Maxis Essay

Introduction Maxis Communications Berhad is a leading mobile phone service provider in Malaysia. Maxis Communications Berhad was established in the early 1990s and commenced mobile telecommunications operation in August 1995. It was then listed under the first board in Kuala Lumpur Stock Exchange (KLSE). At present Maxis Communication Berhad is the biggest telecommunication provider in Malaysia. The company has total subscribers at 13.95 million as of December 2010. Maxis Communications Berhad, through its subsidiary, Maxis Berhad, engages in the provision of mobile, fixed line, and international telecommunications services in Malaysia. It also provides Internet and broadband services; and wireless multimedia related services, as well as owns, maintains, builds, and operates radio facilities and associated switches. The company was founded in 1995 and is based in Kuala Lumpur, Malaysia. Maxis Communications Berhad is a subsidiary of Binariang GSM Sdn Bhd. It uses the dialling prefix identifier of â€Å"012†, â€Å"017† and â€Å"0142†. In 2002, Maxis purchased TimeCell, a rival mobile service provider, from Time dotcom Berhad. Prior to the purchase, Maxis offered phone numbers beginning with 012, and TimeCell 017. Now, subscribers can choose between the two. Maxis provide a variety of mobile communication products and services. They offer prepaid call plans, monthly subscription plans, global roaming, MMS, WAP (over both GSM and GPRS), Residential Fixed Line services, Broadband Internet plans, and as of early 2005, 3G services to both prepaid and post-paid subscription customers. Maxis Broadband make consumer can enjoy internet access in outdoor or indoor. It can go online at speed over 15 times faster than traditional dial up and do more, much more over the internet. Profile Maxis Berhad, with its consolidated subsidiaries (together, ‘Maxis’), is the leading mobile communications service provider in Malaysia. Maxis were granted licences to operate a nationwide GSM900 mobile network, a domestic fixed network and an international gateway in 1993. It commenced its mobile operations in August 1995 and launched its fixed line and international gateway operations in early 1996. Since its establishment, Maxis has been providing a full suite of services on multiple platforms to fulfil the telecommunications needs of individual consumers, SMEs and large corporations in Malaysia. Maxis’ mobile service is offered on a post-paid basis under the Maxis brand and via a prepaid format under the Hotlink brand. The use of these two distinct brands, underpinned by synergistic values, has enabled Maxis to develop its prepaid business successfully while maintaining growth in its post-paid segment. Maxis has also pioneered and led the Malaysian market in delivering innovative mobile products and services. It was the first to launch 3G services in Malaysia — known as Maxis3G — in July 2005, and in September 2006, it became among the world’s first to use HSDPA, a high-speed upgrade of its 3G network, to provide wireless broadband services. It was the first operator to bring the BlackBerryâ„ ¢ and Apple iPhoneâ„ ¢ smart phones to Malaysia. The company in April 2009 unveiled the first commercial NFC-powered service in Malaysia. Maxis provide enhanced post-paid packages to corporate and SME customers, based on its highly successful consumer post-paid plans. These plans are custom-made to meet the needs of enterprises, especially improved communications within and beyond their compound. Maxis’ international gateway services include termination of traffic into Malaysia from international telecommunications companies, supporting Maxis’ own outbound international direct dial (IDD) traffic, collecting international transit traffic and bandwidth leasing services. Maxis presently maintain bilateral  connections with more than 95 carriers in 38 countries and have capital investments in a number of submarine cable systems to carry its international voice and data traffic. Maxis’ significant growth and strong track record of bringing innovation, excellent customer experience and value to stakeholders has won the company numerous awards over the years. The latest awards include: Malaysia’s Top Ten Companies: Ranked 1 – Asia’s 200 Most Admired Companies, The Wall Street Journal Asia, 2006 Asian Mobile Operator of the Year – Asian Mobile News Award, 2007 Fourth Most Valuable Brand in Malaysia – Brand Finance, 2008 and 2009 Service Provider of the Year (Malaysia) – Frost & Sullivan, 2008 Mobile Data Service Provider of the Year (Malaysia) – Frost & Sullivan, 2009 Recipient of the Asia Pacific Super Excellent Brand Award – Asia Pacific International Brands Summit Malaysia, 2009 Maxis’ vision is to bring advanced communications services to enrich its customers’ lives and businesses, in a manner that is simple and personalised, by efficiently and creatively harnessing leading edge technology, and delivering a brand of service experience that is reliable and enchanting. Analysis of Market Structure Market structure classifies some of the key traits of a market, including: Number of firms Similarity of the products sold Ease of entry