India Kicks Off 3G Auction - Analyst Blog

The Indian telecom industry made history as the government finally kick-started the long-awaited 3G WCDMA spectrum (radio airwave) auction on Friday, April 9, 2010. India’s Department of Telecommunications (DoT) is conducting the 3G auction over the Internet with the bidders having respective passwords for accessing the sale process.

Bidders at the auction are vying for a chunk of spectrum to roll out next-generation telecom services in the world’s fastest growing wireless market with roughly 600 million mobile subscribers.

A separate spectrum auction for Broadband Wireless Access (BWA) is expected to start two days after the close of the 3G auction which may take several days to complete. Winning bidders have to pay for their licenses within 10 days following the auction closure.

The DoT recently revealed the bidders’ names for 3G and BWA auctions. The auctions have attracted 20 applicants in aggregate with 9 having enrolled to bid for the 3G auction and 11 for the BWA auction.

The 3G bidders include major privately-held carriers Bharti Airtel, Vodafone’s (VOD) Indian arm Vodafone Essar, Reliance Communications, Idea Cellular, Aircel and Tata Teleservices, the Indian partner of NTT Docomo (DCM). Remaining bidders are Chennai-based minnow S Tel and new entrants Videocon and UAE-based Etisalat. Bharti, which controls 22% of the mobile market, is expected to emerge as a big winner.

The applicants for the BWA auctions include Bharti Airtel, Vodafone Essar, Reliance, Idea, Tata Communications, Aircel and Spice Internet. Others are newcomers like Tikona Digital, Infotel Broadband, UK-based wireless broadband operator Augere Holdings and Qualcomm (QCOM).       

International telecom heavyweights AT&T (T), Verizon (VZ), France Telecom (FTE), Deutsche Telekom (DT) and Telstra have shunned the spectrum auctions given the uncertainty regarding the spectrum availability and high cost of service deployments.

The DoT will auction 3-4 blocks of spectrum in the 2.1 gigahertz (GHz) band for 3G and two blocks in the 2.3 GHz band for BWA in 22 service areas (called “circles"). The floor price for 3G and BWA auction has been set at INR35 billion (US$786 million) and INR17.5 billion (US$393 million), respectively.

The 3G and BWA auctions are expected to fetch INR350 billion (US$8 billion). The Indian government plans to use the proceedings from the spectrum auctions to bridge the high fiscal federal deficit. The limited number of available license slots for auction is expected to increase the bidding price. A fierce bidding war is expected in the metro service areas that boast of high-income groups.

According to the Notice Inviting Application (NIA) issued by the DoT on February 25, the 3G spectrum should be granted to three top bidders in 17 circles (out of total 22), including India’s four metropolitan cities. The remaining five circles will have four players each. 

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 the time of obtaining their spectrum licenses.

India’s telecom market is voice intensive as operators derive a chunk of their revenues from voice services. However, the incumbent operators desperately need to roll out data-based services as they experience contracting revenue and margins on voice services. 3G not only offers faster connectivity but also enables the roll-out of an array of value-added services such as internet TV, video-on-demand and audio-video calls.

India’s 3G subscriber base is forecasted to reach 50 million by 2012. Besides fostering sizable investment in the telecom sector, 3G will boost wireless demand in the country driven by the wider access to advanced data applications.

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.

While 3G licenses are vital for the operators, aggressive bidding may strain their finances and drag future earnings. Most of the bidders (including Vodafone Essar, Idea and Aircel) are funding the 3G spectrum by raising heavy debt which will stretch their balance sheets.