A decade after Europe adopted 3G and nearly two years after the Telecom Regulatory Authority of India (TRAI) gave its recommendations on 3G, the government, in end-July, outlined the roadmap for 3G services, broadband wireless access (BWA) services and number portability.

It was about time too. The policy has been long overdue, compelling the industry to keep on hold its 3G plans. The wait now over, users can expect to catch up with the rest of the world and move on to highend next-generation services. They will get a chance to enjoy fast internet access and a variety of games and multimedia content, from maps to music, on their mobile phones.

It’s not only the country’s over 280 million mobile users who are pleased. Operators, vendors, content developers all see this as an opportunity to scale up to the next level of growth. Most experts agree that though the policy is on expected lines, it will encourage greater consumer choice, lower prices, more competition and also, sizeable revenues for the exchequer.

There are issues of course, and operators are asking for more clarity. Comments Rajat Mukarji, chief, corporate affairs, Idea Cellular, “While we welcome the announcement, we hope that the interests of the end-user have been factored in. With the high level of entry cost proposed, it is unlikely that the endservices will be as cost competitive as the 2G services being provided today. Also, there are several areas where clarity and consistency are required. We hope these will be ironed out.”

3G policy
 The 3G policy is initially looking at about five 3G service providers in each circle. The minister for communications and IT, A. Raja, however, expects that the number of 3G operators will increase, probably to 10, depending on the availability of spectrum.

The 3G space will be open to new licensees, including international players, in order to step up competition. This is contrary to TRAI’s view that the currently available spectrum was just about enough to cover the needs of the existing players, and hence it didn’t make sense to allow new licensees to bid for the limited resource.

Spectrum
One of the most contentious issues has been spectrum allocation. The policy has identified 10 blocks of spectrum for allocation. While GSM players will get one band, CDMA players, which have received special mention in the 3G policy, can pick from three bands in the 450 MHz, 800 MHz and 1900 MHz frequencies. There will be no auction for the 800 MHz band, which is the most efficient and cost effective for 3G services. Players like Reliance Communications (RCOM) and Tata Teleservices Limited (TTSL) can seek one block in each circle, which will be allocated to the operator with the highest subscriber base in that circle.

The allocation of spectrum for both 3G and BWA will be through global auction, on the condition of availability. The allocation will come with fixed rollout obligations. DoT is also considering imposing a penalty for spectrum hoarding.

State-run public sector units (PSUs), Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL), have been given preference. They have a reserved block in each service area, but will need to match the highest bid amount.

A sticky point in the negotiations between the Department of Telecommunications (DoT), CDMA and GSM operators earlier had been on the preferred band for 3G services. This issue has been settled to some extent. Comments B.V. Raman, India country head, CDMA Development Group (CDG), “We welcome DoT’s decision to open the internationally harmonised 450 MHz, 1900 MHz and 2100 MHz bands for 3G services. The CDG hopes that DoT will make spectrum available in the 450 MHz and 1900 MHz bands for auction at the earliest.”

The GSM Association and the Cellular Operators Association of India (COAI) too are happy that the government plans to award licences for 3G spectrum via an auction and automatically extend the underlying 2G licences to make them coterminous with the 3G allocations.

Pricing
The 3G auctions are expected to yield significant revenue according to telecom experts. Despite all the uncertainty related to spectrum availability, the government is looking at a revenue of Rs 300-Rs 400 billion from 3G and BWA auctions.

The calculations are based broadly on the reserve price for spectrum, which has been pegged at Rs 20.2 billion for a panIndian licence, Rs 1.6 billion per block for Category A circles, Rs 800 million for Kolkata and Category B circles, and Rs 300 million for Category C circles. The licence is valid for a period of 20 years.
Operators are exempt from paying any licence fees for the first year; thereafter they will be charged 1 per cent of the adjusted gross revenue every year.

For BWA services, the reserve price will be a quarter of the 3G price. Separate auctions will be held and will be conducted by specialised agencies for each telecom service area. For both 3G and broadband, the highest bid price will have to be matched by all successful players in a circle.

