Good call

Given the stiff opposition he faced from the existing mobile phone service providers, Communications Minister Dayanidhi Maran deserves to be congratulated on his decision to auction 3G spectrum. The pressure to restrict the spectrum at a low cost only to the existing players was intense, as can be seen from the fact that it is almost two years since the telecom regulator, the Telecom Regulatory Authority of India (Trai), first made its recommendations on the matter. Trai, then under a different chairman, said 3G was nothing more than an extension of the existing 2G spectrum; it had to be given to the existing operators. Since this ensured that the country's telecom market would remain the preserve of the ruling elite, the government, to its credit, never accepted the recommendation. So, under a new head, Trai recommended in September 2006 the auction method. The lobbying, however, continued unabated, which is why it has taken so long for Mr Maran to make his announcement. The actual details of the auction process may take several months more.

In one stroke, this resolves many problems, apart from garnering huge sums to the government from the auctions. Telecom firms paid Rs 1,633 crore for the fourth cellular all-India licence, a 2G one, when the country had far less mobile phone users than it has today. It is reasonable to expect that the bids for 3G will be much higher considering that, megahertz for megahertz, the 3G spectrum can service many more customers. It can offer high data speeds and therefore enable applications like TV and video, which are many multiples of the existing services. Besides, 5-6 million new subscribers are being added every month.

The bidding for the 3G spectrum will also ensure that the old practice of firms dressing up subscriber numbers in order to get more spectrum (the current spectrum allocation is linked to subscriber numbers) does not get perpetuated. The fear that auctioning spectrum will lead to higher customer tariffs (as Trai had first argued in May 2005) is also over-stretched. For one, the fourth cellular licence was auctioned and this never led to increased tariffs; indeed the resulting increase in competition ensured that tariffs fell further. In any case, since data-based services such as video/gaming and TV will take a while to reach reasonable levels, the bulk of the new 3G spectrum will be used to provide 2G-type services, that is, mainly voice traffic. This puts an automatic ceiling on tariffs ""it is unlikely a customer will invest in a more costly handset (the existing 2G handsets cannot work on 3G frequencies) and then accept paying much higher tariffs for voice calls only just to be on a 3G network.

The government would do well to use game theorists to help design the auctioning process since, internationally, this is what helped governments collect vast amounts than initially hoped for when they auctioned scarce spectrum to telecom firms. News reports suggest the government will reserve some 3G spectrum for BSNL/MTNL because this is the only way to ensure the country's teledensity targets are met. Given how it was really BSNL that took the lead in taking mobile phones to smaller towns, this may not be a bad idea, provided it is not given at a preferential price. This will avoid distortion of the market.