Maxis economonics assignment


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Maxis economonics assignment

  1. 1. SEGI MBA Assignment on MAXIS Submitted to Ms. Ooi Lecturer Economics for Managers ECO 6073 Submitted byGroup Members:1. Waleed Mohammad Jamal - SCM - 0165842. Md Fantasir Rahman - SCM - 0162953. Dinara Kerimbekova - SCM - 0150664. Aizada Aldekova - SCM - 0160215. Tahmina Aktar Daizy - SCM - 0167156. Mohamed Faizal - SCM - 017084 Page 1
  2. 2. IntroductionMaxis Communications Berhad is a leading mobile phone service provider in Malaysia.Maxis Communications Berhad was established in the early 1990s and commenced mobiletelecommunications operation in August 1995. It was then listed under the first board inKuala Lumpur Stock Exchange (KLSE). At present Maxis Communication Berhad is thebiggest telecommunication provider in Malaysia. The company has total subscribers at 13.95million as of December 2010.Maxis Communications Berhad, through its subsidiary, Maxis Berhad, engages in theprovision of mobile, fixed line, and international telecommunications services in Malaysia. Italso provides Internet and broadband services; and wireless multimedia related services, aswell as owns, maintains, builds, and operates radio facilities and associated switches. Thecompany was founded in 1995 and is based in Kuala Lumpur, Malaysia. MaxisCommunications Berhad is a subsidiary of Binariang GSM Sdn Bhd.It uses the dialling prefix identifier of "012‖, "017" and ―0142‖. In 2002, Maxis purchasedTimeCell, 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 canchoose between the two. Maxis provide a variety of mobile communication products andservices. They offer prepaid call plans, monthly subscription plans, global roaming, MMS,WAP (over both GSM and GPRS), Residential Fixed Line services, Broadband Internetplans, 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 goonline at speed over 15 times faster than traditional dial up and do more, much more over theinternet. Page 2
  3. 3. ProfileMaxis Berhad, with its consolidated subsidiaries (together, Maxis), is the leading mobilecommunications service provider in Malaysia.Maxis were granted licences to operate a nationwide GSM900 mobile network, a domesticfixed network and an international gateway in 1993. It commenced its mobile operations inAugust 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 multipleplatforms to fulfil the telecommunications needs of individual consumers, SMEs and largecorporations in Malaysia.Maxis mobile service is offered on a post-paid basis under the Maxis brand and via a prepaidformat under the Hotlink brand. The use of these two distinct brands, underpinned bysynergistic values, has enabled Maxis to develop its prepaid business successfully whilemaintaining growth in its post-paid segment.Maxis has also pioneered and led the Malaysian market in delivering innovative mobileproducts and services. It was the first to launch 3G services in Malaysia — known asMaxis3G — in July 2005, and in September 2006, it became among the worlds first to useHSDPA, a high-speed upgrade of its 3G network, to provide wireless broadband services. Itwas the first operator to bring the BlackBerry™ and Apple iPhone™ smart phones toMalaysia. The company in April 2009 unveiled the first commercial NFC-powered service inMalaysia.Maxis provide enhanced post-paid packages to corporate and SME customers, based on itshighly successful consumer post-paid plans. These plans are custom-made to meet the needsof enterprises, especially improved communications within and beyond their compound. Page 3
  4. 4. Maxis international gateway services include termination of traffic into Malaysia frominternational telecommunications companies, supporting Maxis own outbound internationaldirect dial (IDD) traffic, collecting international transit traffic and bandwidth leasing services.Maxis presently maintain bilateral connections with more than 95 carriers in 38 countries andhave capital investments in a number of submarine cable systems to carry its internationalvoice and data traffic.Maxis significant growth and strong track record of bringing innovation, excellent customerexperience and value to stakeholders has won the company numerous awards over the years.The latest awards