What factors affect the demand of mobile telephone products?

Introduction

This project is about analysing the factors affecting the demand of mobile telephone products. The case study that will be included is the current state of the UK mobile telecommunications market. The operators to be examined are the four major operators in the UK: BTCellnet, One2one, Orange and Vodafone.

The case study for this project will be based on the current state of the UK mobile telecommunications market and the performance of its four consumer operators.

Before this can be discussed, it is important to understand how mobile telephones have developed over the past decade. Up until about six years ago, peoples mobile telephone calls were carried over analogue transmissions. Analogue transmissions are radio waves, as received by a normal radio. Due to their basic nature, analogue mobile phones where not very secure and they could be "cloned" easily by hackers who wished to make free calls. Because of these setbacks, mobile telephones stayed mainly in the hands of businesses, which needed to contact their employees and didn't worry about the cost. About six years ago, digital mobile phones came onto the market offering a new way to communicate whilst on the move. Prices went down as the demand for digital mobile telephone went up and mobile phones became more and more popular.

It is very important to note that the UK mobile telephone market is rather unique in the international mobile industry due to the fact that there are only six operators (TIW/Dolphin, BTCellnet, One2one, Orange, Virgin Mobile and Vodafone), only five of which offer services for the consumer and only four of which operate their own network (Virgin Mobile runs over the One2one PCN network). This means that they can operate almost as a cartel in that they can remain powers in the industry whilst keeping their prices relatively stable.

( This project will not include the effects to the UK mobile industry that have occurred due to the addition of Virgin Mobile to the consumer's choice of operators. TIW/Dolphin will not be covered either because they do not play any part of the consumer part of this industry.)

Results & Findings

Figure 2.1: Mobile Growth: % of Adults Who Have a Mobile Phone

Figure 2.2: Penetration of Mobile Telephony in UK Homes

Figure 2.3: Mobile Penetration: UK Adults,

Figure 2.4: % of Mobile Users Using Each Network - Survey Sample (May 2000)

Figure 2.5: Profile of Mobile Package Usage

Analysis

The graphs in the Results & Findings section will first be analysed one by one:

Figure 2.1

Despite this graph's large proportions of adults owning mobile phones, it is clear to see that there was a dramatic increase in mobile phone ownership from January 1999 to January 2000. You can also see that it is still increasing, rising around 2% each month. This is most likely due to the decrease in mobile prices, and more importantly the price of line rental and the actual call costs.

Figure 2.2

Over the years the number of homes without a fixed or mobile phone has decreased, even though it was not that high in May 2000. There are relatively few homes with only a mobile phone, however this percentage has increased from 5%, May 2000 to 7%, February 2003. The majority (76%) of homes own both a fixed and mobile phone, this percentage has also increased a lot since 2000. This is a big issue for mobile telephone operators looking at replacing fixed lines. There is no real need (other than price) to have a fixed line instead of a mobile phone - the only thing stopping people switching over to mobile phone-only is the cost of calls and line rental (the cost of the phone is usually reduced to nothing when signing up for a contract tariff). However, the opposite of mobile phones is the fixed line, which is more appealing to consumers wishing to make phone calls from their residence. The costs of calls for fixed lines have gone down significantly and mobile phone calls are still more expensive.

Figure 2.3

Ownership of mobile phones with adults living in the UK is half the population, but this includes the 15-24 bracket which contains the majority of teenagers, who it is now said buy more mobile phones since the introduction of "Pay As You Talk" pre-pay packages into the market. In this bracket, 66% own a mobile phone.

It is easy to see from figure 2.3 that the majority of members of the population in the highest income-bracket, marked 'Over £30k' on this particular chart, own a mobile phone, and this was expected due to the expense of mobile phones. Whilst their prices have lowered in recent years, they are still considered by most of the population to be too expensive to own.

Figure 2.4

This chart shows that despite Orange being the market leader (with Vodafone coming second), the other 3 networks are closely following. In fact, Orange only have an extra 1% compared to Vodafone. This equality amongst the operators is due to the situation mentioned above (in the Case Study section) of only four competitors in the whole industry. This is not really needed in this project because it is not a factor affecting the demand of mobile phones, although it does affect the price to the consumer.

Figure 2.5

Here we can see that the leading package type in the UK is the relatively new Pre-pay package with a 71% share, Feb 03. Even though there is no evidence here, the majority of consumers who own a Pre-pay package are under 18. This is largely due to the fact that young people cannot sign the contract necessary to have a monthly-billed phone and a pre-pay package is the only other option. It is also due to the introduction of mobile phones into teenage fashion.

