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3G Outlook - Impact of spectrum auctions

June 15, 2010
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For the first time, a value has been ascribed to spectrum in an open auction in India, indicating the importance of 3G airwaves. tele.net invited industry analysts to share their views on the impact of the high bids on operator finances, 3G strategies and service plans. They also discussed the implications of the Telecom Regulatory Authority of India's (TRAI) recommendations, "Spectrum Allocation and Licensing Framework", on operator plans and overall industry dynamics...

What will be the likely impact of the 3G spectrum auctions on operator finances and the market over the next few years?

Sourabh Kaushal
Carriers are expected to pay a significant portion of the 3G/broadband wireless access (BWA) spectrum bid amount through debt financing. This is expected to adversely impact their opex as the interest outgo is expected to increase significantly. Carrier margins are expected to reduce in the short to medium term. Some carriers may also plan to raise equity for repayment of the debt.

Romal Shetty
Most of the operators aspiring for a panIndian licence had estimated a payout of around Rs 30 billion for pan-Indian 3G spectrum. With the overshooting bid prices, they went for selective bidding. But the operators have still ended up spending close to what they would have spent for a pan-Indian licence.

While estimating the pan-Indian bid value, operators would have considered the underlying revenues on an all-India basis as well. Since the winning operators are restricted to a maximum of 13 circles, they have to revise down the estimated revenues. Likewise, they will have to revisit all their plans, models and strategies.
Further, due to a high debt burden, there will be a significant strain on their balance sheets for about three years.

Prashant Singhal
The $20 billion -­ Rs 680 billion ($15 billion) for 3G spectrum and $5 billion for network rollout -­ that operators will spend to launch 3G services will have a substantial impact on the industry. Over the next couple of years, operators will be looking to gain greater control over costs and spending. Since these investments will be primarily funded by debt, the operators' financial risk profiles are likely to be under pressure in the medium term.

However, since the Indian telecom industry is still at a high-growth stage, the demand for 3G services is expected to be explosive. Revenues from these services will start accruing by end-2011. The strong cash flows will offset pressure on operators in the long term. The sector's high-growth rate and the latent demand for high speed services could ensure that operators are in a position to repay the amount over the next three-five years.

Dr Mahesh Uppal
3G spectrum prices will affect the balance sheets of the operators. However, since spectrum is an asset of considerable value to their current as well as future businesses, there should be little difficulty in procuring finance. So, this will not be a long-term finance issue.

How will the high 3G spectrum price affect the valuation of operators?

Sourabh Kaushal
The stock price of many carriers has already factored in some major outgo for spectrum payments. We have seen volatility in the stock prices since the auctions closed, but having 3G spectrum is clearly an advantage and it is a long-term asset.

Romal Shetty
Spectrum had a huge valuation quotient earlier, but with this huge spectrum price, the overall valuation of operators may come down. However, this price is not the only factor dragging valuations down. Valuations will also fall because the uptake of 3G services will not be as high as it would have been two-three years ago. Operator focus till 2012 is going to be more on subscriber acquisition on 2-2.5G rather than 3G, especially in areas with low teledensity. So, 3G will start generating value for the company only after two to three years. The intensifying competition is another reason for the dip in valuations.

Prashant Singhal
While 3G spectrum prices have been high, they have also indicated the price that operators were willing to pay for spectrum. The high value will, in turn, enhance the valuation of operators.

The TRAI recommendations on mergers and acquisitions (M&As) will also help improve valuations. M&As will eventually depend on the guidelines of the Department of Telecommunications, supported by willing buyers and sellers.

Dr Mahesh Uppal
The valuations of operators who have not succeeded in winning 3G spectrum will be impacted because the availability or unavailability of spectrum will decide their ability to meet future demand.

How will TRAI's 2G spectrum pricing and allocation recommendations impact the telecom operators?

Sourabh Kaushal
If the recommendations are accepted, Bharat Sanchar Nigam Limited, Mahanagar Telephone Nigam Limited, Bharti Airtel, Vodafone Essar and Idea Cellular will be required to pay for the excess spectrum that they hold beyond 6.2 MHz at 3G spectrum prices. This, along with the 3G and BWA spectrum payment, will have a significant impact on the liquidity of carriers. This liquidity crunch could affect current capex investments in key areas such as rural expansion.

Romal Shetty
TRAI's recommendations, especially the one that directs operators to pay for excess spectrum, will have a huge impact on operators. On account of the limited availability of spectrum, it is unlikely that operators will want to return the spectrum allotted to them. 3G and 2G spectrum prices, along with the capex for the rollout of 3G services, add up to a huge sum to be invested by operators. The capex for 3G rollout is estimated to be $1-$2 billion per operator. However, it will not be as high for 2G.

Prashant Singhal
The immediate impact of the recommendations will be an outflow of cash from the industry to the government. While the charges payable by the incumbent operators and the tower companies will increase, the recommendations will not impact new operators.

Dr Mahesh Uppal
There are positives in that spectrum has been separated from the mobile licence as well as the fact that there is a proposal to bring all licence fees at par to prevent arbitrage. There is no doubt that they will benefit new entrants in the GSM market by guaranteeing more spectrum, and will hurt those who entered the market earlier by imposing higher costs.

How will the recommendations, if accepted, impact the industry in terms of growth and consolidation, especially the suggestion to remove the three-year lock-in period?

Sourabh Kaushal
There wouldn't be any significant impact on consolidation as the lock-in clause for new carriers will expire in the next eight months. Given the current hyper-competitive scenario, carriers might have already started focusing on their M&A strategy and a high-level evaluation of target companies. But by asking for payment for spectrum held beyond 6.2 MHz in the merged entity, the policy recommendations seem to be discouraging major consolidation and supporting the same between small players.