include:Malaysias Top Ten Companies: Ranked 1 – Asias 200 Most Admired Companies, The WallStreet Journal Asia, 2006Asian Mobile Operator of the Year – Asian Mobile News Award, 2007Fourth Most Valuable Brand in Malaysia – Brand Finance, 2008 and 2009Service Provider of the Year (Malaysia) – Frost & Sullivan, 2008Mobile Data Service Provider of the Year (Malaysia) – Frost & Sullivan, 2009Recipient of the Asia Pacific Super Excellent Brand Award – Asia Pacific InternationalBrands Summit Malaysia, 2009Maxis vision is to bring advanced communications services to enrich its customers lives andbusinesses, in a manner that is simple and personalised, by efficiently and creativelyharnessing leading edge technology, and delivering a brand of service experience that isreliable and enchanting. Page 4
  5. 5. Analysis of Market StructureMarket 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 StructuresMarket No. of Types of Product Entry Conditions ExamplesStructure Sellers Small crops,Perfect Large Homogeneous Very Easy InternationalCompetition commodity marketsMonopolistic Boutiques, Large Differentiated EasyCompetition Restaurants, motels Usually Car Making, differentiated butOligopoly Few Difficult Tobacco Products, sometimes Oil homogeneousMonopoly One Unique Extremely difficult Public utilitiesMAXIS 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. Page 5
  6. 6. Comparing Maxis with Perfect Competition Perfect Competition Maxis1. It has very large Number of firms. 1. It has few Competitors in the Market like DIGI, CELCOM, OKTEL etc..2. Entry Requirement is very easy. 2. Entry Requirement is Difficult.3. Very less amount of Capital is enough. 3. It requires large amount of Capital.On Comparing Maxis with Perfect Competition market structure. Maxis do not come underPerfect 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. 1. It has a few Competitors in the 2. Entry requirement is easy. Market. 3. It‘s free from Price Competition. 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 comeunder Monopolistic Competition. Page 6
  7. 7. 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 1. It has its Competitors in the market. market (free from Competitors).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 Maxis1. It has few Sellers in the market. 1. Maxis have few Competitors in the Market.2. Entry Barrier is difficult. 2. Entry barrier is difficult.3. It requires a large amount ofCapital. 3. It requires the large amount of Capital.On Comparing Maxis with Oligopoly market structure. We came to know that Maxis isan Oligopoly. Page 7
  8. 8. Behaviour of MaxisThe behaviour of Maxis can be identified by considering the number and size distribution offirms (market share in terms of subscribers and revenue) in the market; the extent to whichproducts are differentiated; how easy it is for other firms to enter the market; and the extent towhich firms are integrated or diversified. However, as there are only 3 large cellularcommunication firms (Maxis, Digi and Celcom), individual market shares are used tomeasure 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 toquarters as different cellular communication firms took on price-leadership. (000) (%) 600 70 500 60 50 400 Celcom 40 Celcom 300 Maxis Maxis 30 Digi Digi 200 20 100 10 0 0 1Q10 2Q10 3Q10 4Q10 1Q11 1Q10 2Q10 3Q10 4Q10 1Q11 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. Page 8
  9. 9. 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: Page 9
  10. 10. Data Observations and/or Measurement Analysis/CommentNo. of 3 Regulated OligopolyFirms Cellular industry subscriber Subscriber/Revenue market market share (overall) share: Celcom Digi Maxis Celcom: 33% & 36.0% 60 40 Digi: 25% & 25.3% 20 Maxis: 41% & 42.1% 0 1Q10 2Q10 3Q10 4Q10 1Q11 There is no single dominant firm.Market However, Maxis is the leadingShare Cellular industry revenue firm in both revenue & market share (overall) subscriber market share, followed by Celcom and Digi. Celcom Digi Maxis 60 40 20 0 1Q10 2Q10 3Q10 4Q10 1Q11 Product differentiation based on calling plans and pricing structure to appeal to Minimal product differentiation asProduct different customer segments. Value-added airtime is airtime and VAS contentsDifferen- services (ring-tones, etc.) are quite are widely available across all 