Oligopoly is the type of imperfectly competitive market that is characterized with only a few sellers, each offering a product similar or identical to the others. Because an oligopolistic market has only a small group of sellers, a key feature of oligopoly is the tension between cooperation and self-interest. A buyer will take market conditions as given, for he cannot affect them, but a seller will inevitably be preoccupied with guessing the behaviour to be expected from rival sellers. The key distinguishing feature that sets oligopoly apart from competition and from monopoly is that oligopolists are strategically linked to one another. The best policy for one firm is dependent on the policies being followed by each rival firm in the market.
Today the development of telecommunications systems in Kazakhstan is of great significance as it is the conditional factor for integration with the world community. The development of the telecommunications sector is affected by the economical growth and stability, geographical and demographical features, market and user requirements, etc. It is acknowledged that there are also internal political forces; activities of the regulatory body such as the Agency for Informatization and Communication (AIC), representing the Government of Kazakhstan; as well as the Agency for Regulation of Natural Monopolies (ARNM), which influence the system. Internet and data communication segment of the telecommunications market is among the most dynamically developing. The development of the Internet services market in Kazakhstan is restrained by lack of Internet content development, high Internet tariffs and high computer prices, which are not affordable for a considerable number of the population.
Currently, there are five primary Internet providers that have their own access to the global network, thus, they are independent from the other Internet providers, and these include Kazakhtelecom JSC, Transtelecom JSC, Arna JSC, Astel JSC, and KazTransCom JSC. The largest provider of Internet services is Kazakhtelecom JSC, which possesses 61% of market share for Internet services market in Kazakhstan. Kazakhtelecom JSC is the leading telecommunication operator of Kazakhstan and one of most dynamically developing telecommunication companies on post-Soviet territory, providing wide range of information and communication services.
Porter's five forces that shape industry competition
Porter (2008, p.3) states that when firms build their competitive strategy, they have to consider the different marketing environments. An important factor of this is to recognize internal as well as external forces. According to Porter (2008, p.3) competition for profits goes beyond established industry rivals to include four other competitive forces as well: threat of new entrants, bargaining power of buyers, threat of substitute products or services, and bargaining power of suppliers (See Figure 1). The extended rivalry that results from all five forces defines an industry's structure and shapes the nature of competitive interaction within an industry. When firms are mutually dependent and feel that other firms' moves affect their own business and have to react to other firms' moves, there prevails competition.
Analysis of forces of competition in Internet service market
a) Rivalry among existing competitors
Agency for Informatization and Communication (AIC) issued more than 380 licenses for provision of Internet services in Kazakhstan. Currently, there are five major players in the market such as Kazakhtelecom JSC, Transtelecom JSC, Arna JSC, Astel JSC, and KazTransCom JSC.
Historically, the major part of telecommunications network of general using belongs to Kazakhtelecom JSC. The overwhelming majority of subscribers of fixed-line communication are connected to the company's network, which in turn allows Kazakhtelecom JSC to keep the dominating position in the market, especially in the market of fixed, mobile communication and Internet services. The activities of Kazakhtelecom JSC can be divided into the following two market segments: (a) the segment of services of a fixed-line communication, which represents services of wire communication, service of data transmission and service of gateway connections; and (b) the segment of services of cellular communication, which represents wireless communication services. The competitive advantages of Kazakhtelecom JSC include (a) possession of licences for provision of almost full range of services of telecommunications; (b) trust and loyalty to the leading telecommunications provider, popularity of trade mark; (c) introduction of advanced technologies of fixed-line communication, wireless broadband access to Internet and satellite communication in the market (digitalization, ADSL, Metro Ethernet, NGN, WiMax, and Wi-Fi);
Despite the fact that Kazakhtelecom JSC as a leader possesses about 60% of Internet service market share, there are other players that are committed to the business and have aspirations for leadership. Thus, Astel JSC one of the players of the market provides a wide range of competitive services such as (a) services of data transmission with application of modern technologies on the basis of IP, X.25, and Frame Relay; (b) a full package of Internet services, including connection to Internet network on dial-up or allocated line, e-mail, and web-hosting; and (c) services of international telecommunication. Furthermore, the main competitive advantages of Astel JSC in telecommunications market are (a) optimum relationship of price and quality of services; (b) reputation of the provider; (c) capability of the company to provide Internet service in shortest term, with high quality, reliability and unfailing functioning, and (d) close cooperation with leading world communication providers and equipment manufacturers, timely introduction of high technologies and new equipment.
