3G Auction Madness

While it is true that the introduction of 3G (3rd Generation) Mobile Services will change the way how me perceive the marriage of the cellular phone and the Internet the way the 3G services and its insanely precious spectrum is being treated by the government and telecom companies is sheer madness in my opinion.

The first thing that comes to my mind is how the exorbitant price of the spectrum can be justified by telecom companies in such a cut throat competitive market. This question becomes even more difficult to answer when one realizes that telecom companies do not have a proper business model in mind for attracting and maintaining 3G subscribers. Another complication added to the mix is the recommendation from Telecom Regulatory Authority of India (TRAI) to companies having more than the floor 6.2 MHz of spectrum to pay up.

If this recommendation comes to fruition then companies like Vodafone Essar and Bharti Airtel will end up paying around 18000-19000 crore rupees for 2G and 3G spectrum. Add to this capital expenditure of 8000-9000 crore rupees for establishing and launching 3G services and capital costs at around 12-13 percent or Rs. 3000 crore and you get a stock market panic in the telecom sector. The market rightly questions these extremely high costs for 3G services as it fears whether these companies will be able to get a sufficient number of customers who are willing to pay significantly higher fees to access high speed Internet services on their cell phones.

If this does not happen then the telecom companies will have no other option but to use the free portion of the 3G spectrum to provide 2G service (voice and text services ) which is already a very cut throat market and ultimately end up being big time losers.

This basically means that these companies will require one out of every five subscribers to generate a revenue of at least Rs. 500 (this is something Reliance Communications and TATA) are currently earning with their 3G Internet cards). But even they do not have the magic one out of five number. Converting 20% of their subscribers into 3G users in a relatively short to medium period seems quite unlikely for these telecom companies.

And then there is the big question of state owned telecom companies namely MTNL and BSNL.

Both companies have agreed to take 3G spectrum a year ago but haven't made much headway in getting subscribers, so their 3G revenues are minimal. The problem though lies in their agreement to pay the auction price for the 3G spectrum. MTNL could end up paying 6000 crore rupees for Delhi and Mumbai circles while BSNL will have to pay 9000 crore rupees for the rest of India (the total price for a pan India license is Rs. 15000 crore). Thanks to TRAI recommendations MTNL may also have to pay up Rs. 2700 crore for the extra 2G spectrum whereas BSNL will end up paying Rs. 3100 crore if the recommendation is accepted by the Department of Telecommunications (DoT).

The only hope for these two state owned companies lies in the hands of the government coming out with some sort of special dispensation for them. Whether private telcos will take that lying down and whether the Competition Commission of India (CCI) will cry foul remain unanswered questions.

Mitul Choksi

18th May 2010

7:57 PM Indian Standard Time