After 183 rounds of bidding over 34 days, India concluded the auction of 3G spectrum, but the spectrum mud-wrestle in the country is far from over. The BWA auction, in which 11 players will be bidding for two nationwide spectrum slots, begins Monday.
By this time, the highlights of the 3G auction results are well known. The 3G auction will fetch nearly $14.6 billion (about 677 billion Indian rupees) for the government – assuming, of course, that the state-owned MTNL/BSNL combine pays its share to the government. [They are trying to wriggle out of that obligation.] Non-state, or publicly owned, mobile operators have, cumulatively, bid nearly $11 billion for their stakes in the 3G spectrum.
While none of the nine bidders have managed to garner a nationwide 3G spectrum footprint, the price of a nationwide 3G spectrum slot, based on the numbers published by the government, equals about $3.63 billion.
That’s more than four times the $780 million base price set by the government. Talk of price discovery! It does leave you wondering if the operators will ever recover their investment, especially when you factor in the billions that they must spend to deploy and run the 3G networks. For the record, I think they will – over time. Perhaps, a long time.
Before I delve into the reasons why I think the spectrum mud-wrestle will continue in India – and the explanation may lie in three words: BWA, fungibility and TRAI – allow me to address the outcomes and implications of the recently concluded 3G auction.
Bids and bidders
Aircel, Bharti Airtel and Reliance Communications each won 3G spectrum in 13 circles, Idea Cellular won 11 circles, while Tata Teleservices and Vodafone each won 9 circles. New entrant S Tel won 3 circles. Of the nine bidders in the 3G spectrum race, only two – newcomers Etisalat and Videocon – failed to win any license.
A ‘circle’ is an operating area; for the purposes of telecom regulation, India is divided into 22 circles. Not all circles are equal, either in geographical sense or with respect to population. The circles are stratified into A, B and C categories, depending on population and, by inference, revenue prospects.
Since bids varied across circles, the operators will end up paying different amounts for their respective wins. Bharti-Airtel will pay the highest, followed closely by Vodafone. So, for instance, while each of them won 13 circles, Bharti Airtel’s total 3G spectrum bill is nearly $2.66 billion, Reliance’s is nearly $1.86 billion, and Aircel’s nearly $1.4 billion.
Similarly, while Idea will pay nearly $1.25 billion for 11 circles, Vodafone will pay about $2.5 billion and Tata Teleservices nearly $1.27 billion for their respective nine circles. S. Tel has the smallest bill, about $735 million, for its three circles.
As far as circles go, Delhi and Mumbai attracted the highest bids – $717 million and $702 million respectively. Leading players Bharti Airtel, Vodafone and Reliance each garnered 3G spectrum in these prestigious and potentially lucrative markets. Almost two-thirds of the value of the nationwide spectrum was tied up, not unexpectedly, in the three key metros and the remaining five ‘A’ circles.
Aggressive, but realistic
I had noted in an earlier column that the bids were likely to be aggressive, but realistic. They were – although the price of a 3G spectrum slot, at $3.63B, ended up being way more than I had anticipated (about $2B). But while the aggressiveness is evident from the bid amounts, the “realistic” aspect needs some explaining.
The bids were realistic in that players seemed to have followed their respective strategy playbooks – aggressively bidding to ensure they grabbed the circles they deemed strategically important, but judiciously retreating from those that might have been “good to have” under ideal circumstances. None of the players fell prey to any false sense of pride, pursuing a national 3G footprint irrespective of cost.
Most players seem to have pursued a pragmatic strategy, ensuring wins in circles in which they either already face a capacity crunch or in which they believe they can find high-end customers.
Against the conventional wisdom that two players would likely nab a nationwide 3G footprint, I had argued that, at best, one would – probably Bharti-Airtel. Turns out, none did. Bharti-Airtel said it had the intention, but could not, owing to the “auction format and policy uncertainty” that drove bids beyond reasonable levels.
Role of government
And that brings us to the other point I made in a subsequent column – specifically, that the design of the auction was likely to result in sharply elevated bids. Regrettably, it did come true – beyond all estimates. To that end, the only real winner is the government; from the 3G auction alone, the government will earn twice what it imagined it would get from 3G and BWA auctions combined.
While I do believe that auction may be a better way of allocating spectrum than, say, a beauty contest, in that it ensures fairness and transparency, not to mention appropriate price discovery, I also believe that an auction that is designed primarily to benefit the public exchequer invites unfortunate pathologies manifest in delayed network deployment and slower diffusion of high-end services.
