Did India Mobile Operators Overpay in Spectrum Auctions?

Did Indian’s mobile operators spend too much on spectrum in the recent mobile spectrum auctions? Yes, if one looks at the looming impact on cash flow and profits; no, if one looks at the position of incumbents that did not lose the spectrum they already are using to support their businesses.

Overpayment is not unheard of. Many European telcos were nearly bankrupted when they overpaid for 3G spectrum, for example. Some fear that was the case for the recently-concluded Indian spectrum auctions.

"The auction design and the scarcity of spectrum have resulted in exorbitant bids to secure the spectrum, particularly in renewal circles, where huge investments have already been made on the assurance of a continuity of business enshrined in the licenses issued by the DoT," said Gopal Vittal, Bharti Airtel's CEO for India and South Asia.

Put another way, spending probably will have strategic implications, namely a winnowing of suppliers from as many as eight in a region to perhaps five. In that sense, for some of the smaller providers, the spectrum auctions will eventually be seen as contributing to their acquisition by other providers.

Tactically, the market leaders had no choice but to protect their existing cash flows, at whatever cost. That meant winning again the spectrum they already use in the 900 MHz bands, for example.

Still, it is conceivable there will be huge changes in 3G market share in 2015, with Bharti Airtel growing to 18 percent share, up from three percent in 2011.

Reliance Communications, on the other hand, might lose 3G share, dropping from the 2011 level of 39 percent to 15 percent. Tata Teleservices, likewise might drop from the 2011 level of 30 percent to 12 percent in 2015.

Vodafone might grow its share of 3G accounts from two percent up to about 13 percent; Idea Cellular climbing from about two percent to 11 percent.

The sums spent on 900-MHz spectrum with the better coverage capabilities (signal propagation distance) tell the story: Reliance, the fourth largest carrier,  spent an order of magnitude (10 times) less on 900 MHz spectrum than the three bigger companies more reliant on 900 MHz spectrum.

And 900 MHz is synonymous with 3G, as 1800 is synonymous with 4G.

Idea Cellular was the biggest spender in the recently-concluded Indian spectrum auction, accounting for 28 percent  of the 1.099 trillion (€16 billion, about US$17 billion) raised by the government from the sale of frequencies in the 800 MHz, 900 MHz, 1800 MHz and 2.1 GHz bands.

But Bharti Airtel and Vodafone were not far behind. Where Idea represented 28 percent of auction spending, Bharti Airtel was not far behind at 27 percent, while Vodafone represented 24 percent. Reliance Communications spending was nine percent of total.

Under such circumstances, it would not be unusual for a contestant predicted to lose lots of 3G market share pin its hopes on 4G.

“We believe the future is 4G and not 2G and 3G,” said Gurdeep Singh, chief executive of consumer business at Reliance Communications, India's number four mobile operator.

In some sense, the statement is self evident. At some point, the next generation of mobile networks always has superseded the older networks. For Reliance Communications, the statement also is a matter of market positioning by an upstart attacker whose prospects arguably are better in the 4G area than 3G.  

At the same time, turning “weakness” into “strength” is a smart business strategy, when it can be accomplished. Reliance holds less 800 MHz and 900 MHz spectrum than its competitors. By definition, that means less capacity for 2G and 3G services.

“We entered the auction with a focus on the next 20 years in telephony and not unduly biased or driven by the past,” said Singh.