Where’s the third umpire when you need one?

Where’s the third umpire when you need one?

The Delta Perspective

Revisiting mobile spectrum in India

Back in India, the second innings of the spectrum game is underway.  The first innings, and the ensuing scandal, garnered as many eyeballs as the nation’s favourite past time; cricket.  Now, with the stakes higher than ever, the indifferent response of the major players adds a whole other dimension of intrigue to the situation.
 

Blast from the past: A quick recap

In 2008, the Indian government awarded notoriously-undercharged 2G spectrum licences.  As a result, there was disparity between the money collected and the amount the law mandated, leading to a shortfall of ₹1,766 billion (US$32 billion) (according to the more popular estimate from the Comptroller and Auditor General of India).  Fingers were pointed, unflattering bribery claims were made, the accused were ostracised and the years went by.

Then, in 2012, investigations into the scam closed as the Indian High Court condemned the spectrum allotment as “unconstitutional and arbitrary” and summarily quashed all of the 122 licences issued without any repayment to the hapless bidders.  The spectrum was then revalued befitting its status as an “important national asset” with the licences to be re-auctioned accordingly.
 

The dark cloud and a silver lining

Monetary matters aside, the outcome of the 2G licensing process was a crowded market with more than ten operators in India’s 22 circles (geographical regions).  In this hypercompetitive environment, telecom operators were trying hard to salvage their balance sheets amidst high CAPEX outlays and low ARPUs.
 
Blow after blow was dealt as operators had to shell out even more cash for the limited number of 3G licences that were offered in 2010/2011 at inordinately high prices (to compensate somewhat for the 2G underselling perhaps).  The operators that chose not to opt for the 3G licences suffered losses nonetheless from subscribers churning to those that had 3G.
 
On the flipside however was the Indian consumer.  The struggling operators marketed their offers aggressively and pushed down prices even more in a bid to remain competitive.  Rock-bottom pricing and high visibility made mobile services a commodity availed by all, driving mobile penetration in India from 20% in 2007 to 72% in 2011 – and from 50% to 161% in urban areas over the same period.  This implies an incredible CAGR of nearly 30% (a fact highlighted by comparison to peer economies including Pakistan - 8% CAGR, Thailand - 8% CAGR or even Philippines - 11% CAGR).
 
There was significant overall improvement in the sector as underlying market forces came into play.  The indirect implications of this can be considered quite far-reaching: the improved communicability of the average Indian increased his earning potential and thus upped the nation’s GDP.  This in turn would have increased the corporate tax paid to the government and offset the so called losses from the 2G auction.


 

Ghosts of the past

Cutting back to the present, the High Court order revoking the 2G licences had called for their re-auction at ~10x their original price, i.e. about US$5 billion.  In November 2012, 8-11 blocks of 1.25 MHz in each circle for 2G spectrum in the GSM and CDMA bands of 1800 MHz and 800 MHz were offered.  Blocks were even reserved for those who had previously held these licences to level the playing field.
 
However, a less-than-enthusiastic response by the operators resulted in a sale of just over US$1.5 billion.  In fact, the number of bidders for the 800 MHz spectrum ultimately came up to a grand total of zero.  Prime blocks in most metropolitan cities in the country went unsold as operators denounced the reserve price for the bid as financially unviable leaving the government with less than one quarter of the US$7 billion that it had set out to reclaim.
 
Even as whispers of cartelisation and arm-twisting by operators surfaced, the Department of Telecommunications was  forced to slash the licence prices, halving it for the 800 MHz and cutting it by 30% for the unsold 1800 MHz in the second round in March.  However, these were still seen as limiting, and the only bidder for the March 2013 auction was Sistema Shyam, the subsidiary of Russian conglomerate Sistema, for the 800 MHz.
 
Vodafone Group's CEO, Vittorio Colao, was quite explicit in explaining his company’s reason for boycotting the auction, “In India there is a misperception of what is the value of spectrum…we cannot afford to pay the high price”.  This opinion is without doubt shared by his peers as interest in the 1800 MHz, and the added 900 MHz renewal, remained stubbornly at nil.  However, despite not earning more than US$0.7 million in this round, the Indian government still hopes to raise at least ~US$3.5 billion (less than half of the value previously sought) from the spectrum auctions in this fiscal year.  However, it seems unlikely that they will be able to raise any more than US$2 billion thus still leaving a significant shortfall.


Sailing through stormy seas

From an operator’s point of view, there is hope yet in India.  While many players exited this monsters’ ball, the resilient few that remained have developed efficiencies that ensure their continued success.  Even with over ten operators, the incumbents Airtel, Vodafone, RCOM and Idea manage to maintain a combined 65% market share.  And, with a relatively low rural penetration and rising incidence of multiple SIMs per user in urban markets, there is still scope for further growth.
 
As the market is maturing, the operators are culling many of their promotional offers and slowly increasing prices.  The regulator is unlikely to intervene as long as the hike remains an insignificant 0.07-0.09 US¢/year (cents/year) while industry analysts estimate that a meagre 0.05-0.07 US¢ hike would be sufficient to appreciably improve EBITDA margins.  However, if operators were forced to buy the expensive spectrum licences, then they would have to increase prices to an extent detrimental to minutes of use – a situation bound to reverse the anticipated positive trend in ARPUs.

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Delta Partners - TMD Advisory and Investment