After 34 days of aggressive bidding, India's 3G auctions concluded last Wednesday with around $15 billion in revenues for the Government of India, nearly double the goal set for both 3G and BWA auctions combined. The 3G auction was for three to four slots of 2 x 5 MHz spectrum in the 2.1 GHz band. There were several successful bidders with no single operator winning a pan-India license. The results, in our view, are pretty balanced with successful bidders relatively satisfied with the outcome.
"The auction rules allowed bidders to pursue zonal as opposed to pan-India strategies but more significantly, as the intense bidding pushed prices steadily higher, most operators were forced to abandon pan-India dreams and make hard choices. India will now have six significant 3G players with fragmented coverage maps in addition to the state-owned BSNL/MTNL combine," says Shiv Putcha, principal analyst with Ovum's Emerging Markets practice. Many bidders had no choice but to be players or risk being left behind. Most bidders appear to be relatively satisfied with the outcome under the circumstances. The most aggressive bidders were Bharti and Vodafone with total bids of $2.7 billion and $2.6 billion for 13 and 9 circles respectively.
Among the operators, Bharti and Vodafone won the prize circles of Delhi and Mumbai with the satisfaction of having protected their premium subscriber base and heavy legacy investments. The other Metro winner Reliance has ensured that they now have the ability to target premium, high value subscribers. Beyond these Metros, the picture is a mixed bag with circles dispersed among all the winning bidders. The biggest surprise of the auction was the strong show put forth by IDEA and Aircel.
The principal winner of all is the Government of India. The Finance Minister stated that there is more ‘elbow room' to tackle the fiscal deficit, now that the auction proceeds are already nearly double of the budgeted figures ahead of the BWA auctions. It can be safely assumed that significant portions, if not all, of these funds will be used to reduce the fiscal deficit as per the Minister's stated goals. We are hopeful, however, that at least some of the proceeds are allotted to the spectrum refarming fund that TRAI has proposed for investment back into the sector.
The hard work begins now for Indian operators
The Indian mobile sector now stands at a key inflection point as it begins the long, slow transition from volume to value growth. Despite the intensely competitive environment and regulatory uncertainty, all of the winning bidders have made strong bets on the Indian mobile sector and are clearly here to stay. The fragmented 3G coverage maps will of course, have to be filled in at the next auction round in 2014.
Individual operators will feel varying degrees of financial pressure but operators will now have to work hard to realign their balance sheets to cope with rising debt levels that will result from the raising of capital required for 3G network deployments and other prospective costs like increased license fee burdens. Operators like Bharti, Vodafone and MTNL have strong cash reserves and are well placed to absorb rising debt to equity ratios. Reliance, IDEA, and Aircel will be more dependent on external borrowings to finance their respective deployments and keep momentum.
"The key is to quickly drive revenue growth from 3G services. 3G will provide operators with an opportunity to break out of the vicious circle of price competition with differentiated, data-centric services. The lower cost of providing voice will also help margins and provide capacity relief. Moreover, time to market for 3G services will be shorter than the global norm since networks are mostly 3G ready and devices have already been pre-seeded in key circles," concludes Shiv Putcha.