DoT has also stipulated that new players would need to have a unified access service (UAS) licence, which would mean another Rs 16.5 billion for a pan-Indian licence. Recent telecom entrants like Swan, Videocon and Unitech can bid for 3G as they already have UAS licences. However, operators like AT&T and BT would have to first acquire a UAS licence. Their total outgo would therefore be about Rs 40 billion to qualify for the auction.

The bidding in lucrative circles like Delhi and Mumbai is expected to be cutthroat. According to a senior Bharti Airtel official, Delhi and Mumbai will, in all likelihood, not be able to accommodate more than three players initially, given the spectrum crunch. Of this, one block has been reserved for MTNL. Therefore, to gain a presence in these two circles, operators are likely to end up paying a hefty price for acquiring spectrum. Observes Sunil Mittal, chairman and managing director, Bharti Airtel, “Sensible bidding should be the case, but who knows.”

The policy has talked of subsequent auctions, depending on the availability of additional spectrum. In that event, the reserve price would be the highest bid price of the previous auction. This means that for a pan-Indian 3G licence, the subsequent reserve price would be considerably higher than Rs 20.2 billion. The government is also not averse to charging a late fee from players who miss the first round of 3G auctions.

Need for clarity
 Though 3G and number portability are forward-looking and consumer-centric initiatives, operators feel that their implementation may not be smooth. In fact, telecom analysts warn that the auctions may result in chaos.

Industry experts and operators also find a lack of consistency in the fine print of the policy. For instance, DoT has all along pushed for new entrants to be included in the 3G auction. Yet it has imposed extremely high entry barriers, including the need for new players to have prior experience in rolling out 3G services.
This may eventually result in most of the 3G blocks going to the existing operators.

According to analysts, just a few months ago, Raja had insisted that the new 2G entrants deserved spectrum at a hugely discounted 2001 price of Rs 16.51 billion. However, this logic has been reversed in the 3G policy, with the new entrants being required to fork out over Rs 40 billion (including the UAS licence) to offer 3G services. This may prove a deterrent to foreign players “as they would have to commit a minimum investment of $1 billion for 3G in India, apart from finding an Indian partner and getting FIPB approvals”, notes Prashant Singhal, head of telecom practice at Ernst & Young.

The government hints at a possible revision in the M&A guidelines though a time-frame for this has not been mentioned. Likewise, the policy document hints at trading/sharing of spectrum, indicating the possibility of such a measure, but does not comment further on such a critical issue that could have a huge impact on bid planning.

The policy is unclear on several other counts as well. For example, it does not reveal how many blocks of spectrum would be available in each circle. It merely talks of 5 to 10 blocks per circle, depending on availability. This essentially means that the bidders cannot draw up a financial model as the auction price depends on the number of blocks auctioned ? the higher the number of blocks in a circle, the lower the expected bid amount.

The policy also fails to specify when the process of e-auctions will begin. It does not lay down a timetable or acknowl edge the sequential steps required between the guidelines and the actual e-auction.

Meanwhile, the government’s decision to allocate spectrum in the 800 MHz band to the operator with the highest number of subscribers in a circle also has smaller CDMA operators worried. Companies like Sistema-backed Shyam Telecom and TTSL (in circles other than Delhi and Mumbai) are concerned as RCOM has a larger subscriber base.

The next step
 3G will be an expensive proposition given the high upfront costs. Moreover, India has one of the lowest average revenues per user (ARPU) globally and the demand for such services may be limited and price sensitive.

However, since the subscriber base is huge, even a small percentage of it adopting 3G will constitute a substantial user base. Operators believe that while it may take some time for returns to flow, volumes will eventually pick up. In fact, they are counting on 3G services to lift their ARPUs. The COAI has projected 75 million 3G subscribers by 2012.

Already, Indian software companies are drawing up plans to join hands with service providers to develop applications that will meet the needs of the Indian mobile user. M-commerce is also expected to receive a fillip. Meanwhile, mobile manufacturers are customising handsets for the price-sensitive Indian market. Currently, a simple 3G-enabled mobile handset costs about Rs 8,000 while a high-end smartphone costs about Rs 20,000. Foreseeing this as a hurdle to 3G uptake, manufacturers such as Nokia and Sony Ericsson, and chip-makers such as Qualcomm are taking a number of initiatives to make these devices more affordable in India.