Conclusion

From the information gathered and put forward above, the following factors can be seen to be the main factors affecting the demand for mobile phones:

*Cost, to the consumer, of owning a mobile phone.

*Cost of the mobile phone's substitute, the fixed line.

*Fashion status of mobile phones.

Cost, to the consumer, of owning a mobile phone

This is mainly to do with Demand & Supply although the cost itself is affected by the UK mobile telephone Market and its Competition so those theories will be mentioned s well.

Demand & Supply and Elasticity of Supply

The cost to the consumer is affected by both the demand and the supply of mobile phones and the network services that operate them. Now that the operators' digital networks are operating at the highest efficiency with coverage over nearly all of the UK, the price of operating the network is fairly low for the operator so the profit margin on line rental is very large. However, this profit margin is brought down slightly due to the subsidies paid by operators on mobile phones when purchased with one of their tariff packages. The cost of the mobile phone itself is quite low, due to the low price of the parts required to make them. This means that there is still a high profit margin and therefore the operators are willing to supply mobile phones and services at virtually any reasonable price. This results in a supply curve similar to this:

The demand, however, is rather different. Because of the willingness to supply, causing the shallow supply curve, the operators have provided low prices for consumers and as a result the demand for them has risen dramatically as you can see in figure 2.1. However, the ownership only a year ago was much less due to the higher prices. Therefore, we can add a demand curve to the diagram that looks like this:

As you can see, the equilibrium price (P1) is still relatively high and this reflects the high cost of calls compared to the mobile phone's substitute, fixed lines. Despite it being cheaper to use a fixed line, consumers are still more than willing to pay for mobile phones.

The Market, Competition and Monopolies

As mentioned above, the price of mobile phones is also affected by the Market and the competitors within that market. The UK mobile telephone market is known as an oligopoly, which means a market with only a few sellers. As a result, the few sellers can operate prices and other market factors to their advantage. This also gives the appearance of a cartel or price-fixing agreement in operation. The aim of cartels and price-fixing agreements is to maximize joint profits and act as though the market is a pure monopoly. This definition fits this market almost perfectly because all four operators manage to uphold a more or less equal market share and their profits are high due to their prices being equally high. Of course, it is important to realise that this is only suitable to call costs and the network services since the mobile phones themselves are not produced by the operators but the electronics companies, such as Nokia, Ericsson and Sony.

Some economists believe that price-fixing cartels are unstable and that they will become under pressure and eventually break down. This has obviously not happened yet, the signs of this theory coming true are now beginning to show. One of the reasons economists give for the breakdown of cartels is the entry of a non-cartel firm into the industry, which increases market supply and, puts downward pressure on the cartel price. With the introduction of Virgin Mobile, a non-cartel firm in this situation, in the UK mobile telephone market, the price of mobiles is bound to come down since the Virgin Mobile prices are a lot lower than those offered by other operators. A further problem for the "cartel" members is the fact that Virgin Mobile offers pre-pay tariffs only and yet the prices are lower than those offered by many contract tariffs available at the moment.

Cost of the mobile phone's substitute, the fixed line

Fixed line providers, mainly BT and the cable operators (NTL, which previously included Cable & Wireless and Telewest), are not in direct competition with mobile phone operators yet, due to the large difference in the price of calls. Mobile phones have the obvious advantage as they are portable, and this is what has allowed its operators to force higher call charges than their fixed line counterparts. This could well change in the future as the price of mobile phone calls are driven down by the introduction of Virgin Mobile (as mentioned above).

Fashion status of mobile phones

Elasticity of Demand and Costs

This never used to be an important factor in the demand for mobile phones but with the increase in ownership by teenagers (due to the increased availability of pre-pay packages) it has been made one of the operators' main concerns. The teenage market for mobile phones is booming and because of this the demand for mobile phones has become more inelastic.

The demand was previously elastic. An increase in price resulted in a much larger decrease in quantity demanded. This means that before, consumers were more conscious of the price they paid and were unwilling to stand for large price hikes. Now, the demand has become much more inelastic. The same increase in price results in a much smaller decrease in quantity demanded, meaning that people, mainly the teenage market, are less aware of the price and are willing to stand price increases. However, at the same time supply has increased. This is mainly down to developments in mobile technology meaning that mass production of mobile phones has become cheaper and more cost effective. At the same time, providing the mobile telephone service has gone down in price due to the fact that the networks running in the UK need very little development now that they are established. This increase in supply brings the price down as well as increasing the quantity supplied at the equilibrium.