Broadbandindia Magazine

Final price for pan-Indian spectrum $3.61 billion, but no one company wins spectrum in all areas. India’s thirdgeneration mobile bandwidth auction ended after 34 days, boosting government offers by $14.6 billion, as companies such as Bharti Airtel Ltd. and Reliance Communications Ltd. bid to expand their services in the world’s fastest growing telecom market. Bharti, Reliance Communications , Vodafone Essar Ltd. and Idea Cellular Ltd. emerged as the provisional winners in the auction, the Department of Telecommunications, or DoT, said on its website at the end of the auctions, which began April 9.

Tata Teleservices Ltd., Aircel Ltd. and S Tel Pvt. Ltd. are the other provisional winners in the auctions, which lasted 183 rounds of bidding. “The auction results are provisional and subject to the approval of the government,” the DoT said.

The auctions come as the industry is locked in an intense price war amid stiff competition, which has hurt revenue and profits. The Indian government had put on the block three slots of bandwidth to offer 3G services in each of 17 telecom service areas and four in each of the remaining five areas. They drew aggressive bidding—described as “over the top” by an analyst—driven by scarcity of bandwidth in the country, which added around 20 million wireless users in March. The additional bandwidth can be used to offer voice services to start with, and high-end telephone services, which typically attract higher rates from consumers, at a later stage.

The intense race drove the bid price for one slot of bandwidth to offer 3G mobile services across the country to 167.51 billion rupees ($3.61 billion), much higher than the INR35.00 billion starting price. Ernst & Young’s telecoms head, Prashant Singhal, said the expectation was for one slot of pan- India bandwidth to cost about $2.5 billion to $3 billion. However, none of the nine operators bidding won bandwidth for all of India’s 22 service areas.

Bharti, Vodafone Essar and Reliance Communications won bandwidth in the lucrative service areas of Mumbai and Delhi, while emerging top bidders in 13, nine and 13 service areas, respectively. They will pay INR122.95 billion, INR116.18 billion and INR85.85 billion respectively, for the bandwidth. “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,” Bharti Airtel said in a statement. It blamed unreasonable prices for not being able to obtain pan-India 3G spectrum.

Aircel joined Bharti and Reliance Communications among the winners for the most number of service areas, winning in 13 services, and will pay about INR65  billion. Aircel, however, stayed away from the most expensive Delhi and Mumbai service areas, and focused on second- and third-tier areas.

Idea Cellular said it will have a total outlay of INR57.69 billion for the 11 service areas where it won bandwidth. The excess payouts by the companies are likely to be a drag on their earnings for a while. Romal Shetty, a telecom analyst at consulting firm KPMG, said the bids will be a “strain on the balance sheets” of operators. Analysts believe it will be at least two years before 3G services are regularly subscribed to. “We are estimating a break-even in around the fifth or sixth year,” said Abhishek Sawant, an analyst at IndusView Advisors Pvt Ltd. However, the auctions were a windfall for the government, striving to keep its fiscal deficit under check.

The government said it will garner INR677.19 billion from the auctions, including payments by state-run Bharat Sanchar Nigam Ltd. and Mahanagar Telephone Nigam Ltd.(500108.BY), which were given bandwidth before the auctions but now have to match the winning bids. That is nearly double the INR350.00 billion the government had estimated in its federal budget. Analysts said the windfall revenue from 3G auctions is likely to part-fund government payouts toward food, fuel and fertilizer subsidies.

Finance Minister Pranab Mukherjee told the NDTV Profit television channel the incremental revenue won’t only offer fiscal headroom but also add to the  government’s comfort to limit the budget deficit at 5.5% of gross domestic product in the fiscal year started April 1. The 3G bandwidth auction will be followed by the auction for bandwidth to offer wireless broadband services, scheduled to begin two days after the 3G auctions end.

Telcos left high and dry by India 3G auction rules

Following the climax of India’s closely-watched 3G auction, one consultancy has slammed the government’s spectrum tender, claiming there was a fundamental flaw in its design.