According to DoT officials, the 3G global auctions could be completed over the next four months. Once spectrum is allocated, service rollout would be only a matter of time as several leading GSM and CDMA operators have already conducted successful 3G trials. “The adoption of 3G services will be gradual, with the initial rollout expected in the major urban areas. These services will gradually penetrate smaller cities, with the key adoption drivers being the type of content provided and the affordability of 3G handsets and services,” observes Deepika Chaubey, managing analyst, Ovum.

Players like Bharti Airtel, TTSL and Idea Cellular will be in a position to roll out 3G services within six months of being allocated spectrum. DoT expects the 3G auction process to be completed by the end of the year. Therefore, 3G services are likely to be a reality only in early to mid-2009.

According to analysts, the biggest gainers in the 3G race would be BSNL and MTNL, which have already been given 5 MHz spectrum even as private operators are lining up for the auction. This will give the PSUs a first-mover advantage with a near six-month lead.

To sum up, 3G services will give a huge boost to the Indian telecom sector. For consumers, it will mean newer and better services and plenty of application-based innovations. As for service providers, it will hopefully resolve their long-standing problem of spectrum shortage and allow them to escalate growth to the next level.

As we go to press, the government has announced that it is looking to finalise the online 3G spectrum auction process by September 30.

However, it may not be all smooth sailing thereafter. Cracks of dissent are beginning to show with both CDMA and GSM-based mobile operators accusing the policy of being favourable to the other.

Meanwhile, TRAI has pointed out that the government’s decision to allot 3G spectrum (800 MHz) to CDMA players without an auction process is against the principles of equality since GSM players would have to go through a global auction to get 3G spectrum.
Further, TRAI believes that the subscriber base-linked criteria for deciding the priority of spectrum allotment in the 800 MHz slot is against a level playing field, as only RCOM would stand to gain.

Adding to DoT’s embarrassment, TRAI has questioned the government’s readiness to provide 3G licences to new telecom entrants without the regulator giving its recommendations on the terms and conditions of the new licence.

A long wait
 The launch of 3G services in the country, which has been in the offing since 2006, has faced one hurdle after another. While the Telecom Regulatory Authority of India (TRAI) had submitted its recommendations for the rollout of 3G services as early as September 2006 and the government had unveiled broad guidelines for 3G in November 2007, the final guidelines have seen the light of day only recently, after several rounds of postponement.

To start with, GSM and CDMA operators were at loggerheads over the allocation of frequency bands for 3G spectrum. This was followed by delays by the defence ministry in vacating the required 45 MHz of spectrum.

More recently, the eligibility criteria for participating in the 3G auction became a major bone of contention between the Department of Telecommunications (DoT) and TRAI. While TRAI was in favour of limiting 3G spectrum auctions to existing unified access service licence holders to avoid a bidding war with global carriers, DoT argued that 3G auctions should be open to new entrants – both domestic and international ? provided they had at least a year’s experience in operating 3G services. New international aspirants would have to bid after forming joint ventures with Indian companies.

According to TRAI, global bidding would increase the price of spectrum acquisition which may not be in the interest of consumers. Meanwhile, DoT, backed by the finance ministry, was of the view that open bidding would result in more competition and would generate revenues for the government. Industry analysts have pegged the amount at Rs 40-50 billion. Previous Indian spectrum auctions in 1995 and 2001 had also been open to international bidders.

Resolving the contentious issue, the Prime Minister’s Office finally allowed foreign participation in 3G auctions, thereby paving the way for as many as 342 aspirants ? including AT&T, DLF and Deutsche Telecom-MoserBaer, which had failed to get new telecom licences in the last round ? to bid for 3G spectrum and launch 3G mobile services.

Industry speak

Kuldeep Goyal, CMD, Bharat Sanchar Nigam Limited
It is a welcome policy. BSNL has placed orders for equipment; 25 per cent of the 40 million line GSM order is for 3G services. The company plans to roll out an all-India 3G network in the next six months. The first network rollouts will be made in the north and eastern regions.