Next important player is KazTransCom JSC, which is positioned in the Interent service market of Kazakhstan as the modern telecommunication company. KazTransCom JSC implements significant telecommunication projects in strategically important regions of Kazakhstan, actively creating a modern communication infrastructure in the country. KazTransCom actively develops fibre-optical backbone lines and possesses a unique capability to offer the whole complex of telecommunication services in Kazakhstan. Despite the small term of its activities, the company has considerably increased the number of subscribers at the expense of mastering new target, geographical and product segments. The company has a number of competitive advantages including (a) service of local telecommunication; (b) service of long-distance and international telecommunication; (c) the main part of company's investment is directed to building and development of its own land infrastructure of communication; and (d) introduction of high technologies of a fixed-line communication, wireless broadband access and satellite communication.
Another internet service provider is Transtelecom JSC, the subsidiary of National Company Kazakhstan Temir Zholi, which has an ambitious strategy to become a comparable player to Kazakhtelecom JSC in two years. According to Mirbolat Aupov, the CEO of Transtelecom JSC (2009), the company has an ambitious plan to lay more than 14 thousands kilometres of backbone fibre-optic communication lines along the railway lines. Transtelecom JSC signed a deal with Alcate-Lucent Kazakhstan, which will be the prime contractor of construction of backbone fibre-optic communication lines. The project was supported by the European Bank for Reconstruction and Development that provided USD 100 million loan for 10 years. The full implementation of this project will toughen the competition in Internet service market, which in turn will result in reduction of prices and improvement of service quality.
b) Government regulations
As a result of the stage-by-stage liberalization in the telecommunication service market which began at the end of 2004, the preconditions for development of a truly competitive environment have been created. During the liberalization process, actions were taken to adjust tariffs and eliminate cross subsidization (price differentiation by market segments to compensate losses due to below-cost prices offered at certain targeted segments) to create economic incentives for development of competition in every segment of the telecommunication service market, including in rural areas.
Thus, Kazakhstan developed an extensive plan for the development of the telecommunications sector in 2003, entitled "The Programme for the Development of Telecommunications Sector in the Republic of Kazakhstan for 2003-2005." The expected benefits of the programme included: (a) Establishment of a single regulatory and legal framework in the telecoms sector to ensure improved efficiency of government regulation; and (b) Creation of a competitive environment in the telecoms market, including more possibilities for the development of local access lines and value-added services.
In order to develop the telecommunications sector, the Telecommunications Sector Development Program of the Republic of Kazakhstan for 2006-2008 was adopted. For achievement of the specified goal of the program, the following priority objectives shall be achieved: (a) Improvement of governmental regulations of the telecommunication sector in the area of research into further development of the sector; (b) connection of communication operators; (c) development of fixed and mobile communication; (d) development of Internet; and (e) Provision of universal telecommunication services for the population.
c) Barriers to entry
There are barriers of entry to the Internet service market for new entrants. These include: (a) Excessive economic concentration of Internet services market as a result of affiliated entities that provide telecommunication service; (b) Absence of equal access to infrastructure of telecommunications (the problem of joining the telecommunications networks of communication providers, and also access of IP - telephony providers to the telecommunications networks of general utilization); (c) Unadjusted system of universal service; (d) Absence of a free radio-frequency resource; and (e) Anticompetitive actions of dominating providers in the market of joining and traffic admission.
d) Bargaining power of buyers
According to Agency of Statistics of Kazakhstan (2009), in 2009 the number of Internet subscribers was about 756,500, including about 270,000 people that enjoyed broadband Internet access; 486,500 people used dial-up access. In 2009 there were 3.16 million Internet users, which was equivalent to about 19.8% of the population; it is 30% more than in 2008.
