The much-hyped and high-voltage bidding for 3G spectrum auctions concluded in late May, after 34 days and 183 rounds of heavy contesting across the 22 service areas.

The big rush for 3G spectrum, triggered by the operators’ need for crucial airwaves in order to consolidate their position in the world’s fastest growing telecom market, had them bid in excess of Rs 160 billion for a pan-Indian 3G licence. The high price surpassed all expectations, including those of the government, which was looking to rake in revenues worth, at best, Rs 350 billion from the sale of 3G and BWA spectrum. However, with a whopping Rs 677.1 billion from the sale of 3G licences alone, the government is certainly not complaining. In fact, as the industry points outs, the government is the major winner in the 3G game.

For the operators, the stakes were high. The gamble, therefore, was a dynamic yet fine interplay of individual investment rationales based on the operator’s 2G footprint, the new 3G coverage areas, the amount they could pay as the winning bid, and how far they could stretch their balance sheets.

In the end, seven of the nine operators won 3G spectrum. Bharti Airtel, Reliance Communications (RCOM) and Vodafone Essar won the coveted 20-year licences for Delhi and Mumbai, which account for the lion’s share of the country’s customers and revenues. The two metros attracted the top bids of Rs 33.17 billion and Rs 32.47 billion respectively. Bharti Airtel, RCOM and Aircel got 3G licences in 13 circles each, while Idea Cellular followed with 11 circles. Vodafone Essar and Tata Teleservices Limited (TTSL) got nine circles each. Among the new players, only S Tel fared a little better, having secured three circles.

Bharti Airtel bid the highest at Rs 122.95 billion for 13 circles. It was followed by Vodafone Essar with Rs 116.17 billion for nine circles and RCOM with Rs 85.85 billion for 13 circles. TTSL bid Rs 58.64 billion for nine circles while Idea Cellular bid Rs 57.6 billion for 11 circles.

Since no single operator got a pan-Indian 3G licence, analysts believe that the real reach of the 3G gamble for individual operators can be measured not by the number of circles they have won, but by the percentage of the total market they have managed to cover in terms of revenue and subscribers.

Operator speak
Bharti Airtel, in a statement, noted that the 3G spectrum prices had been pushed up beyond reasonable levels because of the auction format and the severe spectrum shortage, along with the ensuing policy uncertainty. “As a result, we could not fulfil our objective of achieving a pan-Indian 3G footprint,” the statement read.

Vodafone Essar’s CEO and managing director Marten Pieters, on the other hand, is happy that the company has secured a strategic footprint across the country, particularly in the markets where demand for 3G services is expected to be high in the next few years. “We are excited to be able to offer 3G to our customers and aim to launch the services before the end of the year. We expect a strong uptake for 3G in these markets, particularly among the higher-value customers, which is a growing segment owing to the rising affluence and increasing urban population,” noted the company statement.

RCOM, too, stated that the company had met its key objectives by winning in the most attractive circles at a conservative spend. The company’s media statement said, “It will help us optimise the immediate and long-term potential for 3G services.”

Sanjeev Aga, CEO of Idea Cellular, who has long maintained that the demand for value-added services and telephony is rising the fastest in rural India as cellphones are the only mode of exposure to the world in these regions, is a happy man. Idea won spectrum in the 11 circles that contribute about 81 per cent to the company’s revenues.

Meanwhile, incumbents Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL), which have been operating in the 3G space for more than a year, having been awarded 3G spectrum in 2008, are more than willing to match the 3G bid price of the private operators. They maintain that they have enough cash reserves to pay the price and do not need to wait. “However, if the government decides to offer a waiver, we will follow the government’s rule,” says BSNL CMD Kuldeep Goyal.

Financial implications
 The outcome of the 3G auctions came as no big surprise. Analyst firms that had been closely following the bidding process had a sense that an all-India 3G licence would go upwards of $2 billion, maybe even closer to $4 billion, according to some firms.

