The government could end up with Rs 45,000-50,000 crore as revenue from the 3G/BWA (third generation/broadband wireless access) auctions for spectrum; this compares with the Budget estimate of Rs 35,000 crore. Day 14 of the auction for 3G spectrum saw bids reach Rs 33,500 crore, while the BWA auction is scheduled to start two days after the 3G bidding is over.
Most telecom service providers have 7 MHz of spectrum. Getting another 5 MHz from the 3G auction could reduce their operational expenses by as much as 30-40 per cent, as economies of spectrum-scale kick in. With the average revenue per user (or Arpu) falling steadily, firms desperately need new revenue streams. Most of these have to do with higher-speed internet access and other applications that require greater bandwidth. While the incremental Arpu is down to as low as Rs 100 per month for new users of voice telephony, the 3G-like wireless internet dongles sold by Tata Teleservices and RCom fetch monthly revenues that are upwards of Rs 650. The number of internet users is, of course, tiny when compared to the total mobile-customer population, so the key question is whether these higher-paying customers, 90-100 million in another five years, according to estimates, are enough to justify bids that total Rs 45,000-50,000 crore.
An estimate by Kotak Institutional Equities Research, which projected bids of Rs 51,300 crore ($10.3 billion for 3G and $1.1 billion for BWA) more than a month ago, puts this number in perspective — while firms stand to gain $6.1 billion through the new/better services they can offer on 3G spectrum, they can lose $6.3 billion if they don’t have 3G as their best customers will leave them. Going by this logic, if firms bid, say, $9 billion for 3G, that’s far in excess of the $6.1 billion they can earn through 3G services. In other words, it’s safe to assume a series of earning re-ratings from analysts once the auctions are over.
The equally vital part of the auction is what it says about the damage that Communications Minister A Raja caused to the exchequer by giving away 2G licences for a pittance in 2008. Assuming the 3G auction settles at Rs 40,000 crore for four all-India licences with 5 MHz each, that’s a price of Rs 2,000 crore per MHz, whereas Mr Raja gave away the licences at Rs 375 crore per MHz. It is true that 3G spectrum allows firms to service more customers per MHz than 2G spectrum does, but on the other hand the demand for 3G services is constrained by the high cost of handsets. Most estimates look at just 10-15 per cent of the market moving to 3G services. Even if 2G spectrum were to be fairly priced at only half that for 3G (i.e. Rs 1,000 crore per MHz), Mr Raja gifted to a handful of favoured companies government money to the tune of Rs 15,000 crore — the largest such gift in Indian history. The question is, why is Mr Raja still a minister in the government?
