How will the spectrum auction impact the industry?

The recently concluded spectrum auction can be seen as a projection of the future of Indian telecom sector.

The base price was Rs 65,463 crore but the bidding generated Rs 1.1 lakh crore which is almost 68percent premium over the base price. The license for newly acquired spectrum will be valid for 20 years.

Meanwhile, 89 percent of the spectrum was sold while 11 percent remains unsold.The bidding saw the three incumbents committing Rs 85,400 crore or nearly 78 percent of the total Rs 1.1 lakh crore spectrum revenue generated by Government of India.

However, although the spectrum auction was successful in generating significant revenue for the government, the Industry debt burden has increased manifold. The debt laden telecom companies will be further leveraged as operators would prefer to pay the government in annual instalments. Depending on the band, carriers will have to pay as much as 33 percent of their final bid within 10 days of the auction's conclusion and the rest in 10 annual instalments starting in 2017. This will make a significant change in the balance sheets and profitability and cash flow would be adversely impacted by payment of principal, interest and amortization of spectrum cost. Asset turnover ratio will deteriorate further.

This will have multiple impact.

For one, while economics demand immediate tariff increase, market forces will determine the quantum and timing of the increase. The Telecom Minister has restricted raise in tariffs to 1.3 paisa per minute.

Secondly, only eight telecom operators out of 13 participated in the auction. Some big players emerged as market leaders while smaller players weakened further. The top 3 operators control almost 3 quarters of revenue, and are emerging as the dominant players. The high debt burden and the rise of top players may speed up the consolidation process.

There was high competition for 800 MHz band because of efficient use for data services. The high potential of data service has been reflected in bidding patterns. The rise in use of smart phones, and the availability of new technologies will see the telecom players investing significantly for data enabled services and better network performance.

The Quality of Service (QoS) which will be the key performance indicator for operators in future, is expected to improve with new spectrum allocations. Data enabled services could improve with the improvement in network, which will eventually benefit the customer.

In the long term, the auction will change the landscape of the Indian Telecom industry and will help in building better customer relationships and experience.

The Government has won, but whether the victory will impact the industry and consumers depends on how the money is utilized, and the infrastructure. Will Digital India get top priority?

The author is Hemant Joshi, partner, Deloitte Haskins & Sells