Industry experts nevertheless cautioned that the high price the operators would have to pay for the airwaves could become a “winner’s curse”, making a huge dent in their balance sheets. Fitch Ratings concurred that the spectrum auction would have a negative impact on the credit metrics of most private telecom operators in the short to medium term.

Analysts say that apart from paying the bid price, the operators will also incur a huge capex ($1 billion-$2 billion per operator) for rolling out 3G services. They would also have to bear a significant interest burden on their borrowings, which would range from Rs 30 billion to Rs 35 billion annually. Moreover, the financial burden on telecom operators could mount if the recent recommendations of the Telecom Regulatory Authority of India (TRAI) linking the price of the excess 2G spectrum held by some operators to the current 3G price gets accepted.

Nevertheless, the operators are not wasting any time in mustering resources, and are actively raising funds through a combination of international and domestic borrowings. Lenders, led by the State Bank of India and IDBI Bank, have more or less committed over Rs 400 billion to telecom companies to meet their 3G spectrum funding requirements, due to be paid by early June.

Bankers say that telecom companies had already tied up Rs 350 billion-Rs 400 billion from the banking system in the past one year to brace up for the auctions. However, with the total winning bids amounting to about Rs 680 billion, the companies are now turning to banks for top-ups.

Expectations and returns on investment
Once spectrum is allocated, the first step for the operators will be to provide the services at the earliest, possibly by late 2010. However, industry watchers wonder how the operators will justify their high bids for 3G spectrum. Neither analysts nor operators expect any significant increase in revenues from users moving to 3G; perhaps 10 per cent due to more data usage, say some analysts.

Apart from providing high speed data services, 3G is also expected to facilitate high bandwidth services such as multimedia-based value-added services. However, with 3G content and killer applications still at a nascent stage in the country, the realisation per subscriber is not likely to go up substantially. “The average revenue per user (ARPU) from subscribers who shift to 3G may go up from Rs 150 to Rs 200. But that is only 10 per cent of the entire market. The impact of the increase in the overall ARPU on account of 3G will not be high,” says a senior analyst from Anand Rathi.

3G services are expected to be targeted at high-ARPU subscribers while high speed data services will be aimed at corporate users. The services are first expected to pick up in the Delhi and Mumbai metros, where 15 per cent to 20 per cent of the subscribers already have a 3G handset. They will have no difficulty in moving to the new service. These subscribers also generate ARPUs of about Rs 750-Rs 1,000 per month. In the rest of the country, however, the uptake of 3G services is likely to be less than 5 per cent.

As a positive fallout, the industry expects 3G handset prices to fall to about $70, which will result in an accelerated shift of the existing 2G users to the new services. “The prices of high-end smartphones will come down significantly after the introduction of 3G services. Currently, the penetration of 3G handsets in India is just 1 per cent. However, it will take at least two-three years for 3G mobile services to pick up significantly,” notes Angel Broking analyst Rahul Jain.

However, some analysts are optimistic about 3G services and see a huge market potential in it. A report by research firm CLSA points out that India has over 150 million users who use some form of data on their phones, and over 50-60 million circulating 3G handsets. Further, with broadband penetration at an abysmal 1 per cent, there is tremendous scope for future growth of this segment. These factors are expected to provide a major boost to the uptake of 3G services.

For Indian telecom operators, even an initial incremental increase in revenue from higher data usage is worth it. Their decision to pay a high price for 3G spectrum was also largely based on the fact that they would no longer be constrained in expanding their 2G user base on account of spectrum shortage. Most operators expect an aggressive expansion in the 2G customer base riding on the back of 3G spectrum.

Clearly, the industry is looking forward to exciting times. After slugging it out for spectrum, the next big battle will be centred on netting the maximum number of users for 3G-based services and applications. Meanwhile, the BWA spectrum auction also promises to be as aggressive and engaging as the 3G spectrum auction.
Shampa Bahadur and Dolly Khattar