Is 3G worthwhile for operators?

The 3G drama in India has come to a close, after 34 days, 184 rounds of bidding across 22 circles across India. Bharti Airtel, Vodafone, Reliance Communications, Aircel, Tata Teleservices, Idea Cellular are among the seven telecom operators that have emerged victorious in the battle.

The government, which has struggled in the past few years to bring the next generation of telecom in the country, will now have possibly around Rs 67,718 crore from the sale of airwaves, a figure which is double of what they has predicted in the Union Budget.

Bharti Airtel, Reliance Communications and Aircel have netted around 13 regions. Airtel, Reliance and Vodafone bagged Delhi and Mumbai. Idea Cellular followed with 11 circles, Vodafone Essar and Tata Teleservices got nine circles each, and STel secured three.

While Vodafone Essar will pay Rs 11,617 crore for nine circles, Reliance Communications will pay Rs 8,585 crore. Bharti Airtel, Reliance Communications and Vodafone will pay Rs 3,316 crore each for Delhi, the highest price in all the circles and 10 times its reserve price of Rs 320 crore. The trio will pay Rs 3,247 crore each for Mumbai, again 10 times the base price.

The revenue issue

The auction money will have to be paid in 20 days and without a doubt, this payment will adversely impact the bottomline of telecom operators. Profitablity from 3G services will be a question. Breakeven will be in the long term and there will be pressure on these companies to be profitable and afloat for the next few years. Experts predict that across the industry, 3G auction breakeven should take at least five years.

Considering that the current fixed 3G rentals per month per subscriber (Rs 25 per month over and above voice plan of BSNL) and a penetration of 20% of total mobile subscriber base, operators would generate just about Rs 3,000 crore per year from rentals. Despite making payments for 3G access, the telcos need to fork out more money to invest in 3G network equipment in India. Thus operators will have to work overtime to ensure 3G services usage generates enough revenues per annum to enable normal pay back and returns.

However, sensing the European trends where many telecos went bankrupt after paying astronomical amounts for 3G licenses, loan offers have started coming in from banks. The State Bank of India announced that it will lend about Rs 20,000 crore for operators participating in the auction for 3G spectrum. The bank as of March end had liquidity of Rs 40,000 crore. The 3G auction could reduce it by 50% if there is no further growth in its deposits. SBI revealed that more than one 3G operator had approached SBI and the bank had given appropriate limits to them.

Borrowers have expressed fears that if money for the 3G auctions flows out of the banking system to the government, liquidity would dry up and interest rates will go up. However, this could reverse if more foreign investments come to India.

Despite all the fears, India is adding 12-16 million new mobile phone users a month and the country has around 500 million subscribers currently. Moreover, the rising price of the auction has forced most telcos to let go of pan-Indian ambitions. Sticking to certain regions could very well become profitable for the companies. Only time will tell, however, if 3G in India will be a genuine success.

madhurak@cybermedia.co.in