Firm-level Analysis
Authors: Ashutosh Jha
Manisha Chakrabarty
Debashis Saha
Publication date: 13-08-2022
Publisher: Springer US
Published in: Information Systems Frontiers / Issue 5/2023
Print ISSN: 1387-3326
Electronic ISSN: 1572-9419
DOI: https://doi.org/10.1007/s10796-022-10322-0

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