3tiation homogenously provided by 3rd party firms. provider. High entry barriers mainly due to government regulations Due to frequent technology Licensing and regulations changes, incumbents do incur substantial ongoing capital Heavy capital investments & minimum expenditures and face theEntry efficient of scale required dangers of being ―leapfrogged‖barriers First-mover advantages: Network & by potential entrants Lock-in effects Numbers portability not implemented yet to counter the lock-in effects of personalized phone numbers.Exit Bulk of capital investments are Huge sunk costsbarriers asset specific to Telco operations. Source : MALAYSIA TELECOMMUNICATIONS REPORT Q3 2011Price competitionUsing game theoretic model, Telco‘s are assumed to provide a homogenous product and havesufficient capacity to serve the market demand. It is a non-cooperative game as there weren‘tany enforceable agreements between them as they compete in the marketplace. It is a Page 10
  11. 11. repeated one-shot simultaneous game as they were driven by quarterly performanceaccountable to shareholders. As such, they would decide on their pricing strategiesindependently and aware of rivals‘ prices in the market while forming certain expectationsabout rivals‘ pricing strategies. Actions available are Maintain Price and Undercut Price.Payoffs are ranked in order of preference (higher number is preferred). The most preferredoutcome by firms is where one undercuts price while its competitors maintains price, leadingto market share gain at the expense of its rivals. When all firms maintain prices, there is nochange in market-share and profitability. When all firms undercut prices, market-shareremains with reduced profitability. The strategic-form representation in a simplified 2-playermodel is as follows: Telco2 Maintain Price Undercut Price Telco1 Maintain Price 3,3 1,4 Undercut Price 4,1 2,2 Example of Game TheorySolving for Nash equilibrium, both players have Undercut Price as their dominant strategyresulting in a Pareto-inefficient Dominant- Strategy-Equilibrium at (2,2). This is a repeatedPrisoners‘ Dilemma game and these interactions are witnessed in the current market throughan 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 Page 11
  12. 12. 60 56 56 56 55 57 52 51 54 54 53 49 49 49 49 56 55 55 52 51 50 54 53 53 50 50 53 49 53 45 50 51 40 Celcom Maxis 30 Digi 20 10 0 1Q09 1Q10 1Q11Source : 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-Tatstrategy may result in non-competitive/monopolistic-like pricing which reduces publicwelfare. Though Maxis had a higher ARPU previously according to the above data, Maxisalways need to be proactive in monitoring firms‘ behaviour to detect possible tacit collusionthrough price-signaling.Product differentiationThe above game theoretic analysis suggests that if the price-war continues, Maxis and theother two firms will eventually be forced to price at their marginal costs – similar to aperfectly competitive firm. Therefore, it is rational to expect Maxis or the similar firms tosoften the intensity of the price competition through product differentiation and customersegmentation. It is important to note that traditional microeconomic theory treats allconsumers as homogenous. In reality, this is not the case and these firms are thus offeringdifferent calling plans, pricing structures (ON-Net/Off-Net), pre-bundled minutes andservices, etc. Page 12
  13. 13. Due to bounded rationality and heterogeneous consumption, consumers find it difficult tomake head-to head cost-benefits comparisons and thus make the products appear to besomewhat non-homogenous and not fully substitutable for one another.These firms are also competing and differentiating through demand stimulation (‗shifting‘ thedemand curve) by organizing SMS contests, sponsoring shows like ‗Malaysian Idol‘ whichencourage SMS voting, etc. where the SMS charges are priced much higher than normal SMScharges in order to drive higher non-voice revenue and profitability as illustrated by Maxis,Celcom and Digi‘s 2010 announcements below. Revenue Comparison of 2009 and 2010 Celcom Maxis 2010 2009 DiGi 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% 45.00% 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 marketinstead of addressing a large homogenous market, thus allowing Telco‘s to raise price above Page 13