into and exit from the market. Comparison of Market Structures Market Structure No. of Sellers Types of Product Entry Conditions Examples Perfect Competition Large Homogeneous Very Easy Small crops, International commodity markets Monopolistic Competition Large Differentiated Easy Boutiques, Restaurants, motels Oligopoly Few Usually differentiated but sometimes homogeneous Difficult Car Making, Tobacco Products, Oil Monopoly One Unique Extremely difficult Public utilities MAXIS TELECOMMUNICATION FIRM. Few Competitors like DIGI, CELCOM, TUNETALK etc.. Entry into Telecommunication is Difficult. It requires a large amount of capital. Perfect Competition Perfect Competition Market has very large number of small firms, which acts independently rather co-coordinating decisions centrally. Perfect Competition is Price takers due to Huge Competition. Perfect Competition mainly deals with Homogenous Products. Homogenous mean Goods from one firm cannot be differentiated from other. Comparing Maxis with Perfect Competition Perfect Competition Maxis 1. It has very large Number of firms. 2. Entry Requirement is very easy. 3. Very less amount of Capital is enough. 1. It has few Competitors in the Market like DIGI, CELCOM, OKTEL etc.. 2. Entry Requirement is Difficult. 3. It requires large amount of Capital. On Comparing Maxis with Perfect Competition market structure. Maxis do not come under Perfect Competition. Monopolistic Competition Monopolistic Competition Firm has many Small Sellers. They involves in differentiated Product. It is free from Price Competition. It has Easy Entry as well as Exit. Comparing Maxis with Monopolistic Competition Monopolistic Competition Maxis 1. It has many small sellers. 2. Entry requirement is easy. 3. It’s free from Price Competition. 1. It has a few Competitors in the Market. 2. Entry requirement is difficult. 3. It has competition in price with their competitor. On comparing Maxis with Monopolistic Competition market structure. Maxis do not come under Monopolistic Competition. Monopoly Monopoly is a Single Seller in the market. It deals with unique product. Entry Barriers is very difficult. Comparing Maxis with Monopoly Monopoly Maxis 1. It has Single Seller in the market (free from Competitors). 1. It has its Competitors in the market. On comparing Maxis with Monopoly market structure. Maxis do not come under Monopoly. Oligopoly It has very few seller (which is dominated by a few large firms).. It deals with Homogenous as well as Differentiated Product. Entry Barrier is difficult. Comparing Maxis with Oligopoly Oligopoly Maxis 1. It has few Sellers in the market. 2. Entry Barrier is difficult. 3. It requires a large amount of Capital. 1. Maxis have few Competitors in the Market. 2. Entry barrier is difficult. 3. It requires the large amount of Capital. On Comparing Maxis with Oligopoly market structure. We came to know that Maxis is an Oligopoly. Behaviour of Maxis The behaviour of Maxis can be identified by considering the number and size distribution of firms (market share in terms of subscribers and revenue) in the market; the extent to which products are differentiated; how easy it is for other firms to enter the market; and the extent to which firms are integrated or diversified. However, as there are only 3 large cellular communication firms (Maxis, Digi and Celcom), individual market shares are used to measure market power. The basic conditions faced by the cellular communication firms are: Demand conditions †¢Price is relatively elastic as seen by huge swings in net additions leadership quarters to quarters as different cellular communication firms took on price-leadership. Source : MALAYSIA TELECOMMUNICATIONS REPORT Q3 2011 Where the actions and the outcomes of these actions are interdependent among several agents and this interdependence is mutually recognized. Neoclassical economics assume perfectly rational agents, perfect information and zero transaction costs under perfect competition. However, due to limited cognitive capability and/or imperfect information, bounded rational agents experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information. Routine standard procedures or heuristic approaches to decision-making are employed by bounded rational agents. The sum of the market shares of the n-largest firms. Maxis subscriber net addition dropped to a dismal 120,000 users in 3Q10 before regaining to 274,000 users in 4Q10. The relevant substitutes are provided by fixed-line Telco’s for local city calls (fixed-line rate of RM0.04/minute versus cellular rate of RM0.15/minute) and Voice-over-Internet-Protocol (VoIP) providers for IDD calls. However, these are not of major concerns currently as the mobile services are cannibalizing/substituting fixed-line services while the VoIP providers are competing in a value-conscious segment with an inferior product (i.e. poorer voice quality). Supply conditions The cellular technology adopted is the European GSM standards. However, due to constant technology changes, both Maxis and Celcom have launched 3G services earlier while Digi had its 2.75G (EDGE) services previously and recently added 3G services in order to