With bids for 3G (third-generation) telecom services crossing Rs 15,000 crore for a pan-India licence, and with the auction process still having legs, the question is whether this is a process that has produced a perverse result: consumers having to pay high tariffs, and companies uncertain about whether business will justify the high price. The matter becomes even more complicated since the Telecom Regulatory Authority of India (Trai) has recommended that firms must pay for their existing spectrum, beyond a floor entitlement of 6.2 MHz, on the basis of the 3G bids. If market leaders like Bharti and Vodafone win in the 3G bidding, they could end up paying Rs 18,000-19,000 crore for 2G and 3G spectrum taken together, on top of which there will be the cost of rolling out the 3G network.
While the stock market has reacted in alarm, the possible scenarios suggest that fingers should be kept crossed. The telecom operators will be fine if they are able to get enough subscribers for their networks, and if these subscribers pay more for using the vastly superior internet speeds that will be on offer. If, on the other hand, 3G spectrum will be used to deliver mostly voice services, for which the price is already set at 0.5-1 paisa per second, the auction winners will end up being big-time losers.
On a pan-Indian licence fee of Rs 15,000 crore and Rs 8,000-9,000 crore as capex, the standing charge on the basis of the 20-year period of the licence and standard depreciation norms could be Rs 2,000 crore per year. Assuming a weighted average capital cost (combining equity and debt) of 12-13 per cent (another Rs 3,000 crore), all it will take to build a good business is for every fifth customer out of 100 million per telco to pay Rs 500 per month — which is what RCom and Tata already get on their 3G internet cards. The challenge will lie in getting 20 per cent of customers to convert to the higher level of service, and then to use more data services. The optimistic prospect, of course, is that India’s internet revolution is going to come through mobile phones, not through PCs. So, there is a definite opportunity here. From this perspective, there may well be method in the seeming madness of the bids.
While private telcos like Bharti, Vodafone and RCom may, therefore, make good, there is less ambiguity about the fate of the two public sector telcos, Bharat Sanchar Nigam and Mahanagar Telephone Nigam. The boards of both firms agreed to take 3G spectrum a year ago but haven’t made much headway in getting subscribers, so that revenues are minimal. The problem is that they have committed to pay the auction price, once it is determined. MTNL, therefore, could end up paying around Rs 6,000 crore for Delhi and Mumbai, while BSNL will pay around Rs 9,000 crore for the rest of India. Thanks to the Trai recommendations, MTNL may also end up paying another Rs 2,700 crore for the extra 2G spectrum it has, and BSNL around Rs 3,100 crore. The only hope for these two state-owned firms lies in the government coming out with a special dispensation for them. Whether private sector firms will take that lying down and whether the Competition Commission will cry foul are, of course, operative questions.