Telecom is a Special Case

Some time ago- I can’t remember the exact date- there was an argument at young Shivam’s blog about what the poster child of Indian reforms was- Shivam said it was BPO, while Gaurav Sabnis said that telecom was a better example. A link isn’t provided because that particular post was deleted when Shivam transmogrified into Albert Krishna Ali.

I realised- admittedly some months late- that Gaurav’s assertion about telecom being the poster child was slightly flawed. The telecom sector can be a poster child, but it’s a very unrealistic poster child. All other things being equal, the kind of growth the telecom sector has seen won’t be matched by any other sector.

The reason for this, of course, is the good old network effect. Telecom growth feeds on itself because every time the number of users increases, it makes even more sense for a nonuser to become a user- there are that many more people to contact when he takes a phone. On the other hand, an increase in the number of motorcycle users doesn’t make motorcycles more or less attractive to other users.

This raises two questions:

  1. Given the same level of reform, is there any other sector in India which will see the same level of growth?
  2. Out of all the industries which don’t benefit from network effects, which one can be a realistic poster child for reform?

In keeping with the grand tradition of procrastination on this blog, I will answer both of these in separate posts.

0 Responses to Telecom is a Special Case

  1. Nitin says:

    Aadisht,

    There is some amount of network effect at work in most infrastructure industries. If you modify your example from motorcycles to roads, then you’ll see a network effect. Liberalising infrastructure industries first, especially those with pronounced network effects, makes good sense. Roads, Airports, Electricity, Water etc.

    Analogous to network effect is the “clustering effect” (the word comes from Michael Porter, I think). This suggests that a cluster of related industries sets off effects similar to network effects. BPO and the IT industry is a successful example of this.

  2. Elysia says:

    Where are you these days?? No posts?

  3. […] Back in the days when I had internet access, I had picked nits with Gaurav over the suitability of telecom as a poster child for reform. I had said that telecom benefitted so much from network effects that it wasn’t fair to attribute the entire success of the telecom sector to reform- though of course the success wouldn’t have happened if reform hadn’t been there in the first place. […]

  4. […] Three months ago, I pointed out that telecom is a bad poster child for reform because it has an unfair advantage- the network effect. I wrote about how retail is a better poster child, and also sidetracked into services retailing, but left one question unanswered: is there another industry which could benefit as much from the network effect as telecom has? Well, it’s time to answer that question. […]

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