Determinants of mobile penetration in Asia-a panel data study

Indian Journal of Economics and Business, Dec, 2007 by Sujoy Chakravarty

Abstract

This study uses the International Telecommunications Union (ITU) Database to study the diffusion of mobile telephony in Asia between 1993 and 2004 and analyses a 29 country 12 year panel data set in order to study the determinants of mobile penetration. The results indicate that entry and competition have played a major role in increasing the diffusion of cell phones. Furthermore, the presence of an independent telecommunication regulator and the capacity of fixed line telephone exchanges have also positively affected the diffusion of mobile services by increasing the size of the telecommunications network.

JEL Classification: L11, L96, C23.

Keywords: Competition, Telecommunication, Diffusion.

I. INTRODUCTION

The market for cellular mobile technologies in Asia has seen explosive growth in the nineties and the first few years of the millennium. This study documents this growth, explores the organization and firm behaviour in various countries and puts forward and tests certain hypotheses regarding the increase of the subscriber base for cellular technologies using a variety of econometric techniques.

The main reasons for the growth of mobile telephony in Asia are the opening up of markets to competition, introduction of digital cellular technologies and large untapped telecommunications demand with limited fixed line penetration. In the early nineties, the emergence of mobile operators as de facto universal service providers (as they are in many countries in Asia) was unexpected. It was but a specialty service targeted at a small number of wealthy customers. However as penetration increased, it became clear that there was a strong demand for mobile telephony from all sectors of the population. The introduction of second generation networks reduced costs and a combination of economies of scale (both from the supply as well as from the demand side) drastically lowered the cost of handsets. As a result, mobile telephony rather than being a high cost premium service became for many customers a relatively low cost method of obtaining a basic telephone connection. Much of the cost advantage of mobile telephony networks stems from the fact that the access (radio frequency) network is shared between subscribers. Once this access network is in place, the marginal cost of adding another subscriber is very low, and is primarily the cost of a handset. This contrasts with traditional fixed wire line telephony, where the incremental cost of an additional subscription is significant and often involves adding copper backbone to the existing network. The relatively low start-up and marginal costs have thus allowed many less developed countries to adopt digital cellular networks without having any history of cellular technology, and thus leapfrog over generations of technologies. (1) Mobile operators in Asia have translated this low cost advantage into affordable pre-paid packages (the main growth of mobile telephony has been in the area of prepaid GSM plans) which allow low income users a basic connection to the network. Pre-payment allows operators to lower operational costs and reduce credit risks and also gives subscribers far more control over their expenditure than traditional post paid solutions, thus increasing their attractiveness to low income users.

An important feature of Asian cellular markets that does not find a strong parallel in America and the EU is that existence of more than one competing but compatible wireless standard. Whereas the dominant cellular standard is still GSM, CDMA networks may be found coexisting with GSM in numerous markets in India, China, Indonesia, Malaysia, Hong Kong, Korea and Japan. Furthermore, the leapfrogging nature of cellular technology has also sped up the adoption of third generation (3G) mobile technology, with Japan being the first country in the world to launch a 3G network in 2001. Thailand, Korea, Hong Kong and Singapore are among other countries that have licensed 3G cellular networks for service provision in the early part of the millennium.

II. COMPETITION POLICY IN THE TELECOMMUNICATIONS SECTOR

Substantial empirical evidence reveals that privatization or deregulation in the telecommunications sector can lead to performance improvements. Megginson, et al. (1994) compare pre- and post-privatization financial and operating performance of 61 companies (in 32 industries, including telecommunications) from 18 countries. They find increased sales, profits, investments, and employment following privatization. The early empirical work in this area compares average performance indicators across firms or countries before and after deregulatory reforms. Most of that evidence is from Latin America, a fact that is not surprising, given the region's relatively early start in reforms. In general, these studies find positive effects of reforms (e.g., Kikeri, et al. 1992; Wellenius and Stern, 1992).

Though privatization has yielded significant benefits, allowing entry and competition in the sector tends to yield far greater benefits (Wallsten, 2002). A monopoly provider, whether state-owned or private, experiences fewer incentives to improve service and lower prices than do firms that operate in a more competitive environment. As Ambrose, et al. (1990) argue, "simply moving a monopoly from the public to the private sphere will not result in competitive behavior." This wisdom is reflected in results obtained from a broad class of studies, which finds that competition leads to the biggest improvements in the sector (Fink, et al. 2002; Li and Xu 2001; McNary 2001; Petrazzini 1996; Ros 1999; Wallsten 2001).