Indian government rakes in $14.6B from 3G spectrum

INDIA--With limited short-term revenue opportunity for 3G, the costly spectrum may cause financial strain on the balance sheets of operators that have won the licences, say industry analysts.

The 34-day auction for 3G spectrum in India drew to a close on Wednesday. The bidding frenzy saw leading mobile operators Bharti Airtel, Reliance Communications and Aircel winning licences for 13 circles each.

The country was geographically-divided into 22 circles, but no single operator had the financial muscle to buy a license covering the entire country.

The auction eventually raised INR 677.2 billion (US$14.6 billion) for the Indian government--nearly twice its expected amount of INR 350 billion (US$7.4 billion). It had fixed a reserve price of INR 35 billion (US$755 million) for the spectrum.

Eventually, the price of a pan-India license hit INR 168.28 billion (US$3.63 billion), falling out of reach of the bidders.

Bharti, India's largest wireless operator, said in a statement: "The auction format and severe spectrum shortage, along with ensuing policy uncertainty, drove the prices beyond reasonable levels. As a result, we could not achieve our objective of pan-India 3G footprint in this round."

The proceeds will help the government cut its fiscal deficit to nearly 4.9 percent from 5.5 percent of GDP projected in the Union Budget.

"With the imminent advent of 3G services, the India telecom industry is going to enter a new phase," Kapil Dev Singh, IDC India's strategic business advisor, said in a statement.

"This phase is expected to witness introduction of innovative services and heightened collaboration between telecom players, application developers, IT infrastructure providers, content providers and consumer products companies," he added.

Nupur Singh Andley, associate research manager, connectivity, Springboard Research told ZDNet Asia in an e-mail: "With a mobile tele-density of 48 percent, market opportunities in the Indian telecom sector are tremendous."

According to Springboard data, operating expenditure in the Indian telecom industry is likely to surpass US$10 billion by 2011. "In such a scenario, where the voice ARPUs are amongst the lowest in the world, 3G services reveal new growth avenues around high-end data services," Singh Andley said.

Aggressive bidding
Delhi topped the list of most expensive circles with a final price of INR 33.17 billion (US$715 million). Vodafone, Bharti and Reliance were declared winners for the circle. Mumbai came in second with a winning bid of INR 32.47 million (US$700.4 million). Reliance, Vodafone and Bharti Airtel won this circle.

Jaideep Ghosh, executive director, KPMG said in an e-mail: "3G bids were made by telecom operators based on their business cases. It was a conscious decision, even if influenced by overall competitive bidding trends. I can't call this excessive, though it appeared aggressive."

According to Ghosh, players had bid aggressively due to the overall value that the 3G spectrum is expected to have on their business. "Spectrum is scarce and 3G offers an opportunity to roll out newer services and enhance revenues. Besides, players wanted to avoid losing the 3G race and remain a 2G player in a 3G market," he added.

Kasturi Bhattacharjee, associate director, infocomm practice at PricewaterhouseCoopers concurred: "Whether 3G spectrum would be limited to 3G services or not is debatable. Most operators may use this spectrum to expand their 2G customer base."

She said a big factor pushing telecom companies has been the fear of losing their high-end customers to the competition.

Financial strain on operators
According to Ghosh, the outflow of funds toward the auction fee will have an impact on funding for 3G roll outs and may be a source of financial strain to telecom players. "If a listed player loses key circles in the 3G auction, it will find it difficult to retain and attract high-end customers with ARPUs (average revenues per user) of over INR 700 (US$15)."

Further, with the implementation of mobile number portability (MNP), the 3G operators could induce churn in the post-paid base of an operator that lost out in the 3G bidding, thereby creating a downward pressure on margins.

"Battling that churn will be a key activity of the 3G have-nots," said Ghosh. Assuming a listed player wins many key circles, there could be a medium-term balance sheet strain due to the capital expenditure incurred in upgrading to 3G, he added.

The cost of spectrum, network roll outs and financing could be substantial. "On the profit and loss statements of operators [who have won 3G bids], we can expect to see a larger marketing and product launch budget, marginal increases in their customer service delivery spend to service the higher-end subscribers and increased network operating costs," said Ghosh.

A Religare Capital Markets report on the telecom sector, released on Thursday, said that while operators would obtain spectrum relief by adding 3G to existing 2G airwaves, moving 2G subscribers to 3G will still be a challenge given the handset ecosystem. "In our view, near-term revenue opportunity from 3G is limited and is going to put pressure on the balance sheets and profitability," the report added.

Nareshchandra Singh, Gartner principal research analyst, however, had a different viewpoint. "Though the high spectrum price will cause a financial strain on telecom operators, one mustn't forget that India is a big, growing market for telecom services. Volumes will more than compensate for low ARPUs."

According to him, operators would have done their homework before making such high bids. "Telecom is a long-term game. And India has seen reasonable amount of success. India is becoming more like the developed markets," said Singh in a phone interview.

3G's business case
The bigger question before operators is how strong the business case for 3G is, said Bhattacharjee.

She said: "The high cost of license and related capital expenditure may drag down earnings for years to come. Besides, 3G handsets are still not a mass market product in India. The cost of a low-end 3G set ranges from US$100-170.

"With license fees extremely high and the business case for 3G yet to be established with a viable average ARPU, telecom companies will take a minimum of six to seven years to recover the investment."

Singh Andley said the Indian market's high price sensitivity will force operators to plan modest 3G price tariffs in order to achieve wide-scale adoption. This will leave little room for them to recover investments and make significant profits in the short-term, she said.

Ghosh, however, disagreed: "Operators are finding it increasingly difficult to differentiate their service offering. 3G could be the silver lining to the cloud if rolled out successfully."

Against this backdrop, Ghosh said the next three years would see the heavier adoption of 3G-related services in the top 100 Indian cities, with total 3G subscribers on handhelds reaching 40 million in 2014. Additionally, HSDPA (high speed downlink packet access) subscribers accessing the network through laptops is expected to reach 13 million by 2014, he said.

"There is a business case to be capitalized on by operators and the early movers will clearly have an advantage," said Ghosh.

Swati Prasad is a freelance IT writer based in India.