Consultancy company, which advised one of the participating operators, said the Department of Telecommunications (DoT) did not take into account potential synergies between some of India’s 22 telecom circles. “They assumed that the value to an operator of Circle A plus Circle B would be no greater than the sum of its parts,” wrote Consultancy company.

Conversely, operators did anticipate synergies from combining multiple service areas. As a result the auction’s format – The operators were required to place bids on individual circles, rather than groups of circles or even a single nationwide licence – increased the risk of operators securing disjointed pockets of spectrum at inflated prices.

“Aggregation risk is the risk that arises when you place bids on a combination of individual circles which collectively justify paying a higher price due to synergies than simply the sum of all the prices you would have been prepared to pay… based on their standalone valuations,” said analyst.

“The risk is that you are then outbid on one of the circles in your desired combination which destroys the value of your synergies, but you cannot step back from your other winning bids on the remaining circles.”

The DoT announced the end of its 3G auction, which when combined with payments to be made for 3G airwaves earlier awarded to state-run telcos BSNL and MTNL will generate around $14.5 billion for the Indian government, nearly double the $7.5 billion it predicted ahead of the auction. Despite the high price, none of the nine participating operators won spectrum in every one of the country’s 22 telecom circles, meaning no single telco will be able to offer nationwide 3G coverage. “The auction format and severe spectrum shortage along with ensuing policy uncertainty drove the prices beyond reasonable levels,” said Bharti Airtel in a statement. “As a result, we could not achieve our objective of a pan-India 3G footprint.”

Had the DoT taken into account the value of a pan-India 3G footprint, it may have adopted an alternative auction structure that would have enabled participants to  bid for combined packages of telecom circles, said. “In a combinatorial auction, bidders… are guaranteed to receive the whole package of circles or nothing at all,”  analyst said. Analyst claimed this format would have ruled out aggregation risk and enabled a player like Bharti to set with greater confidence the value it placed  on a pan-India footprint. “A combinatorial approach may not have resulted in the frustrations that they are currently expressing and could have resulted in a more economically optimal allocation of spectrum,” analyst said.

What happens next?

None of the bidders succeeded in acquiring pan-Indian spectrum. Bharti Airtel’s final bill was the highest at 122.95 billion rupees (US$2.63 billion) for spectrum in 13 circles; Reliance and Aircel also won spectrum in 13 circles, while second-highest bidder Vodafone Essar agreed to pay 116.18 billion rupees ($2.49 billion) for spectrum in nine circles.

How will the allocation of 3G bandwidth alter the landscape of the Indian mobile market?

We threw the ‘what next?’ question at U.K.-based analyst firm, which advised one of the successful bidders in the auction and has already challenged the auction process itself. “A most likely scenario is for Bharti and Vodafone to enter into a roaming arrangement with Idea; they already share sites through Indus,” a joint venture between the three of them, said Ravi Nagarajan an analyst.

Nagarajan rejected suggestions that a merger between players with complementary 3G footprints, such as Idea and Bharti, partly because M&A rules would restrict a merged player to a 30% market share in any circle. “Reliance and Tata’s circles complement each other but it is difficult to imagine them coming together in any partnership,” Nagarajan added. He pointed out that a tie-up between Tata and Aircel would be more likely, but would still leave the pair out of the Delhi and Mumbai metros.

“Reliance may aggressively push for the next round of spectrum to be released by the Defence Ministry,” Nagarajan said, referring to India’s plans to allocate more spectrum when it is released in September. The situation regarding that award process is still unclear: the country could offer the spectrum to the failed bidders from the previous contest in order of their bids, or, depending on the time frame, it could order a new auction.

In a statement criticizing the format of the auction and policy uncertainty, Bharti Airtel hinted that it expects to acquire more 3G spectrum in future. “We could not achieve our objective of a pan-India 3G footprint in this round,” the company said. However, Vodafone played it cool.

As is usually the case with India though, ‘wait and sees’ is the only real answer to the question ‘what happens next?’