These operators, including Bharti Airtel, Reliance Communications, Vodafone Essar and Tata Teleservices, have emerged winners in the recently concluded auction that lasted for 34 days. Together, they have agreed to pay as much as Rs 67,718 crore to the Government for buying the spectrum that's required to offer 3G services. For example Vodafone will cough up nearly Rs 11,500 crore for air waves in nine circles while Reliance Communication has won spectrum in 13 circles for Rs 8,585 crore. (see table) But the worry now is whether these operators, in their desperation to get more spectrum, have overbid and as a result will consumers have to pay out a higher fee for availing all the goodies that 3G technology brings? The concerns are not unfounded because similar auctions conducted earlier in Europe ended with operators quoting astronomical amounts resulting in high tariffs.
A quick comparison with international benchmarks on dollar/MHz/Population shows that Indian operators have to pay $5.5 per Mhz per population for Metros areas, which is the same levels reached during auctions in the UK and Germany. However on an all-India basis, this number is close to $0.6 that compares with Asia (Ex Japan) and US 3G auction benchmarks of $0.6/MHz/ population. Calculations done on a dollar per Mhz basis reveal that Indian operators have to pay about $26 million per Mhz for a circle such as Maharashtra, $6.8 million per Mhz in Punjab and a whopping $70 million per Mhz for Delhi. In Europe, this number was just near to $3 million per Mhz though it has to be noted that larger chunks of spectrum were put on the block.
pressure on operators
Prashant Singhal, Telecom Industry Leader, Ernst & Young, thinks that the high bids will put pressure on the operators. “The impact of the 3G bids will be felt on the industry for years to come. The industry is yet to recover from the price war that culminated in the 1 paisa per second plan. As a result, the industry has seen little revenue growth over the past six quarters. That could be a big negative for a sector that was not impacted much by the global slowdown in 2008-09.” (See article below.)
Bharti Airtel, which has to pay to the tune of Rs 12,295 crore — the highest among all the bidders — thinks that the number is high. “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.
As a result, we could not achieve our objective of pan India 3G footprint in this round,” said a Bharti spokesperson.
Others, however, don't agree that the bids quoted will pinch the operators. There are two factors working in favour of Indian players. First, with as many as 500 million mobile users, the market potential is huge. For most consumers 3G will be the first and only way to access broadband services on mobile devices. Second, if one looks at the bidding pattern, the operators have wisely taken circles where they already have a strong presence. Both these factors will cushion the high spectrum cost to some extent.
Naresh Singh, telecom analyst, Gartner, says, “Obviously, the spectrum pricing looks very high, but if you look at 500 million subscribers, that 3G has the potential as it can be used for both voice and data, the spectrum price may be viable. This shows that the Indian telecom market has matured, and now I think the operators have taken into consideration that this market will require longer time of gestation and are willing to take that risk.”
Agrees Praveen Bhadada, Engagement Manager, Zinnov Management Consulting Pvt Ltd, “Given the fact that 3G spectrum will ease capacity constraints and increase the revenue per user, service providers should be able to absorb the high costs and roll out cost-effective 3G services for the end consumers.”
Bidding trends
A look at the bidding trends reveals that most operators have quoted amounts that are much lower than the annual revenues they get from that circle. For example, in 11 of the 13 circles where Bharti won 3G spectrum, the operator has quoted an amount that is much lower than the current revenues it earns from those circles.
In Andhra Pradesh, Bharti has agreed to pay Rs 1,373 crore for 3G spectrum which is just 48 per cent of its current annual gross revenue from that circle. In Karnataka, Bharti has to pay Rs 1,578 crore which is just 49 per cent of the income generated there. On the other hand, Bharti dropped out of the race in Maharashtra and Gujarat where the bid amount had crossed the company's annual revenue numbers. Similarly, Vodafone has taken spectrum in circles mostly where the bid amount is lower than its annual revenues from that circle..
“Given the high price of pan-India spectrum, the operators opted for circle selective strategy to cover their key strategic circles or build geographic foot print. Incumbent operators have ensured that they offer 3G services in their stronghold circles to protect their key high ARPU subscribers,” says a report from Religare Capital Markets.
There's another reason why operators may not be able to charge a very high fee for 3G services. There are already five players in the country who are offering 3G services and the tariffs they offer could act as a benchmark for the new players. “Benchmark for 3G service has been set by BSNL and MTNL. In the data segment, there are products such as Tata Photon plus, so new operators will have to price their services accordingly to remain competitive,” says Kunal Bajaj, Partner, Director India Analysys Mason (India).
