On 19 May, India’s 3G auctions concluded after 34 days with more than $15 billion in revenues for the Indian government – nearly double the goal set for both the 3G and BWA auctions combined.
The 3G auction was for three to four slots of 2x5MHz spectrum in the 2.1GHz band. There were several successful bidders, with no single operator winning a pan-India license. In our view, the results are fairly balanced, with successful bidders relatively satisfied with the outcome.
Two major factors have contributed to the fact that no operator has won a pan-India license. The first was the structure of the auction itself. The simultaneous ascending bidding over multiple clock rounds combined with circle-level bids meant that individual bidders could adopt a zonal (as opposed to a pan-India) strategy.
Second, as the intense bidding pushed prices steadily higher, most operators were forced to abandon pan-India dreams and make some hard choices. The end result is that India will have as many as six significant 3G players, in addition to the state-owned BSNL/MTNL, with fragmented coverage maps.
The aggressive bidding reflects the view by many bidders that they simply had no choice but to participate or risk being left behind. Most bidders appear to be relatively satisfied with their outcomes under the circumstances. Unsurprisingly, the most aggressive bidders were Bharti and Vodafone, with total bids of $2.7 billion and $2.6 billion for 13 and nine circles respectively.
Bharti and Vodafone have won the prized circles of Delhi and Mumbai, and will be satisfied that they have protected their premium subscriber bases and heavy legacy investments. The other metro winner, Reliance, has ensured that it now has the ability to target premium, high-value subscribers. Beyond these metro circles, the picture is a mixed bag, with circles dispersed among all the winning bidders. The biggest surprise of the auction was the strong showing of Idea and Aircel.
But perhaps the biggest winner from the auctions is the government. The Finance Minister spoke of having more “elbow room” to tackle the fiscal deficit, considering the auction proceeds are already nearly double the figures budgeted 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. However, we are hopeful that at least some of the proceeds will go towards the spectrum re-farming fund that the Telecom Regulatory Authority of India (TRAI) has proposed for investment back into the sector.
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 have to be filled in at the next auction round in 2014.
Individual operators will feel varying degrees of financial pressure. Operators will now have to work hard to realign their balance sheets to cope with the rising debt levels that will result from the raising of capital required for 3G network deployments, and other prospective costs such as increased license fee burdens. Operators such as 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 maintain momentum.
The key will be 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.