New Delhi: The winners of the recently concluded auction for spectrum to provide so-called third generation, or 3G, mobile phone services may be able to recoup the investment within the next five-six years, according to calculations done by consulting firm Analysys Mason.
The spectrum that the telcos won in the auction is valid for 20 years. The calculations take into account the existing user base at the existing average revenue per user (Arpu) levels and do not account for subscribers who would be added in the future. India has been adding 15-20 million subscribers every month, making it the world’s fastest growing wireless market.
The winning firms have to pay the money that they have bid for the spectrum on Monday, making the government richer by Rs67,710 crore.
Bharti Airtel Ltd, India’s biggest telecom company, won 3G spectrum in 13 telecom circles, or operating areas, bidding Rs12,300 crore, the most any company will have to pay. The circles account for 68% of its total mobile revenue and 65% of its subscriber base.
Reliance Communications Ltd (RCom) won spectrum in 13 circles, bidding around Rs8,600 crore. The circles where RCom has won account for 55% of its total mobile revenue and 49% of its total subscriber base.
Idea Cellular Ltd has won spectrum in 11 circles, bidding around Rs5,770 crore. The circles where Idea has won account for 80% of its total mobile revenue and 45% of its total subscriber base
“The carriers will require between 61-118 months to break even in Delhi and Mumbai, based on their subscriber market share and, hence, high-end subscribers,” said Kunal Bajaj, director at Analysys Mason. “The break-even in categories A, B and C circles would be between 23-68, 12-52 and 11-55 months, respectively, with revenue enhancement of only 20%, 10% and 5% for category A, B and C, respectively.”
Most analysts agree that the operators that won spectrum went after telecom circles that they are already strong in, in terms of both revenue and market share.
Demand anticipation: Cellphone users in New Delhi. Telecom firms have bid a total of Rs67,710 crore for 3G spectrum in the auction. Hemant Mishra/Mint
For the telcos, 3G is important due to its potential to help them retain and attract high-end subscribers who make up around 8-15% of the total subscriber base. High-end subscribers constitute around 25-30% of revenue and 45-50% of the profit margins, making them very valuable to a telecom firm, especially at a time when a tariff war is squeezing margins.
Analysys Mason estimates that 15% of total subscribers in Delhi or Mumbai give the operators Arpu of at least Rs1,000. This figure for category A, B and C circles is approximately 10%, 8% and 5%, respectively (Arpu higher than Rs700, Rs600 and Rs500, respectively). It is expected that carriers will be able to generate an additional 50% Arpu from these targeted high-end subscribers through modem-based high-speed wireless data services and adoption of multimedia-based value-added services, or VAS.
The calculations assumes a conservative migration of user base to 3G of fewer than 30 million subscribers across India. “The return on investment in the telecom industry is typically much longer,” Bajaj said.
“They will pay the cost of the C category circle within the first year, while for B circles it may take around two-three years. For metros, it would take four-five years, while for category A circles, they will be able to pay off the money within three-four years,” Bajaj said.
A company executive from one of the larger telcos that won spectrum, however, disagrees with the calculations saying that it would take up to 10 years to recoup the investment. The executive didn’t want to be named.
“The calculations are a bit bullish, but they can be done easily,” a Mumbai-based analyst working with a multinational brokerage firm said. “How the money from 3G services comes in has to be seen at the ground level as well as the conversion of the existing subscriber base, which could take up to 18 months in metros.”
“The one difference between roll-out of 2G (second-generation telephony) and 3G will be that for the latter, it will be simultaneous in metros and lower category C circles. In 2G, the roll-out first took place in metros and then, much later, reached the C-circles. VAS revenues in the non-metros is much higher than in the metros,” the analyst added.