BSNL charges as low as Rs 249 a month for its basic 3G plan and offers up to 5 Gb download for Rs 899 a month. Reliance offers 20 GB download for Rs 799 a month using EVDO technology, which is a 3G platform. (The average monthly download at present is about 4-5 GB per user per month according to industry estimates).
Handset price, coverage issues
But there are other challenges. To avail 3G services, consumers will have to purchase a handset that is 3G-enabled. At present only about 20 million subscribers own a handset that is 3G enabled. A new 3G handset today costs upwards of Rs 5,000, which for many could be prohibitive. In the 2G space, the market boomed only when the cost of handset reached Rs 1,000 level. Therefore, there could be a possibility that initially 3G services will be limited to mid and high-end customers.
However, handset vendors and chip makers such as Qualcomm say that they are working on cheaper devices. “We are committed to making 3G a mass market experience for all Indian consumers,” says Kanwalinder Singh, President, Qualcomm India and South Asia.
The other issue could be the lack of pan- India coverage for any of the seven operators. Bharti, Reliance and Aircel have managed to get a maximum of 13 circles. Others have even less. This could be a problem when it comes to roaming. While roaming agreements between the operators could address the issue of coverage, the charges could be a worry. In the 2G space, even though operators have pan-India coverage they still charge a premium for roaming so they could charge higher for 3G services, especially since they do not have their own network in every circle. CDMA players Tata Teleservices and Reliance Communications are probably the best positioned in this regard since they have a pan India EVDO network in addition to the 3G spectrum they have now bagged in 13 and 9 circles, respectively.
Another dampener
Lack of applications and value-added services could be another dampener. Though operators and value-added service players are investing a lot of money and time to pull out some interesting applications, trends so far in this space have been disappointing, with most applications revolving around bollywood, social networking and entertainment. However this is also an opportunity for all the value-added service providers to start innovating and come up with applications that help consumers in their daily lives.
For instance, NTT DoCoMo, in Japan, has a health service on the mobile device that monitors the user's various health-related parameters such as heart beat rate and calories burnt during the day. At the end of each day the service generates a report and sends it to the user and also to the user's doctor. In India a number of pilots are being conducted on services relevant for farmers, fishermen, healthcare service providers and education.
“You will see a plethora of interesting applications over the next 12-18 months because now the ecosystem required for VAS is coming all together. Soon the 3G network will be in place, handset devices that support innovative applications are already coming into the market and now the operators themselves will push such services. Till now it's all been ad-hoc and VAS players were left in the fringe. But this is changing,” says Vinish Kathuria, COO, Spice Digital. There are a host of other players such as OnMobile, Comviva, Nazara and TeleDNA who are looking to latch on to the opportunity.
Operators gung-ho
Notwithstanding these challenges operators themselves are quite gung-ho about launching 3G services. Vodafone Essar's CEO and Managing Director, Marten Pieters, says: “We are excited to be able to offer 3G services to our customers and aim to launch the services before the end of the year. We expect a strong uptake for 3G in these markets, particularly among the higher value customers, which is a growing segment owing to rising affluence and increasing urban population. We also note with interest that a significant proportion of our customer base in these markets already has a 3G-enabled device.”
STel, which is the only new player to have won 3G spectrum in three circles is looking at a regional play. “Unlike the large pan- India players we are focused on the regional markets. This is an advantage to us because we can think about localising 3G services to meet the requirements of our customers,” says Shamik Das, Chief Executive Officer, S Tel. So in six months' time you could well be experiencing 3G services, hopefully those that are not expensive.
What is 3G?
3G is the next big step in mobile communications. The higher speed that 3G provides will enable subscribers to download data much more quickly. Compared with an average speed of about 70 kbps offered by current GSM networks, 3G will enable up to 1 Mbps speeds. Among the possible services are mobile TV, video on demand, video calls, tele-medicine, tele-education and a host of other applications. Of course it will also improve the quality of voice calls. To avail the service, users will need a 3G-enabled phone, which currently costs about Rs 5,000. There are two 3G technologies that are being deployed — EVDO and HSDPA +. While CDMA operators offer EVDO-based 3G services, GSM operators will roll out HSPA+
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