  14. 14. 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. Wefind from the above data that Maxis currently have the highest market power and leadingcompany with the highest revenue.However, these type of firms balance between the reductions in welfare caused by productdifferentiation pricing above marginal costs versus the increased in welfare by allowingdisparate consumers‘ preferences to be closely met. Each firm also ensure proper ethicalbehaviour on the part of the Telco‘s to ensure that public welfare is protected in SMScontests, SMS voting, etc. to prevent undesirable negative consumption externalities such asencouraging the habit of ‗gambling‘, excessive spending, etc.AdvertisingMaxis often use advertising to create brand and/or product differentiation in order to softenthe price competition. To the extent that persuasive advertising create customer loyaltythrough perceived differentiation over essentially identical products, they create marketpower in the sense that consumers may be willing to pay more for preferred brands, thusallowing these type of firms to raise prices above marginal costs.Following the previous assumptions with payoffs ranked in order of preference (highernumber is preferred), the most preferred outcome by firms is where one advertises while itscompetitors 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 allfirms advertise, market-share remains with reduced profitability. Maxis uses similar strategyby advertising less gaining market share and more profit at expense of its rivals which we cansee below: Advertising Expense of 2005 by Malaysian cellular communications industryCommunications Sector: RM Communications Sector: RM Total Mobile Line Services (million) Mobile Interactive (million) RM Services (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 :, Reports by Maxis, Celcom and Digi 2005 Page 14
  15. 15. Customer Satisfaction SKMM Consumer Survey 2007 3.66 3.65 3.64 3.64 3.63 3.62 3.6 2006 3.58 3.57 2007 3.56 3.55 3.55 3.54 3.52 3.5 Maxis Celcom DiGi Source : SKMM Consumer Survey 2007 at Customer-Satisfaction-Index (CSI) for the three firms are almost similar. We find thatMaxis‘ performance is satisfactory in the market and can be considered as a leading oligopolyfirm among the three. Page 15
  16. 16. ConclusionMaxis is one of the Malaysian oligopoly cellular communications industry with high entrybarriers, mainly due to government licensing restrictions; and high exit barriers due to hugecapital investments (sunk costs). However, frequent technology changes could potentiallyallow ―leapfrogging‖ by competitors or potential entrants. The market share is with intenseprice-competition as the market gets more saturated. Non-price competition is also intense,mainly through advertising. However, as price-competition escalates, other cellularcommunication industries are pricing closer to marginal costs as evidenced by the steadydrop in ARPU over the past few years. Consumer satisfaction is high for Maxis thoughconsumers are seeking for even lower communications charges and greater geographiccoverage.Maxis is currently doing a good job and should continue to push ahead with its plan to allowgreater customer choice. Maxis should also monitor for deceptive advertising, SMS contests& voting, etc. and also possible tacit collusive behaviour through price-signaling. It is alsorecommended that Maxis conducts benchmarking against regional and international cellularcommunication industries on key areas like profitability and/or returns on equity to determinefair-returns, service quality, technical efficiency, etc. to determine the success of its policiesin future. _______ Page 16
  17. 17. Referenceswww.theedgedaily.comDigi gains market share‖, The Edge Daily, 5 Dec Quarterly 2009 ReportMaxis Quarterly 2010 ReportDiGi 2009 ReportDiGi 2010 ReportCelcom Annual Report 2010Maxis Annual Report 2010DiGi Annual Report Profit_expense_2005www.boardroomlimited.comDixit, A and Skeath, S (2004): Games of Strategy (2nd Ed), W.W.Nortonwww.wikipedia.orgRosenberg, E.A. and Clements, M.: ―Evolving market structure, conduct and policy inlocal telecommunications‖, The National Regulatory Research Institute.SKMM Consumer Survey 2007 at’ Page 17