Telecom is a critical infrastructure, with positive network effects. The link between a robust telecom infrastructure providing widespread connectivity and economic growth is well understood. Yet, unfortunately, governments the world over often pursue myopic agendas and tend to act like a greedy monopolists extracting high economic rent as they auction scarce resources like spectrum.
A cow to be milked?
Apropos of Churchill’s view of private enterprise, it would serve the Indian government well, to view the telecom sector more as a horse pulling the wagon rather than a cow to be milked. It would serve the country well, if its political leaders recognized that emaciating the market players providing a critical socio-economic infrastructure hurts the entire polity.
It would be interesting to see what the government does with its windfall gain. Early comments from the federal finance minister suggest the monies would be used to reduce the fiscal deficit. Some critics have suggested it could be worse – the funds could be used to initiate and fund populist programs that merely provide electoral advantage to the ruling party.
Either of the outcomes would be unfortunate. A more useful way of spending the windfall gain might be to invest it in infrastructure projects, preferably re-invest it in the telecom sector. For instance, following the spectrum auction, Indian operators are likely to spend an additional $5B to $7B a year on telecom infrastructure. Perhaps, the government could use the monies, or at least a sizeable part thereof, to seed the market with domestic home-grown manufacturing capability.
TRAI causes uncertainty
The sector regulator, the Telecom Regulatory Authority of India, or TRAI, decided to publish its spectrum recommendations while the 3G auction was in progress. The timing of the recommendations tempts one to think that the most elementary lesson about markets – that they crave stable regulatory environment and predictability – seems to be lost on the Indian telecom regulator.
The recommendations – that proscribe spectrum trading even as they articulate a difficult and expensive playbook for
mergers – added greater uncertainty to the pr
ocess, lending much validity to Bharti-Airtel’s lament cited above.
The recommendations are ostensibly an exercise in rationalizing the complex, somewhat ad hoc, spectrum allocation that obtains in India. But a preliminary reading of the 437-page document leaves the impression that TRAI may be seeking to fundamentally redefine the market landscape. While any attempt to rationalize spectrum allocation and policy is invariably likely to invite criticism by one or another party, the retroactive change of rules and pricing recommended by the TRAI is indeed troublesome.
The intricate policy for mergers and consolidation seems geared primarily to help the public exchequer with little concern for the spectrum position of players or a meaningful redrawing of the sector map. The recommendations can easily be read as being slanted against incumbent players, particularly of the GSM family.
Auction and services
Much is being made of the potential impact of the high spectrum prices on the price of 3G services that might be launched. I think the impact is likely to be more on rollout schedules and geographical scope of network deployment, than on the prices of services.
Service pricing, or tariffs of 3G value-added services, is more likely to be driven by competitive pressures than by one-time spectrum costs that, most economists would argue, is a necessary sunk investment.
Of course, like Vodafone, which last week wrote down about $3.2 billion against its $11 billion Indian investment, giving a more colloquial meaning to “sunk investment,” some other Indian mobile operators may also be forced to take a write down on their current spectrum investments at some point.
The competitive pressures on pricing of services are likely to come from two different vectors, if history is any guide. The first, easily understood, vector is the competition among 3G players. It little strains the imagination to believe these operators are likely to compete aggressively to attract and retain customers – specially given that wireless number portability is going to be in effect before they launch 3G services.
The more troublesome competitive pressure is likely to be from 2.5G services. Operators launching 3G services will have to strive hard to design services that are clearly differentiated from 2.5G based offerings. And, if the experience of European and North American operators is any guide, this may not be easy.
Additionally, mobile operators who boast CDMA networks are likely to be another source of competition. It is one of the peculiarities of the Indian market that CDMA EV-DO is not perceived as a 3G technology. Regardless of this public relations failure, EV-DO based offerings are likely to provide strong competition to the high-end services offered by the new winners of the 3G spectrum.
Positive for infrastructure vendors
The completion of the 3G auction is likely to have a positive impact on infrastructure vendors, specially the western vendors, and on suppliers of mobile devices, again, perhaps western suppliers. The emphasis on the ‘western’ follows from the fact that Indian government still seems inclined to disallow Chinese made equipment into the country owing to security concerns. The current imbroglio may last through fall, by which time most infrastructure contracts would have been given out.