be able to compete with both Maxis and Celcom. The market structure analysis summary of Maxis is as follows: Data Observations and/or Measurement Analysis/Comment No. of Firms 3 Regulated Oligopoly Market Share Cellular industry subscriber market share (overall) Cellular industry revenue market share (overall) Subscriber/Revenue market share: Celcom: 33% & 36.0% Digi: 25% & 25.3% Maxis: 41% & 42.1% There is no single dominant firm. However, Maxis is the leading firm in both revenue & subscriber market share, followed by Celcom and Digi. Product Differen-tiation Product differentiation based on calling plans and pricing structure to appeal to different customer segments. Value-added services (ring-tones, etc.) are quite homogenously provided by 3rd party provider. Minimal product differentiation as airtime is airtime and VAS contents are widely available across all 3 firms. Entry barriers Licensing and regulations Heavy capital investments & minimum efficient of scale required First-mover advantages: Network & Lock-in effects High entry barriers mainly due to government regulations Due to frequent technology changes, incumbents do incur substantial ongoing capital expenditures and face the dangers of being â€Å"leapfrogged† by potential entrants Numbers portability not implemented yet to counter the lock-in effects of personalized phone numbers. Exit barriers Huge sunk costs Bulk of capital investments are asset specific to Telco operations. Source : MALAYSIA TELECOMMUNICATIONS REPORT Q3 2011 Price competition Using game theoretic model, Telco’s are assumed to provide a homogenous product and have sufficient capacity to serve the market demand. It is a non-cooperative game as there weren’t any enforceable agreements between them as they compete in the marketplace. It is a repeated one-shot simultaneous game as they were driven by quarterly performance accountable to shareholders. As such, they would decide on their pricing strategies independently and aware of rivals’ prices in the market while forming certain expectations about rivals’ pricing strategies. Actions available are Maintain Price and Undercut Price. Payoffs are ranked in order of preference (higher number is preferred). The most preferred outcome by firms is where one undercuts price while its competitors maintains price, leading to market share gain at the expense of its rivals. When all firms maintain prices, there is no change in market-share and profitability. When all firms undercut prices, market-share remains with reduced profitability. The strategic-form representation in a simplified 2-player model is as follows: Telco2 Telco1 Maintain Price Undercut Price Maintain Price 3,3 1,4 Undercut Price 4,1 2,2 Example of Game Theory Solving for Nash equilibrium, both players have Undercut Price as their dominant strategy resulting in a Pareto-inefficient Dominant- Strategy-Equilibrium at (2,2). This is a repeated Prisoners’ Dilemma game and these interactions are witnessed in the current market through an escalating price-war resulting in reduced Average-Revenue-Per-User (ARPU). Example of Starter pack price wars involving Maxis and Digi Launch Date Maxis Hotlink 017 Digi Beyond Prepaid Sep 8, 2005 RM20 to RM10 Oct 27, 2005 RM18 to RM9.90 Nov 25, 2005 RM10 to RM8.80 Dec 10, 2005 RM9.90 to RM8.50 Average Revenue per User Source : Articles from 2009 to 2011, Press release 2009 to 2011, Maxis reports 2009 to 2011, Digi Reports 2009 to 2011, Celcom Reports 2009 to 2011. If this game is repeated infinitely, collusive behaviour through the use of Tit-For-Tat strategy may result in non-competitive/monopolistic-like pricing which reduces public welfare. Though Maxis had a higher ARPU previously according to the above data, Maxis always need to be proactive in monitoring firms’ behaviour to detect possible tacit collusion through price-signaling. Product differentiation The above game theoretic analysis suggests that if the price-war continues,  Maxis and the other two firms will eventually be forced to price at their marginal costs – similar to a perfectly competitive firm. Therefore, it is rational to expect Maxis or the similar firms to soften the intensity of the price competition through product differentiation and customer segmentation. It is important to note that traditional microeconomic theory treats all consumers as homogenous. In reality, this is not the case and these firms are thus offering different calling plans, pricing structures (ON-Net/Off-Net), pre-bundled minutes and services, etc. Due to bounded rationality and heterogeneous consumption, consumers find it difficult to make head-to head cost-benefits comparisons and thus make the products appear to be somewhat non-homogenous and not fully substitutable for one another. These firms are also competing and differentiating through demand stimulation (‘shifting’ the demand curve) by organizing SMS contests, sponsoring shows like ‘Malaysian Idol’ which encourage SMS voting, etc. where the SMS charges are priced much higher than normal SMS charges in order to drive higher non-voice revenue and profitability as illustrated by Maxis, Celcom and Digi’s 2010 announcements below. Source: