IHS Global Insight Perspective | |
Significance | India has finally concluded its 3G spectrum auction, with the leading players in the market emerging as the biggest winners. |
Implications | However, the fierce competition has massively pushed up the bidding prices above expectation. |
Outlook | Although the winners will now gain competitive advantages over their rivals, high spectrum fees and network costs will bring serious financial burdens in the years to come. |
India’s 3G mobile spectrum auction, which began on 9 April, finally ended yesterday (20 May), after 183 rounds of bidding. According to Dow Jones, the Indian government said it would garner 677.19 billion rupees (US$14.6 billion) from the auction, including payments by state-run BSNL and MTNL, which were given 3G spectrum before the auction but now have to match the winning bids. The figure is nearly double the 350 billion rupees the government had estimated in its federal budget. The auction results are provisional and subject to the approval of the government, said the Department of Telecommunications (DoT).
The Indian government had put on the block three slots of spectrum to offer 3G services in each of 17 telecom service areas and four in each of the remaining five areas. The intense bidding war drove the bid price for one slot of pan-India spectrum to offer 3G mobile services across the country to 167.51 billion rupees, much higher than the 35.00-billion-rupee starting price. However, none of the nine operators bidding won spectrum for all of India's 22 service areas. "We would like to point out that the auction format and severe spectrum shortage along with ensuing policy uncertainty, drove the prices beyond reasonable levels," Bharti Airtel said in a statement. The company blamed unreasonable prices for not being able to obtain pan-India 3G spectrum.
The country’s three leading mobile operators Bharti Airtel, Reliance Communications, and Vodafone Essar won spectrum in the lucrative service areas of Mumbai and Delhi, while emerging as the top bidders in 13, 13 and nine service areas respectively. They will pay 122.95 billion rupees, 85.85 billion rupees, and 116.18 billion rupees respectively. Aircel is also among the winners for the most number of service areas, winning in 13 services, and will pay about 65 billion rupees. Aircel, however, stayed away from the most expensive Delhi and Mumbai service areas, and focused on second- and third-tier areas. Idea Cellular won spectrum in 11 service areas with a total payment of 57.69 billion rupees.
Outlook and Implications
- Bidding Prices Well Above Expectation: The fierce bidding war, which lasted 34 days, pushed up the prices much over the level expected by the operators and industry observers. The strong interest in the 3G spectrum demonstrated the operators’ desire to develop enhanced services to attract high-end users and stimulate revenue growth. Competition in the 2G segment has intensified tremendously with the recent entry of new players. High competition and tariff cuts have slowed operators’ subscriber and profit growth. However, high 3G spectrum fees and network investment costs will further drag down the winners’ financial performance in the years to come. Vodafone Group, for example, has cut the value of its Indian arm, Vodafone Essar, by US$3.2 billion because of a price war triggered by stiff competition and future payment for spectrum (see World-United Kingdom: 18 May 2010: Vodafone Reports Flat EBITDA for 2009 Financial Year, Hit by Indian Licence Costs).
- High Costs to Weigh Down Earnings: Meanwhile, the Telecom Regulatory Authority of India (TRAI) has told the telecom ministry that two of its recent key recommendations on reforming telecoms norms that have attracted a lot of opposition from the industry players are still works in progress and suggested that the government wait for the finished article before taking any decision. The TRAI emphasised that the recommendation linking the price of 2G wireless spectrum to 3G is only an interim suggestion and a separate exercise is being initiated to further study the subject. The development is undoubtedly good news for many operators, as the original suggestion by the TRAI would effectively drive up 2G spectrum usage fees massively for the likes of Bharti Airtel and Vodafone Essar (see India: 12 May 2010: TRAI Proposes Changes over 2G Spectrum Fees).