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The goose with the golden spectrum (Comment)

Finally, it’s over. Eleven years after the birth of third generation (3G) telephony and near the end of its life, India’s auction for enabling spectrum or airwaves concluded May 19.

Here’s to the teamwork among India’s communications, finance and defence ministries that set telecom back by a half-decade. From its place ‘ahead of the curve’ 10 years ago — with SMS services like mobile banking way before their US usage — India fell way, way behind global 3G use.

Oh yes, some 3G is around, sort of. Public-sector operators Mahanagar Telephone Nigam Ltd (MTNL) and Bharat Sanchar Nigam Ltd (BSNL) got a cozy deal and started selling 3G services over a year ago, a last-ditch effort at monopoly protection in a competitive market – but got few users. And CDMA operators — Reliance Communications and Tata Teleservices — have been successfully selling 3G data cards since end-2009.

After over a month and 180 rounds of bidding, the 3G auction grossed $15 billion in licence fees. Airtel, Vodafone and Reliance were big bidders, as expected, but ‘dark horses’ Aircel and Idea picked up more circles than Airtel, though the latter took the top five circles.

No one took up a pan-India licence, with the base price for that licence being nearly matched by the final bid price for Delhi alone.

To see the fee of $15 billion as a stroke of ministerial genius, poised to wipe out a tenth of the country’s fiscal deficit, is a short-sighted view. Operators will find it tough to raise the funds by end-May. External borrowings are slow, in the wake of the European debt crisis. And the central bank has been tightening liquidity to tackle inflation.

And then operators are going to be hard pressed to recover the money, while keeping services affordable. But why should the government care?

Affordable mobile data services and high quality mobile voice would give a big boost to India’s industry, economy and employment and, yes, tax collections. The government took the easy way out — shake the money out upfront. The finance ministry caught the goose that laid the golden eggs.

Here’s the government line: What can we do? It was an open auction. Operators chose to bid at these rates. We too were surprised. All these arguments are fine. But the government needs to work out steps now to avoid crippling the golden goose, including spreading the licence fees over 10 years.

There will be legal issues with that, but it needs to work on the options. The party line, however, varies. The Bharatiya Janata Party (BJP) and Leftists ask: ‘Why did we not get this money out of the 2G auction?’ They even want Communications Minister A. Raja sacked. But translated into ground reality, this stand means: Why didn’t we kill the golden goose in the last century itself?

This $15 billion isn’t all that operators have to worry about. They have to spend on the actual rollout, equipment upgrades, whopping marketing costs to sell services in a high-volume, contend with a low revenue-per-user market. They also have to worry about the extra cost of 2G spectrum that they now hold beyond 6.25 MHz, at prices matching the 3G spectrum bids.

But India’s telecom companies are innovative. They show profits in the world’s lowest-revenue regime, against unique cost pressures — much like the generator back-ups for thousands of towers. But the 3G path ahead will be tougher. The pressure to recover is high. They may have some years to do so, which will be booked as capital expenditure, but the stock markets are not patient.

Let’s not forget that nine-tenths of India’s 600 million mobiles phones are with low-revenue prepaid users. From the rest, operators have to somehow recover over Rs.10,000 per customer for just the licence fees.

The alternative for the government, if it doesn’t bury its head — or the golden goose — in the sand, is to work out what it could do with the funds to reduce operator costs, such as providing them with 24×7 guaranteed power for their towers.

All this assumes that operators can raise funds over the next few days. That’s tough. BSNL and MTNL, for a start, may not be able to cough up the $3.5 billion they need to pay up to match the 3G bids and stick to their end of the cozy deal. To make matters cozier, the government may end up waiving this ‘burden’ for its pet duo.

So without intervention, expect over-priced 3G data services in India. That could be the second 3G market fiasco — the first being the BSNL-MTNL 3G flop-show since 2009.

One hopes this does not happen. One hopes India’s telecom operators again come up with spectacular innovations to launch affordable data services and raise the plummeting quality of service in the world’s second-largest mobile market.

(23-05-2010- Prasanto K. Roy is chief editor of Dataquest and Voice&Data from technology publisher CyberMedia. He can be reached at pkr@cybermedia.co.in, twitter.com/prasanto)

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