Romal Shetty
A three-year lock-in period has been recommended to curb spectrum trading. However, there are five to six small operators who will not be able to survive the competition and thereofer, it is better for them to merge. With a three-year lock-in period, some of them will actually go bankrupt. TRAI's recommendation to do away with the lock-in clause will allow at least some M&As in the sector.

However, the problem with this recommendation is that if an operator goes for a merger and the combined spectrum crosses the 6.2 MHz limit, it will have to pay for the extra spectrum. Since some of these players are really small and offer very little value-addition other than spectrum, it does not make a business case for large operators to buy out these firms if they have to pay more for this additional spectrum.

Prashant Singhal
Among the TRAI recommendations, the one relating to removing the three-year lock-in clause is a positive step towards consolidation. However, the differential that the merged entity has to pay on the spectrum will impact operator finances, leading to an outflow of $4 billion-$5 billion from the industry. This money could have been utilised to expand capacity and provide a suite of services to consumers.

By limiting the subscriber base and adjusted gross revenue of the merged entity to 30 per cent in a circle, the government has restricted large incumbent operators from acquiring existing medium-size operators or even new entrants. Therefore, M&As will have to take place among the new operators.

Dr Mahesh Uppal
To some extent, the TRAI recommendations favour consolidation but they also strengthen those new players who may decide to play the waiting game and look for options rather than simply selling out.

None of the players has acquired a panIndian licence. How are they placed, given the circles in which they have won and the amount they have paid?

Sourabh Kaushal
Apart from a few aberrations, carriers have bid and won in circles where they already have a leading market position in terms of revenue or subscribers.

In some circles, where a non-leading operator has won spectrum, the strategy of the carrier could be to churn high-ARPU subscribers from the market leaders who have not won spectrum in that circle.

In the metros, leading GSM carriers have paid 1 to 2.2 times their existing gross revenue in 2009-10, while in the Category A, B and C circles, the 3G spectrum priceto-gross revenue ratio has been 0.8 or lower. This ratio is significantly higher for dual-technology operators and new carriers. This can be attributed to the low ARPU of CDMA subscribers as compared to GSM subscribers and the lower subscriber base of new carriers.

The main objective of carriers is to retain high-end subscribers and enhance ARPUs by providing high speed wireless data and multimedia-based value-added services (VAS). Currently, high-ARPU subscribers constitute 9 per cent of the total subscriber base, but account for 27 per cent of revenues and 45 per cent of margins.

Romal Shetty
Operators have focused on winning 3G spectrum in those circles where they have high-end subscribers because they want to convert these subscribers from 2G to 3G for higher ARPUs.

Some operators have not bid for Mumbai or Delhi, which top the list of high-end circles. These players probably do not have the business case today to justify investing Rs 30 billion in the Mumbai or Delhi circles. Therefore, every player had a different strategy while bidding.

The circle division among the big players is very complementary. Major operators like Idea Cellular, Vodafone Essar and Bharti Airtel are not present together in any of the circles. Therefore, going forward, one can expect synergies and alliances among operators', which are necessary for providing roaming services.

Prashant Singhal
The fact that no player has acquired panIndian spectrum is a positive development. It shows that operators have bid for licences within their war chest. Apart from the unrealistically high bidding in two circles, bids have been in line with expectations.

Since there is a strategic distribution of circles, there will be a greater degree of cooperation among operators. If there were two pan-Indian 3G spectrum winners, this cooperation wouldn't have been expected. This distribution will ensure that there is healthy competition in terms of providing mobile content. It is unlikely that there will be any unhealthy price war in 3G in the immediate future, which will be good for the industry.

Dr Mahesh Uppal
Airtel has paid the highest and would perhaps be disappointed at having failed to acquire 3G licences in Maharashtra and Gujarat, which are potentially large sources of its revenues. Almost all players have sought to capitalise on their first-mover advantage. For example, Idea has been able to defend its stronghold in Maharashtra and Gujarat, and Aircel in its southern circles.

What future trends do you see for allied industries like VAS, following the 3G rollout?

Sourabh Kaushal
Initially, 3G services will be targeted at high-ARPU subscribers. While high speed data services will be targeted at corporates, video-based entertainment services will be targeted at young professionals and the high-income youth segment.

Apart from providing high speed data services, 3G is expected to facilitate high bandwidth services such as multimediabased VAS. Globally, video-based services have been the killer applications for 3G and the Indian market will be no different. These services will present opportunities for players across the value chain and, especially for players with proven technological expertise in delivering video over mobile.

Romal Shetty
3G will be used for providing services beyond conventional VAS like ringtones, astrology, Bollywood, cricket, etc. Once quality content is generated, interactive gaming is likely to pick up on the 3G platform. Mobile commerce is another segment that will gain momentum, provided the Reserve Bank of India (RBI) gives the necessary approval and operators work together with the RBI. Mobile advertisement is also likely to gain traction. 3G revenues, however, will not be based purely on advertising as is being speculated. They will depend on how operators leverage advertising, mobile commerce, interactive gaming, and bring in new content.

Prashant Singhal
The key driver for 3G services will be internet access to low-income people. We can already see a lot of innovation in applications that are of high interest in India like Bollywood, music, cricket and religion. The advent of 3G will also lead to increased handset sales in India.

Dr Mahesh Uppal
With the voice market becoming more commoditised, the real margins in revenues will depend on data services or VAS. The growth of these services will be slow initially, but will gain pace over the years.


 
 
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