Introduction
The telecom industry in UK provides information and communication services such as voice and data delivery. The industry has realized significant growth in the last three decades and is currently at its maturity stage (Streel, 2010, pp. 210-260). The industry is completely deregulated following the implementation of the 2003 Communication Act. Consequently, many firms have joined the industry thereby increasing competition.
The steady growth in the industry is attributed to advancement in technology which facilitates product and process innovation (Hsuan and Mahnke, 2011, pp. 154-165). The growth is also attributed to high demand for mobile phone and data services. This paper analyzes the telecom industry in UK. The competitiveness of the market and the influence of the macroeconomic environment on the performance of the industry will be illuminated.
Current Industry Overview
Top Ten Firms in the Industry
The recent deregulation of the industry has led to elimination of most of the entry barriers. Besides, advancement in information and communication technology has led to the development of new products such as online TV services. This has resulted in to high demand in the industry thus prompting more firms to join it.
Currently, the following firms are the market leaders in the industry. The top ten firms include, Vodafone, Orange, T-Mobile, British Telecom, Gamma, O2, Avaya, Vodat Telecoms, Cable and Wireless and Analysys (Cadman and Helen, 2010, pp. 320-364).
Current Market Conditions
The market is characterized by intense competition especially in the mobile and broadband segments. This has led to a significant fall in consumer prices (Michael and Hong, 2010, pp. 137-165).
However, growth is expected to accelerate due to investments in next generation technologies and an ever increasing demand for data and mobile phone services. Since the market is at its maturity stage, most firms are consolidating their market shares through mergers and diversification of products.
Competitiveness and Market Share
The industry is characterized by high competition in all segments. The market shares of firms providing mobile phone services are as follows. O2 commands 26% of the market, Vodafone’s market share is 24%, Orange’s market share is 21%, followed by T-Mobile with 17% and the rest is shared by small operators (Rohrbeck, 2011, pp. 420-430).
Market shares for the top five firms in the broadband segment are as follows. British Telecom leads with 62.5%, NTL/Telewire is second with 16.7%, TalkTalk is third with 10%, Homecall commands 2.5%, Sky Talk commands 2.1% and the rest is shared by small firms (Rohrbeck, 2011, pp. 420-430). British Telecom is the main provider of fixed wire call services.
Concentration Rations
The mobile phone segment has the highest concentration of 89% since it has only four firms (Rohrbeck, 2011, pp. 420-430). The internet service segment has the lowest concentration of 700 firms.
Economic Conditions
The industry continues to record robust growth despite the high competition. In the last quarter of 2010 revenue grew by 2% across all firms (Trath and Pitt, 2010, pp. 213-261). The industry is expected to realize $ 376 billion in revenue between the 2010 and 2015 (Trath and Pitt, 2010, pp. 213-261).
The mobile segment is expected to record the highest growth of 12.7% between 2010 and 2015 (Trath and Pitt, 2010, pp. 213-261). Demand for fixed line phones continues to decline as consumers shift their expenditure to mobile phone services.
Internal Industry Analysis
Threat of New Entrants
The telecommunication industry in UK is associated with a high level of product differentiation due to advancements in technology. The incumbent firms are able to enjoy economies of scale through expansion into new markets (Michael and Hong, 2010, pp. 137-165).
However, high capital requirement prevents firms from joining the industry. Besides, switching cost in the industry is very high. These trends indicate that the threat of new entrants is low in the industry (Mankiw, 2008, p. 89).
Bargaining Power of the Buyer
The buyers (telecommunication firms) have a low bargaining power in the industry due to the following reasons. First, the concentration of buyers is low especially in the internet service providers segment (Michael and Hong, 2010, pp. 137-165).
Second, the products of the suppliers are highly differentiated since they are normally tailor made for each buyer (Rohrbeck, 2011, pp. 420-430). Besides, the switching costs are very high. The low bargaining power of the buyers means that they can be exploited by their suppliers through high prices of supplies (Frank, 2009, p. 65).
Bargaining Power of the Suppliers
The suppliers have a high bargaining power due to the following reasons. First, there are few suppliers as compared to the existing buyers (telecommunication firms). This means that there is high competition for supplies. Second, there is low availability of substitute supplies (Trath and Pitt, 2010, pp. 213-261).
For example, networking cables and equipment have no substitutes. Finally, the suppliers’ products are highly differentiated. The suppliers thus have a high bargaining power since the buyers highly depend on them (Blanchard, 2010, p. 67).
Threat of Substitutes
The threat attributed to substitute products is very low in the industry. Postal services are the main substitutes to telecommunication services. However, postal services are having little differentiation (Michael and Hong, 2010, pp. 137-165).