DiGi AGM 2011 IRwebsite One has to take note that the marginal costs are almost negligible relative to the huge fixed-cost investments required. ON-Net refers to calls within the same provider’s network. OFF-Net refers to calls made from one provider to another provider’s network. Decision-making based on imperfect information (uncertainty about future, costly to acquire perfect information) and/or limited cognitive capability. Through product differentiation, each differentiated product is addressing its relevant market instead of addressing a large homogenous market, thus allowing Telco’s to raise price above marginal cost (and reduce consumer’s surplus) without losing its entire market share. Thus, product differentiation can soften price competition and create a degree of market  power. We find from the above data that Maxis currently have the highest market power and leading company with the highest revenue. However, these type of firms balance between the reductions in welfare caused by product differentiation pricing above marginal costs versus the increased in welfare by allowing disparate consumers’ preferences to be closely met. Each firm also ensure proper ethical behaviour on the part of the Telco’s to ensure that public welfare is protected in SMS contests, SMS voting, etc. to prevent undesirable negative consumption externalities such as encouraging the habit of ‘gambling’, excessive spending, etc. Advertising Maxis often use advertising to create brand and/or product differentiation in order to soften the price competition. To the extent that persuasive advertising create customer loyalty through perceived differentiation over essentially identical products, they create market power in the sense that consumers may be willing to pay more for preferred brands, thus allowing these type of firms to raise prices above marginal costs. Following the previous assumptions with payoffs ranked in order of preference (higher number is preferred), the most preferred outcome by firms is where one advertises while its competitors don’t, leading to market share and profitability gain at the expense of its rivals. When all firms don’t advertise, there is no change in market-share and profitability. When all firms advertise, market-share remains with reduced profitability. Maxis uses similar strategy by advertising less gaining market share and more profit at expense of its rivals which we can see below: Advertising Expense of 2005 by Malaysian cellular communications industry Communications Sector: Mobile Line Services RM (million) Communications Sector: Mobile Interactive Services RM (million) Total RM (million) Celcom 52.3 Celcom 6.6 58.9 DiGi 37.7 DiGi 5.1 42.8 Maxis 47.8 Maxis 1.9 49.7 Source : www.mcmc.gov.my, Reports by Maxis, Celcom and Digi 2005 Customer Satisfaction Source : SKMM Consumer Survey 2007 at www.mcmc.gov.my The Customer-Satisfaction-Index (CSI) for the three firms are almost similar. We find that Maxis’ performance is satisfactory in the market and can be considered as a leading oligopoly firm among the three. Conclusion Maxis is one of the Malaysian oligopoly cellular communications industry with high entry barriers, mainly due to government licensing restrictions; and high exit barriers due to huge capital investments (sunk costs). However, frequent technology changes could potentially allow â€Å"leapfrogging† by competitors or potential entrants. The market share is with intense price-competition as the market gets more saturated. Non-price competition  is also intense, mainly through advertising. However, as price-competition escalates, other cellular communication industries are pricing closer to marginal costs as evidenced by the steady drop in ARPU over the past few years. Consumer satisfaction is high for Maxis though consumers are seeking for even lower communications charges and greater geographic coverage. Maxis is currently doing a good job and should continue to push ahead with its plan to allow greater customer choice. Maxis should also monitor for deceptive advertising, SMS contests & voting, etc. and also possible tacit collusive behaviour through price-signaling. It is also recommended that Maxis conducts benchmarking against regional and international cellular communication industries on key areas like profitability and/or returns on equity to determine fair-returns, service quality, technical efficiency, etc. to determine the success of its policies in future. _______ References www.theedgedaily.com Digi gains market share†, The Edge Daily, 5 Dec 2005 www.osk188.com www.digi.com.my www.maxis.com.my www.celcom.com.my Maxis Quarterly 2009 Report Maxis Quarterly 2010 Report DiGi 2009 Report DiGi 2010 Report Celcom Annual Report 2010 Maxis Annual Report 2010 DiGi Annual Report 2010 www.mcmc.gov.my www.mobileworld.com.my/ Profit_expense_2005 www.boardroomlimited.com Dixit, A and Skeath, S (2004): Games of Strategy (2nd Ed), W.W.Norton www.wikipedia.org Rosenberg, E.A. and Clements, M.: â€Å"Evolving market structure, conduct and policy in local telecommunications†, The National Regulatory Research Institute. 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