One of the most significant reasons for high Internet tariffs is linked to high costs that providers have to pay in order to get access to the world Internet resources. Users from Russian Federation find 80 per cent of their information using internal Russian Internet resources which are very cheap, while providers in Kazakhstan use international or foreign (e.g., Russian) Internet capacity and sell it to local subscribers for a fee with a sizable margin. Therefore, over 90% of the users in Kazakhstan use external, out-of-Kazakhstan, resources linking the problem of high cost of Internet in Kazakhstan to the need for development of domestic content.
The issue of increasing the locally relevant content with a view of enhancing its attractiveness to ordinary users is one of the key issues, which requires special attention on the part of the Government. In the opinion of experts in Kazakhstan, there are various reasons constraining the development and use of the Internet in the country which include limited local content, and the low level of overall computerization in the country.
For the purpose of development of the Internet segment, private companies are also making efforts. JSC Kazakhtelecom, for example, plans to carry out a comprehensive set of actions such as development of electronic payments, formation of a hosting market, development and maintenance of local Internet resources, and setting up of Internet Data Centers. The increase in speed from 128 Kbps. up to 256 Kbps for broadband access to Internet external resources (Megaline Hit service) is planned. Speed of Internet access to domestic Kazakhstan resources will be at the level of 512 Kbps. At the same time the company is planning to maintain the same level of user fee.
Background of Kazakhtelecom JSC
JSC «Kazakhtelecom», the national carrier of Kazakhstan and one of the fastest growing telecommunications companies in the former Soviet Union, provides a broad spectrum of information and communication services.
51% of Kazakhtelecom JSC shares belong to the state in the face of "Samruk-Kazyna" National prosperity fund. ALTEL JSC (100%), GSM Kazakhstan LLC of Kazakhtelecom OJSC (49%), Nursat JSC (77,08%), Signum LLC (100%), Vostoktelecom LLC (100%), Kepter telecom LLC (100%), Radio Tell LLC (100%), Online.kg LLC (100%) (As of 31.03.2010) are included to the structure of the Group of Kazakhtelecom JSC companies. Today the Group of Kazakhtelecom JSC companies cover all main info communication consumer markets.
The company employs about 30 thousand people. JSC «Kazakhtelecom» has regional offices in each area of the country and provides services throughout the country. According to operative data as of 1 January 2009 the company serves more than 3, 333 million fixed-line subscribers. The telephone density in the Republic of Kazakhstan is an average of 21.3 fixed lines per 100 people. JSC «Kazakhtelecom» closely cooperates and works with more than 40 operators from both near and far abroad.
It is estimated that the total number of Internet users of Kazakhtelecom JSC (taking into account the subsidiary companies) was on the basis of 2008, more than 1.19 million people, which is 41.5% more than in 2007, of which the number of users Broadband Internet (based subsidiaries) are more than 660 thousand people. The increase compared with 2007 is 124.5%.
According to the operational data for the 12 months of 2008 consolidated revenues of Kazakhtelecom JSC amounted to KZT 164.39 billion (Tenge is the National currency of Kazakhstan, current exchange rate is 1USD=147.7 KZT). The increase in consolidated revenues compared to 2007 was more than 3%. Value EBITDA (income before taxes and amortization) amounted to about KZT 46 billion. Net profit of Kazakhtelecom JSC for 2008 is projected at the level of actual 2007 and amounted to KZT 31.38 billion.