Their prices are also on the rise due to the increase in transportation costs as the price of oil rises. Thus consumers prefer telecommunication services that are differentiated and cheap to use (Hollensen, 2010, p. 84)).
Intensity of Competitive Rivalry
The industry is associated with intense competition in all segments due to the following reasons. First, apart from the mobile phone segment, all other segments have very many competitors (Michael and Hong, 2010, pp. 137-165). Second, the industry is experiencing a slow growth rate since it has already reached its maturity stage.
Third, the industry is labor intensive thus the fixed costs are very high. The firms hire many employees to attend to their customers at various call centers. Therefore, competition becomes intense as firms struggle to lower costs and retain their market shares (Gary, Harker, Kottler, 2009, p. 89)
Complementary Products
The incumbent firms are able to achieve high growth due to the availability of cheap complementary products. With advancement in technology, the cost of mobile phones and computers has significantly reduced. Currently, the mobile phone penetration rate in UK is 86% while 90% of households have computers (Trath and Pitt, 2010, pp. 213-261). This leads to high demand for call services and internet services (Roger, 2010, p. 35).
External Macro Industry Analysis
Political
UK is one of the most politically stable countries in the Euro-zone. The government of UK has established strong political ties with most countries in Europe, America and Asia. At the national level, the strong political stability promotes economic activities since the investors are assured of the security of their investments.
Besides, political stability promotes rapid economic growth which translates into high demand in the telecom industry. At the international level strong political ties with foreign countries has led to the entry of foreign firms in the industry. For example, Fujitsu from Japan has joined the industry (Vitorovich, 2011, p. 1).
This has contributed to the high competition in the industry (Cadman and Helen, 2010, pp. 320-364). Besides, the foreign firms have stimulated innovation in the industry as firms struggle to lower costs in order to improve their competitiveness.
Economic and Financial
The economy of UK has since recovered from the effects of the 2008/ 2009 recession. In 2010, UK’s GDP grew by 1.7% and is expected to grow by 2.4% and 2.7% in 2011 and 2012 respectively (Global Economic Weekly, 2010). The inflation rate in UK was 3.2% in 2010 (Global Economic Weekly, 2010).
Currently, the inflation rate is 2.7% and is expected to decline further to 1.8% in 2012 (Global Economic Weekly, 2010). The increase in GDP is expected to translate into high disposable income among the citizens.
This will lead to high demand for telecommunication services. The reduction in inflation will reduce the prices of telecommunication services thus increasing their demand. Therefore, the robust economic growth in UK will translate into high growth in its telecom industry.
Social Cultural Environment
UK is associated with the culture of consumerism. Besides, the rich population has high preference for high quality products. This has resulted into a high demand for smart phones in the country (Rohrbeck, 2011, pp. 420-430).
Thus most firms in the telecom industry are focusing on innovation and product differentiation in order to meet customers’ expectation in regard to product quality (Cambini and Jiang, 2010, pp. 559-574). The consumers are also very sensitive to prices (Charles, 2011). This has led to high price elasticity for most products especially internet services.
Technology
UK has a culture of developing technologies that change the lifestyles of its citizens and promotes economic growth. Currently, UK is the leading in research and development in Europe (Lichtenthaler, 2011, pp. 317-330). Its investment in research and development grows at an annual rate of 10.3% (Lichtenthaler, 2011, pp. 317-330).
This has facilitated innovation in the telecom industry. British Telecom is among the firms that have heavily invested in next generation technologies. Thus advancement in technology has enabled UK telecom firms to introduce new products, reduce costs and improve the quality of customer services.
Legal
The telecom industry in UK is completely liberalized (Business and Market Development, 2011). This means that the government has limited interference in the industry. Thus firms are able to pursue their growth plans effectively. Ofcom being the industry regulator formulates policies that guide competition (Business and Market Development, 2011).
Environment
The telecom industry has little negative impacts on the environment since it focuses on the provision of services. However, disposal of complementary products such as cell phones leads to environmental pollution. Building telecommunication networks also leads to destruction of ecologies or animal habitats (Huang, 2011, pp. 641-653). Consequently, most firms channel a high percentage of their social responsibility funds towards environmental conservation programs (Cohmann, 2010, 499-534).
Conclusion
Telecom industry is the strongest in UK. It is completely deregulated and is associated with intense competition. The main drivers of growth include technological advancements, innovation and product differentiation (Streel, 2010, pp. 210-260).
The incumbent firms are able to maintain their market shares due to the low threat of new entrants and substitutes. Growth in the industry is also enhanced by the rapid economic growth and political stability (Streel, 2010, pp. 210-260). The main barriers to growth include, low buyers’ bargaining power and the high threat of competitive rivalry.
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