The much-awaited, first ever auction of radio frequency spectrum for 3G services kicked off on April 9, 2010 with nine mobile operators, including India’s big six private players, aggressively participating in the bidding.
The start of the auctions has brought great relief to the industry, which has been starved of spectrum and has been lagging behind other countries in offering 3G services. The major players ?? Bharti Airtel, Reliance Telecom, Vodafone Essar, Tata Teleservices Limited (TTSL), Idea Cellular and Aircel ?? will make a bid for all-India 3G spectrum, while new players like Videocon Telecommunications, S Tel and Etisalat will only bid for a few selected circles.
The government has offered three or four blocks of spectrum in each of the 22 circles. According to the notice inviting applications issued in February 2010, of the 22 telecom circles, Punjab, Bihar, West Bengal, Himachal Pradesh and Jammu & Kashmir will have four private players for the auction. The other circles, including the Delhi, Mumbai, Kolkata and Chennai metros, will have only three private players. State-run operators Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Limited are not participating in the auction as they were allotted spectrum last year and have already started delivering 3G services. They now have to match the price paid by the highest bidder in the respective circles.
The auction format, as designed by the Department of Telecommunications (DoT), allows the simultaneous online auction of 22 service areas over a secure website. The bidding is being conducted from 9 a.m. to 7.30 p.m. on all days, except Sundays and national holidays.
The bidding process will play out in such a manner that, in each case, the auctioneer will raise the price step by step until the number of bidders remaining on the deck matches the number of slots available for sale. The “clock auction” is intended to start on a slow note and gather momentum gradually at a pace set by the auctioneer. This will eliminate the chances of overbidding for licences. Analysts and operators expect the auctions to continue till early May, after which the broadband wireless access (BWA) auctions, involving companies, are expected to begin.
With the base price for 3G spectrum fixed at Rs 35 billion, the government hopes to rake in at least Rs 350 billion from the auction, which will significantly help in bringing down the government’s budget deficit amounting to Rs 4.14 trillion (6.7 per cent of the GDP) in the previous fiscal year. Analysts believe that the expectations may not be unrealistic because, given that there are only threefour slots per circle, the bidding will be aggressive. They expect at least the four serious bidders ?? Bharti, Reliance Telecom, TTSL and Vodafone Essar ?? to slug it out for obtaining some more airwaves.
Other analysts, however, feel that the ongoing auctions will not yield much financially. They believe that only the serious players, who are well aware of the market conditions, have applied, and they would obviously not be willing to overpay. According to these analysts, the three panIndian 3G slots will generate only about Rs 240 billion, as against the expected Rs 350 billion.
3G services were originally scheduled to be launched in India in 2007, but have been repeatedly delayed amidst controversies involving the setting of the bid price and in getting the defence forces to release spectrum. This, along with the European experience of overbidding at 3G auctions, has made the operators more circumspect. As Marten Pieters, MD and CEO, Vodafone Essar, recently put it, “We have seen the problems with the auction in the UK. We, as operators, have learnt some lessons from Europe, where prices for 3G licence, with hindsight, were very high. With that learning, I can tell you that we are not planning to overpay. So, whatever we pay will be based on a valuation and business case, which means that we can make returns on that investment. At the same time, you have to realise that 3G is not like starting a new business. It’s the next version of the same thing. It is the turbo on the existing engine and will not be sold as a separate category. It means we will simply sell our existing customers better data services. It is completely built on top of the existing business case.
In a media interview, Mahesh Prasad, president, Reliance Communications voiced doubts about the business case for 3G. According to him, 3G provides an opportunity to launch wireless broadband, but going wireless in metros alone will not justify the business case. Also, deploying 3G will not change the ARPU level in the country as it will play only a marginal role in improving the user experience.
Uninor MD Stein-Erik Vellan stated that the company would stay away from 3G bidding as it not see a business case for 3G. According to Vellan, voice-based services provided by the 2G technology contribute about 90 per cent to operator revenues, and this situation is expected to continue for a long time.
Multinational telecom firms AT&T, Verizon, British Telecom, France Telecom, MTN, Orascom and Deutsche Telekom have also decided not to participate in the auctions. They contend that the 3G policy will favour the existing operators that offer services on 2G airwaves. Successful bidders for 3G spectrum will receive only 5 MHz of airwaves, which is not enough for new players to start 3G services.
Market watchers predict that the BWA auctions will generate greater interest among operators, not only from Wi-Max players as expected earlier but also from operators like Qualcomm, which have time division long term evolution plans for India. Dr Mahesh Uppal, director, ComFirst, says, “BWA is definitely going to be more attractive for the players than 3G as it is reasonably priced and is, therefore, more attractive. Also, the BWA market will cater to operators who are planning long term and intend to build on fourth-generation technology.
All said, the start of the 3G auction is good news for the industry. Expectations are high. With voice calls making way for video downloads and online gaming, analyst firms have pegged spends of over $15 billion on 3G services by 2013. The handset industry, in line with market sentiments, has flooded the market with lowpriced, 3G-enabled handhelds over the past year. 3G, finally, seems set to make a splash in the country.
Spectrum auction process
The ongoing 3G spectrum auction process involves a fixed number of spectrum slots that are being auctioned separately for the 22 telecom circles, through a simultaneous process over the internet. Bidders have authentication tokens and passwords to access the electronic auction from their computers.
The ascending e-auction process consists of multiple rounds. At the end of each round, provisional winners are declared. In the first round, the operators had to match the base price quoted by DoT for each circle. This price is revised after each round. The auctioneer, Rothschild and DotEcon, announces a higher price for every round and analyses the demand at that price. The revised figure can be higher than the last round’s base price by 1 to 10 per cent depending on the demand. For instance, if the number of bidders is one more than the number of spectrum slots, the increase would be 5 per cent. If there are two more bidders than the number of slots, the price would be raised by 10 per cent. However, if the number of bidders is the same as the number of slots, the price goes up by only 1 per cent.
The initial base price for pan-Indian 3G airwaves has been pegged at Rs 35 billion, while for BWA airwaves, it is Rs 17.5 billion. The auction process will end when the demand equals the number of slots available in each service area.
To begin with, the government has collected a total of Rs 58.06 billion in earnest money from the potential bidders. Applicants seeking 3G spectrum across the country have paid Rs 5.5 billion each as earnest money; those who wanted a pan-Indian presence for BWA have paid Rs 2.52 billion each.
This deposit amount determines the initial eligibility points for a bidder. These points, in turn, determine the bidders’ subsequent ability to make bids. For the purpose of the auction, the circles have been divided into three categories ?? A, B and C. For example, if a bidder places a deposit of Rs 2.8 billion, this would result in an initial eligibility of 224 points, which corresponds to the eligibility points associated with the seven circles placed in Category A. However, this bidder would not be able to bid for a combination of three Category A service areas, eight Category B service areas and five Category C service areas even though this combination has an associated eligibility of 207 points (which is less than the bidder’s initial eligibility of 224 points). This is because the earnest money deposit required for this combination is Rs 3.17 billion (which is greater than the bidder’s earnest money deposit of Rs 2.8 billion).
Based on the earnest money deposited by various companies, DoT has given 350 initial points each to six companies, allowing them to bid for all the circles. Videocon has got only 12 points, which will enable it to bid for any of the 15 circles in Categories B and C. S Tel has 18 points, Etisalat has 311 points, Augere has 102 points, Spice Internet has 64 points and Tikona Digital has 248 points. These points will, however, keep changing as the auction progresses, depending on the company’s activity. An aggressive bidder could get more points while an inactive company may lose points which, in turn, will affect their ability to make fresh bids.
