The 3G spectrum auctions have been postponed three times due to differences among various ministries over issues such as the reserve price and the number of blocks to be auctioned. In the latest development, the government is likely to hike the base price for 3G spectrum auctions from Rs 20.2 billion to either Rs 35.4 billion (as proposed by the Department of Telecommunications) or Rs 40.4 billion (as proposed by the Ministry of Finance). tele.net speaks to industry analysts about the hike in 3G spectrum prices…
Is the hike in reserve price for 3G spectrum justified? Does it make a viable business case for the operators?
Kunal Bajaj: In my view, the reserve price of Rs 40.4 billion is definitely a bit high. But I think that the government is trying to ensure that minimum revenue levels are earned from the spectrum auctions. However, say for a circle in which six to seven slots are going to be auctioned, and only that many operators are in a position to be able to afford 3G licences or spectrum, the bid might just end up settling at the reserve price itself.
Our analysis shows that it is difficult to create a good business case for 3G at Rs 40.4 billion. But operators will still need to go in for 3G auctions, as there is really not much choice. This will be particularly true of the metros, where, if operators do not get 3G spectrum today, it is going to create a major gap in their service portfolios vis-? -vis operators who do get the spectrum. High-end subscribers are important revenue and profit margin contributors for operators. If operators are unable to service their highend subscribers, it would actually have an adverse economic impact on them.
Priyabrata Das: There has been a long-standing debate in the country on the contours of the 3G auction design including, inter alia, the issue of reserve price for 3G spectrum and the number of operators to be awarded licences in a given circle. While the reserve price for 3G spectrum was initially set at Rs 20.2 billion for pan-Indian licences, various ministries/stakeholders preferred a higher reserve price ranging from around Rs 35 billion to Rs 40.4 billion. Similarly, on the number of available slots, there have been varied viewpoints ranging from less than five to as many as eight operator slots for a circle.
Needless to say, guidelines for allocation and pricing of spectrum determine the nature, quality and price of wireless services to the end-customer. A marketfriendly price will determine whether 3G technologies, which support data services like high speed internet, music and video downloads, are available widely across India for all customer segments, or serve only selected pockets (typically in the metros and category A circles).
It is widely appreciated that while many operators have evinced interest in 3G auctions, it will make a viable business proposition only up to a particular price point. Industry experts believe that in India, the mass market is expected to be predominantly a voice-play one in the short to medium term. Thus, while data usage in most markets here is expected to be a niche product in the short term, it may help in reducing churn amongst certain customer segments.
Furthermore, it needs to be ascertained whether enough spectrum will be available for a mass-market wireless broadband offering, which can drive higher ARPUs. In addition, services such as music download or video calls on mobile phones may not yield sufficiently high incremental overall revenues so as to justify excessive prices for 3G spectrum. Industry observers believe that most telecom operators had factored in a lower reserve price in theircalculations for 3G spectrum. High reserve prices may push the bid amounts leading to high tariffs, as operators will need to ensure a viable business proposition for 3G services. High prices may also adversely impact service uptake and make it difficult to achieve the overarching objective of higher penetration.
Sridhar Pai: The hike in 3G spectrum pricing could have been avoided. The adjusted gross revenue (AGR) component could have been raised in a progressive manner to make up for the revenues.
On the other hand, this approach could have been designed to limit the number of participants artificially. In any case, the real big boys will participate for sure as for them, 3G spectrum is hardly a matter of choice; it is a necessity.
Mahesh Uppal: I believe that the spectrum reserve price should make a difference only in those instances where the level of competition is likely to be low. I do not believe that a high reserve price is going to make a huge difference in those circles where the competition is high like the metro and A and B circles. In most other cases, the auctions should easily exceed the reserve price. Reserve prices should not be kept low only so that more people can participate in the auctions.
The issue really is whether operators can sustain their growth without spectrum. There is practically no likelihood of spectrum coming to them in a non-competitive fashion. In the future, spectrum will not come at an administered price. So, operators will have to factor in the cost of spectrum at a realistic market price, and I do not believe that these prices should really be astronomical except in some extreme cases.
