Will 3G turn to be a bitter pill for Indian telcos?

Devidutta Tripathy

NEW DELHI, INDIA: Aggressive bidding for 3G mobile spectrum in India, with the cost of one nationwide licence hitting $2.5 billion, puts further pressure on Indian carriers in a cutthroat market to make the most out of the new services.

The auction among nine operators including Bharti Airtel, Reliance Communications and Vodafone's Indian unit, is expected to wind up in coming days.

Bids have exceeded expectations, which is good news for a deficit-strapped government but raises the stakes for carriers who will spend billions more on equipment to build 3G networks in a market where call rates are among the cheapest in the world and selling value-added services will be tough.

Elsewhere, operators have struggled to turn high-speed 3G technology into meaningful new revenue streams, and in India the "killer application" for 3G spectrum may be additional capacity on the country's crowded airwaves.

"The bids are getting very aggressive but is there a choice for the key players?," said Hemant Joshi, telecoms practice head for consulting firm Deloitte in India, who said heavy bids could erode the profitability of the winners.

"Maybe the telcos are future-proofing their companies by getting additional spectrum. Spectrum is in short supply and service levels in voice are getting bad," he said.

The government is poised to generate roughly $10 billion from 3G alone, higher than its estimates of $8 billion in total from separate auctions for 3G and wireless broadband spectrum. The broadband auction starts two days after the 3G auction closes.

Most analysts were expecting all-India spectrum to cost between $1.3 billion to $2 billion. Brokerage Kotak Securities had the highest winning-price forecast of $2.53 billion.

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The government is selling four sets of nationwide licences -- three from the auction and one set to state-run telecoms firms which would have to match the highest bid price paid by private operators. Some bidders are competing only in selected zones.

In 2000, the UK raised more than $35 billion from a spectrum auction, while Germany collected about $67 billion from its UMTS licence auctions. In 2008, the United States raised $18 billion from spectrum auction.

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The popular valuation metric for 3G auctions is dollar per megahertz of spectrum per population covered, said Kunal Bajaj, India director for telecoms consulting firm Analysys Mason.

That metric reached as high as $4/MHz/pop in the UK auctions and has crossed $4 in some Indian zones like Delhi and Mumbai to be at "crazy levels", Bajaj said, though for the pan-India level it is at $0.40.

Deloitte's Joshi estimates each 3G-winning Indian operator would need to generate additional annual revenue of 18 billion rupees ($397 million) to maintain profitability after paying the 3G licence cost. That would mean signing up 7.5 million more subscribers on top of the current additions.

"From where they are going to come? Who is going to pay the additional top line of 18 billion rupees? What is going to happen to profitability?," he said.

Bharti Airtel and Vodafone Essar have not received additional 2G spectrum for about a year, even as subscribers have soared, undermining quality of services.

"The 3G auction is kind of do or die situation for companies," said Mahesh Uppal, director at telecoms consulting firm Com First, who expects spectrum winners to upgrade high-value customers to 3G to give them better quality of services and retain them from being poached by competitors.

"One basic thing is to remain competitive in the long term, you need to secure spectrum to save voice business that is your main contributor to revenue, and at the same time look for new revenue sources in data," he said.

Reliance Communications and Bharti, the two worst-performing stocks in the benchmark index last year, are down about 11 percent and 9 percent so far this year amid concerns about a price war eating into profits, while high spending for 3G remains an overhang. The benchmark index has lost 2.7 percent.