3G Auction – beyond the Windfall

34 days & 183 rounds of intense bidding later, 3G licenses in India were sold for whopping $
14.6 billion. This may look pale in comparison to $ 34 billion fetched by auction of 3G spectrum
in U.K in 2002, but the fact is that as a percentage of GDP, revenues from the 3G spectrum
auction alone will help the government wipe off 0.97 per cent of the fiscal deficit in 2010-11(1).

The govt may be in jubilant mood after raking in the moolah but telecom operators are more
uncertain now than they were before the auction. Bharti Airtel, which emerged winner in 13
circles paying Rs. 12,295.46 crore, could not help point out that “the auction format and severe
spectrum shortage along with ensuing policy uncertainty, drove the prices beyond reasonable
levels”.

While rejoicing the windfall reaped by govt of India, we must not forget lessons from past.
Licenses for GSM services were handed out in bulk between1995-97, the telecom companies
promised to pay a fixed amount of money as license fee. Since they had overestimated the
revenue potential, most of them defaulted on their payments resulting in large scale
consolidation in market and formation of new telecom policy (NTP) for sharing revenues which is
still in existence for 2G
.
The 3G track record doesn't inspire confidence either. In Europe, telecom companies lost $700
billion in stock market value in the two and a half years following the first 3G auction (2). India's
state-owned BSNL, which the government allowed to launch 3G a year ago, now offers service
in 300 cities, has just 700,000 customers, and has cut tariffs at least twice (3).

Spectrum is scarce resource and govt needs to extract full commercial value for it, but telecom
sector should not be seen only as one time revenue generator. We must not overlook the role
telecom sector has played in development of India; greater connectivity has indirectly
contributed to the GDP of nation. Today India has tele-density of 55.38 % with 654 million
subscribers (4).

However, no holds barred price war in telecom sector has resulted in per second billing and
falling APRU which was already less than $ 3.6. Increased competition has driven down EBIDTA
& Share price of Telecom companies in last 2 years (Fig. 1) forcing the likes of Bharti Airtel to
look overseas.

Figure - 1

Having already shelled heavy prices for the licenses, telecom operators will have tough time
setting up the infrastructure required to roll out services. They may be forced to concentrate
only on the urban sectors with more revenue potential or pass on higher rates to users, which
will further limit their customer base.

Unless telecom operators resort to innovative ideas to deploy 3G with reasonable costs, we may
have repeat of 1999 scenario with government agreeing to revenue sharing pact. In such case,
the windfall reaped by govt. will be reduced to a myth.

- Kulraj Singh

Reference:
(1) Economic times – 3G proceeds will cut fiscal deficit
(2) The Undercover Economist – Tim Hartford
(3) Bloomberg Business week – India’s 3G auction - Why are companies fearful.
(4) www.ibef.org
(5) Figure 1 – Forbes India – How the mighty have fallen