Strategy of Kazakhtelecom JSC
The major long term strategic objective is to increase share capital value of the Group of companies of JSC Kazakhtelecom. Based upon the mission and vision of JSC Kazakhtelecom, the following key strategic directions have been determined for up to 2017 in order to achieve strategic objectives: (1) building up efficient structure of the Group; (2) developing business (new services and new markets); (3) optimizing the mechanisms of management of the Group; (4) building up modern telecommunications infrastructure meeting the requirements of the world trends in developing communications networks and taking into account both the exiting and new types of telecommunications services; (5) introducing new info-communications technologies on the telecommunications networks; and (6) integrating the national telecommunications network into the global info-communications infrastructure.
Analysis of performance of Kazakhtelecom JSC
Kazakhtelecom JSC is implementing a number of major infrastructure projects, upgrading and digitalization of telecommunications networks, the introduction of new technologies providing for the villages, as well as the development of broadband Internet access.
Currently, Kazakhstan has an independent and competitive telecommunications network, the operation, which is largely attributable to the implementation of Kazakhtelecom JSC largest state project - the construction of an information superhighway (INSM). This project helped to make a significant step towards the creation of «digital States», infrastructure «electronic government», and «information society». In addition, NISH will ensure the integration of Kazakhstan into the world information space.
An important direction of development of telecommunications sector is the modernization and development of the local telecommunications network, the construction of the data transmission network, the introduction of new services. Kazakhtelecom JSC develops backbone IP / MPLS. The project established multi routers for large-scale introduction of new services of data transmission. At the level of regional and district centres in Kazakhstan in 2006, launched the service of broadband access to Internet-based technology ADSL - «Megaline», IP VPN.
Infrastructure projects of Kazakhtelecom JSC
Within the framework of «30 corporate leaders of Kazakhstan», Kazakhtelecom JSC completed the construction of a backbone network such as Next Generation Networks. Today, JSC «Kazakhtelecom» is the first telecom operator in the CIS that implemented the transition to NGN network of Call Centers throughout the country. Unlike traditional network-distance connection is working on NGN technology IP. This decision enabled the network to expand distance communications most efficient and economical way and at its base to develop local networks of NGN. During 2007, local NGN networks in the following cities of Astana, Almaty, Karaganda and Pavlodar, Taraz, and Taldykorgan were put into operation. In 2008, the running of the NGN network in the following cities of Petropavlovsk, Ust-Kamenogorsk, Semipalatinsk and Shymkent were implemented. The construction of NGN networks are being implemented in the cities of Atyrau, Almaty and Aktobe.
As part of «30 corporate leaders of Kazakhstan», Kazakhtelecom JSC started a development of modernization of rural telecommunications networks using technology CDMA.The digital standard for wireless CDMA (Code Division Multiple Access) allows rural telephone services through wireless technologies. Coverage base station CDMA-450 in rural areas is 25-35 km. Development of this is realized from the beginning of 2008 by the subsidiary of the company Vostoktelekom LLC. For the year 2008 it installed 200 base stations in 12 areas.
As part of the State Program for the Development of Rural Areas for 2004-2010, the company completed all the advanced telephone system and provide electricity in rural areas in 2008. In addition, the Kazakhtelecom JSC carried out projects for the introduction of wireless Internet access technology for Wi-Fi and Wi-max in 2006.
Successful achievements of Kazakhtelecom JSC
The successful activities of Kazakhtelecom JSC were marked by EuroMoney, an international publishing house. In 2005 year Kazakhtelecom JSC was nominated the best telecommunication company of CIS and in 2006 year - the best telecommunication company in Central Asia. Kazakhstan's stock exchange had awarded Kazakhtelecom JSC by the honorary diploma among other emitters with valuable securities circulating at the organised market of Kazakhstan for more than 10 years. The stocks of Kazakhtelecom JSC are traded on KASE from 1997 year. Now they are one of the most liquid equity instruments on exchange traded market of Kazakhstan.