Rajat Mukarji, Chief, Corporate Affairs, Idea Cellular
The policy announcement is a culmination of consultations between the licensor and the regulator. While we welcome the announcement, we hope that the interests of the end-user have also been factored in. With the high level of entry cost proposed, it is unlikely that the end-services will be as cost competitive as the 2G services being provided today. Also, there are several areas where clarity and consistency are required. We hope these will be ironed out. We do not see this new proposal as accelerating growth in this sector for some time to come. 3G services have not yet gained major traction in Asia.

R.S.P. Sinha, CMD, MTNL
While welcoming the move, we are expecting formal allocation of spectrum from DoT. Indoor testing of 3G equipment from the trial spectrum has already been done in Delhi but outdoor trial is yet to be done as we have not yet got the spectrum. Once this is completed, we should be able to roll out services in three months.

T.V. Ramachandran, Director-General, COAI
We are okay with the 3G policy. The government intends to auction blocks of 5 MHz, which is more than enough at the moment for an operator to start offering services. 3G will nourish competition, which is clearly important for its success in the country, as competition is what helped promote growth of 2G services. Some of the cities in southern India will get as much as 60 MHz, which essentially means that there will be about 12 operators in a circle. In most other states, 45 to 50 MHz will be available, which means eight-nine players will be able to offer 3G services. We are very happy that the policy is coming well in advance of the Commonwealth Games. This will lead to good uptake of 3G services. Moreover, India can capitalise on its expertise in IT and software to develop content and applications for the 3G industry. However, we are a little perturbed that enough spectrum has not been allocated in the metros where there is maximum demand. This will lead to intensely competitive bidding. The high prices paid for the spectrum, coupled with the cost of 3G network rollouts, will impact the business model of telecom operators.

Kanwalinder Singh, President, Qualcomm India & SAARC
Qualcomm welcomes the announcement of the 3G policy by the government. We believe that the launch of 3G will benefit the entire wireless communications ecosystem in the country. The technology will bring efficient voice and rich data services to Indian consumers.

Dr D.K. Ghosh, CMD, ZTE
The pricing of 3G handsets will be the key issue in determining its uptake. While manufacturers are aggressively working to address this issue, the timing is important. With the government intending to allot spectrum to the incumbent BSNL on a priority basis, ICT will take off at the rural level. I hope that the government allocates spectrum to BSNL at a lower price. This will enable widespread 3G uptake and leading private operators will take on BSNL with aggressive pricing strategies.

Mahesh Uppal, Director, ComFirst
The policy has been long overdue and is, in many ways along expected lines. However, there are some key issues.
The policy is deeply flawed with regard to its stance on new entrants because if the idea is to promote competition in the sector, the terms and conditions for new entrants should have been more, not less, favourable. Adding a sum as high as Rs 16.51 million to the bidding amount is a distinct disincentive. Mobile licences world over are given virtually free as they are worthless without spectrum, but in India we are setting a dangerous precedent by valuing a piece of paper at $400 million. This will encourage unhealthy deals between the new licensees and the 3G entrants, and will raise the valuation of these companies that were not serious players to begin with.

Prashant Singhal, Telecom Industry Leader, Ernst & Young
It is a balanced policy. This is an opportunity for global telecom operators who missed the bus to make their presence felt in the telecom space. It also provides an opportunity for existing operators to leverage their strength, thus raising the level of competition. However, since India has one of the lowest average revenue per user (ARPU) globally, the demand for such services may be quite limited. Nonetheless, given the country’s large subscriber base, even if 5 per cent of the current users adopt 3G, there will be 14 million users. The sheer volumes could drive growth in 3G.

B.V. Raman, India Country Head, CDG
CDG hopes that DoT will make spectrum available in the 450 and 1900 MHz bands for auction at the earliest.

Kunal Bajaj, Director, BDA India
Assuming services are rolled out by January 2009, which is highly unlikely in the present scenario, we will basically be looking at 30 million 3G subscribers by 2010. The size of the Indian 3G market would be good as there are around 500 million 3G handsets in use today. So, if tariffs are reasonable, people would definitely take to 3G services.

Kiran Pande, President, ECI Telecom India
We believe the policy will give a thrust to operators to migrate their infrastructure from the current 2/2.5G to 3G and introduce a plethora of triple-play services. End-customers will benefit from new services such as video calls, and the surfing experience on mobile devices will undergo a sea-change.