Indian 3G Auction: The Aftermath - Analyst Blog

The prolonged 3G spectrum (radio airwave) auction in India was finally wrapped up on May 19, 2010, according to the country’s Department of Telecommunications (DoT). The auction, which started on April 9 and lasted for 34 days with 183 rounds of aggressive bidding, has fetched a staggering INR667.19 billion (US$14.6 billion), overwhelming the government’s initial estimate of INR350 billion (US$7.6 billion).     

 

The DoT has auctioned 71 3G spectrum licenses in the 2.1 gigahertz (GHz) band in India’s 22 telecom service areas (“circles") with all the circles receiving bids. Three slots of spectrum have been auctioned off in each of the 17 circles while four slots were auctioned in each of the remaining 5 circles.

 

One block of 3G spectrum has been reserved for the state-run Mahanagar Telephone Nigam Ltd (MTE) in Delhi and Mumbai and Bharat Sanchar Nigam Ltd (BSNL) in 20 remaining circles. These operators now have to pay the government a sum equivalent to the highest bids in the respective circles where 3G services are available. 

 

The limited number of available license slots has propelled the bid price for a single bandwidth slot to a whopping INR167.5 billion (US$3.6 billion). The highest bid was recorded in the nation’s capital– Delhi, where a 3G license costs INR33 billion (US$714 million). This is close to the floor price of the auction which was set at INR35 billion (US$758 million). Delhi is followed by Mumbai, Karnataka and Tamil Nadu circles.

 

Nine carriers had bid for the 3G auction including the major privately-held firms Bharti Airtel, Vodafone’s (VOD) Indian arm Vodafone Essar, Reliance Communications, Idea Cellular, Aircel and Tata Teleservices, the Indian partner of NTT Docomo (DCM).

 

Telecom powerhouses Bharti, Reliance and Vodafone Essar have emerged as the top winners in the auction grabbing licenses for the lucrative Delhi and Mumbai circles. However, no single operator has been granted a license for offering 3G services in all 22 circles. Shares of the Indian telecom firms rallied following the auction closure with Bharti, Reliance and Idea being the notable gainers.

 

The victorious bidders at the 3G auction have to pay for their spectrum licenses within 10 days following the end of the auction. The government plans to use the windfall from the auction to bridge the high fiscal federal deficit and partly fund payments towards food, fuel and fertilizer subsidies, according to India’s Finance Ministry.

 

Bharti and Reliance, which have won licenses in 13 circles each, will pay INR123 billion (US$2.7 billion) and INR85.9 billion (US$1.9 billion), respectively. Vodafone Essar has nabbed licenses in 9 circles for INR116.2 billion (US$2.5 billion).

 

Other notable winners Aircel (in 13 circles) and Idea (in 11 circles) will pay INR65 billion (US$1.4 billion) and INR57.7 billion (US$1.2 billion), respectively. Most of the successful bidders are funding the 3G spectrum payment by raising huge debts, which will stretch their balance sheets.   

 

Successful bidders will be allowed to launch commercial services from September 1, 2010. Operators have to comply with deployment obligations by covering at least 90% of the metro service areas with 3G within five years from obtaining their spectrum licenses.

 

The DoT will now auction two blocks of Broadband Wireless Access (BWA) spectrum in the 2.3 GHz band to be used by the operators for 4G services. The floor bidding price for the BWA auction has been set at INR17.5 billion (US$360 million). A total of 11 operators will bid at the auction including Bharti, Vodafone Essar, Reliance, Idea, Tata Communications and Aircel. US chip giant Qualcomm (QCOM) is a surprise applicant for the auction.

 

The 3G auction came at a time when Indian telecom firms were struggling amid aggressive price competition which has pushed down voice tariffs to as low as INR0.01 (US$0.0002) per second. With contracting voice revenues and margins, the incumbent operators are desperately looking to roll out lucrative data-based services enabled by 3G.

 

The Indian 3G handset market will bloom with the roll-out of high-speed Internet by a number of operators. Currently, the country’s handset market is flooded with 3G phones from the world’s leading manufacturers such as Nokia (NOK), Motorola (MOT), Research In Motion (RIMM), LG, Samsung and Sony Ericsson, a joint venture between Sony Corp (SNE) and Ericsson (ERIC). Moreover, Apple’s (AAPL) iPhone 3G and 3GS are also being sold in India.

 

The entry of private players in 3G connectivity will boost demand for 3G-compatible handsets and accessories as customers upgrade their phones to take full advantage of the data services enabled by 3G. This will significantly benefit leading global handset manufacturers in the world’s fastest growing wireless market.

 

However, 3G penetration may eventually be slower-than-expected in India as adoption is likely to be restricted to the elite segment of the population across metros and large cities. Handset price may also be a limiting factor as 3G cell phones are more expensive than the regular 2G handsets used by an average Indian.