What do you estimate will be the final bid price for 3G spectrum?
Kunal Bajaj: It depends on which of the following scenarios is going to prevail.
The old scenario involved a reserve price of Rs 20.2 billion, with four slots available for bidding and only two slots available for Delhi. If the earlier model is followed, it is believed that the final bid price will settle slightly above the reserve price for each of the circles, and this will be true for most circles. But for Delhi, it is very difficult to say what the final price is going to be, since there will be only two slots available for auction, with all major telecom operators planning to bid for them. No operator will want to miss out on the opportunity to get spectrum in Delhi. Hence, the likes of Airtel, Reliance and Vodafone may be willing to bid almost endlessly to ensure that they win the Delhi bid.
If six to seven slots are going to be made available for auction, then the final price is likely to be very close to the reserve price. So, whether the reserve price is Rs 20.2 billion or Rs 40.4 billion, the final bidding price is unlikely to be much higher than the reserve price. If the situation is such that Rs 40.4 billion is the reserve price, and if there are, say, only four available slots for auction, with only two slots available for Delhi, then again, the final price should be somewhere around Rs 40.4 billion, except in Delhi, where the price may go somewhat higher than the reserve price.
Priyabrata Das: Given the vastly different market potentials of various telecom circles, investor interest and bid price are expected to vary from circle to circle. Industry observers believe that some operators, as part of their business strategies, may initially focus their 3G offerings on metros and category A circles. It is in these circles that auctions may witness significantly higher interest from the current market players, new players and international telecom operators. Hence, the bids are expected to be driven in these circles.
It is worth mentioning here that setting a clear timetable for 3G auctions, resolving differences over reserve price and injecting greater clarity on 2G spectrum policy will kindle greater interest in the 3G auctions.
Sridhar Pai: No comments.
Mahesh Uppal: It is difficult to project a final price, but I expect it to be substantially higher than the reserve price in most circles.
How are smaller operators like Aircel, Loop or Swan positioned in terms of bidding? Do they stand a fair chance?
Kunal Bajaj: I think it is going to be quite difficult for the smaller operators and foreign entrants expecting to win the 3G auctions, especially in a situation where, let’s say, only four slots are up for auction. Clearly, the carriers that have an established presence and operations in the country are going to be in a better position. However, in some circles that are commercially not very attractive, like some category C circles, some of the operators may decide that they want to limit their investments and some small regional operator may be able to win the 3G spectrum. However, in a scenario where six to seven slots of spectrum are up for auction, it is difficult to believe that any of the small or regional operators will actually be able to win 3G spectrum.
This is because their spending power and ability to earn a return on investment will be limited, particularly after mobile number portability is introduced. In some countries, small regional operators have lost out to larger operators with a national footprint and better coverage. Combining the effect of mobile number portability with 3G auctions, smaller operators will definitely have a tough time.
Priyabrata Das: Each prospective 3G operator is permitted only one pair of 5 MHz spectrum slots in each circle, that is, 5 MHz between 1920 and 1980 MHz and 5 MHz between 2110 and 2170 MHz. It is therefore estimated that anywhere between three and eight 3G players could be operating in various circles in India.
The high reserve price could possibly be a deterrent for new operators to take part in 3G auctions, as they would need investments in the range of $1 billion for the licence and thereafter, additional funds for pan-Indian network rollouts. However, some new operators are of the view that 3G will drastically change the rules of the game with a potential for service differentiation and higher margins. This may provide the opportunity to offer services at attractive tariffs, along with growing volumes. Therefore, some of the new mobile players,who have just started services or are yet to roll them out, believe that 3G could be an attractive opportunity to transform the contours of the market and dramatically alter the competitive landscape.
Sridhar Pai: It would be speculative to respond to this because no matter how we look at it, operator strategies are changing every day. A lot will depend on the ensuing pricing scenario. Besides, we are yet to know if the auctions will happen at all this year. Despite all the discussions, the Ministry of Finance, DoT, and other policy-makers are maintaining a deafening silence on the matter, thereby completely confusing investors, operators and the industry.