Infrastructure vendors like Ericsson, Nokia Siemens and Alcatel Lucent are likely to be the key beneficiaries as Indian operators look to deploy 3G networks and services. However, given the fact that deployment mandates are fairly lax, and the spectrum costs have run high, network deployment – and therefore vendor revenue gains – may be a tad slower than what could be.
Device vendors
Device vendors will likely gain tremendously from the completion of the 3G auction in India.
The performance of state-owned operators MTNL and BSNL has been rather dismal with respect to 3G, despite the fact that they were allocated 3G spectrum in advance. While part of it may be attributed to inefficiencies inherent in state-owned enterprises, a part of the blame ought also be attributed to the lack of widespread availability of 3G devices. This situation will likely change soon.
Theoretically, the completion of the 3G auction should be good news for Nokia that has a huge presence in India. Having invested in building a strong distribution network, not to mention strong operators relationships, Nokia should be able to exploit the advent of 3G in India. However, it is not that simple. The advent of 3G in India might well exacerbate Nokia’s challenges.
For instance, it is likely to face increased competition from other leading vendors who will now find a greater reason to focus on India. INQ is already gearing up for the Indian market, as are HTC and Samsung. And then there is RIM, already a major player in the Indian market, and one surely to gain greater traction.
Nokia is likely to face an equally significant threat from Silicon Valley players like Apple, Google and HP, each of whom might make enter the Indian market with phones in one hand and tablets in the other. Apple could gain a sizeable presence in India if it were to make its 3G iPhone available at somewhat more affordable prices (since Indian operators do not provide subsidies). Apple might wish to relax the price of its 3G phone as it launches its 4G version.
Google could exploit its Android ecology to address the price sensitive Indian consumer’s nascent demand for smartphones as well as tablets. Motorola may be able to leverage the attention accorded to Android for a strong re-entry into India.
Armed with its newfound Web OS, HP, a respected and recognized brand in India, might also find it prudent to address the Indian market and establish a strong foothold there.
All of this might pose a real challenge for Nokia, even as it is anchored in perception. As the current market leader Nokia will, given the nature of things, likely see its market share in India erode in the face of the many challenges from rivals. If this translates into media hoopla, Nokia may find itself in a really difficult position since its retreat in the face of otherwise normal market dynamics, coupled with its recent stumbles on touch-screen devices, will create the impression that the company may be in free fall.
Spectrum mud-wrestle to continue
The recently concluded auction of 3G spectrum is one of two spectrum auctions scheduled by the Indian government. The other is the BWA spectrum auction scheduled to start this Saturday. Eleven players are in the race for two nationwide 20MHz slots in the 2.3GHz band. Six of the 3G spectrum winners are also bidding for the broadband wireless access spectrum.
The BWA spectrum, especially when the government was considering the 2.5 GHz spectrum band for BWA, was once seen as a sure shoe-in for WiMAX in India. However, when the government decided to grant unpaired spectrum in the 2.3 GHz band and make it technology neutral, everything changed. Most importantly, TD-LTE, once seen as a Chinese technology designed for China’s domestic use, suddenly gained global attention – for reasons explained in an earlier column.
The fungibility of spectrum between 3G and BWA in the short to medium term is one of the key reasons why the spectrum mud-wrestle is likely to continue. Indian mobile operators will likely seek to ensure they have enough spectrum for future growth, especially when the LTE technology becomes more viable.
BWA bids will be intense
Further, the spectrum mud-wrestle will continue – resulting in equally, if not more, intense bidding for BWA spectrum – because operators will seek to realize their ambition
for a nationwide spectrum footprint for high-end servi
ces. This ambition was thwarted, as Bharti-Airtel quote above notes, owing to the design of the 3G auction and the rapidly escalating bids.
The BWA spectrum auction is also likely to be intense because most operators are likely to use a sizeable chunk of the meager 5MHz paired spectrum they have been granted for 3G for easing up the spectrum crunch for voice services – especially after mobile number portability is instituted.
Finally, the spectrum mud-wrestle will continue, perhaps even beyond the BWA spectrum auction, because the sector regulator may have failed to create the conditions required to serve the rapidly growing number of users and the corresponding spurt in usage.
Dr. Shiv Bakhshi is founder and principal analyst of Mobile Perspectives, a research and analysis firm serving the mobile industry. He can be reached at [email protected]. You can follow him on Twitter @ShivBakhshi