Mahesh Uppal: Smaller players are clearly stretched out as existing players have already been in the market for longer and do not have the other infrastructure costs which the new ones are now incurring. The incumbents and the established players will be far better placed than the new ones in the auctions.
Is the competition for 3G spectrum likely to be intense if the reserve price is raised? Will foreign participation be impacted?
Kunal Bajaj: If more slots are available for auction and the reserve price is kept low, then foreign operators may become interested and want to bid. But again, if there are a limited number of slots and the reserve price is kept high, it would be difficult for foreign operators to justify bidding directly for 3G spectrum and trying to make a stand-alone business case for 3G.
Even if the foreign operators get 3G spectrum, they need to pay an additional amount to get the universal access licence, thus making it rather tough for them to make a business case for 3G.
Priyabrata Das: International telecom companies with 3G experience are allowed to participate in the 3G auctions, thus paving the way for global behemoths to gain a foothold in the world’s fastest growing mobile market. It is apparent that India’s geographical size, current telecom penetration levels and growth potential offer enormous advantages over other comparable markets. However, keeping in mind the current Indian low-price model, it will be imperative to provide 3G services at the most affordable rates.
While investor interest is expected to be positive, there are some international operators who may prefer to focus on the 2G business model (based on press reports). Certain industry players are of the view that some customer segments in India may not be as inclined towards 3G as others. Considering the trend in other markets, the 3G market may take time to evolve and, during that period, it may be used more as a capacity enhancer.
Sridhar Pai: The big players will undoubtedly participate. Foreign players such as NTT DoCoMo will participate through their JV vehicles. Brand new operators such as AT&T may or may not go solo. This depends on a number of factors such as timing of the auction, general sense of improvement in the global financial market scenario, and any new rules that may just come out of the government corridors.
Mahesh Uppal: The competition for 3G spectrum in at least the major circles like the metros and category A and B circles, should be fairly high. I do not expect much foreign participation since 2G spectrum will still be a problem and a pure 3G offering may be unrealistic in India’s already crowded market. Most of the players that have got licences are players who are essentially Indian players with foreign participation. I would expect most foreign players to buy into existing companies after the auction to bid for 3G on their own.
Given the expected hike in reserve price, how is the pricing model for 3G services likely to be affected?
Kunal Bajaj: Unfortunately, telecom operators are in a tough position. They have learnt their lessons from 3G launches in other countries. Regardless of what the spectrum price is, they cannot increase tariffs. This will probably make the operators a little less aggressive when entering the 3G market. Though operators may not reduce the pricing for data services and data cards, they will not increase voice tariffs for 3G as these will essentially have to be the same as 2G. The real challenge is going to be in how quickly operators become comfortable with offering unlimited data plans and data cards, and giving discounts on valueadded services (VAS).
Priyabrata Das: High reserve prices would typically imply high 3G tariffs. Operators will, therefore, have the opportunity to offer data services with relatively high margins to these select customer segments in cities, while voice revenues are expected to become a commodity business with fewer margins.
In view of this, 3G players are expected to provide attractive price plans for high speed internet, music and video downloads so that the same can encourage greater uptake, drive VAS and data revenues and act as a key differentiator for their services in these select markets.
Going forward, operators are expected to continue their efforts in broad-basing the 3G market in India by lowering price points. As of now, only about 6-8 per cent of mobile phones in India are 3G capable. It is expected that we will see greater efforts on the part of operators to facilitate 3G phones at lower price points so as to generate mass-market interest for 3G phones and services. While 3G handsets are relatively more expensive, it is a well-known fact that equipment suppliers are exploring options to make them more commercially viable.
Sridhar Pai: No comments.
Mahesh Uppal: I do not expect the 3G pricing model to be affected in any way for the simple reason that auction prices are typically sunk costs for market entry. They do not impact enduser prices that most economists have predicted. If companies pay huge amounts of money for spectrum it might affect their rollout plans, which is quite different from end-user prices. Rollouts will be slower because operators need to raise money to invest. But given the competitive market scenario, they have no choice but to compete at the given prices.
