Mumbai: As the huge payout for high-speed third-generation (3G) spectrum puts pressure on telecom companies’ revenue and profitability, there might be a return to pricing discipline in the Indian market, where call tariffs have fallen due to intense competition, Prashant Singhal, head of telecom advisory services at consultancy firm Ernst and Young, said in an interview. Edited excerpts:
Now that the 3G bids are over, do you think the auction helped the price discovery process?
Clearly, the auction was designed to maximize revenue for the government. The aggressive bidding by operators for 3G spectrum has led to higher-than-estimated licence fee outgo. Delhi and Mumbai circles witnessed exorbitant clearing price at Rs3,300 crore (9.8 times the floor price) and Rs3,200 crore (9.2 times the reserve price), respectively, together accounting for about 40% of all-India tally. The significant capital outlay for 3G spectrum fees and capex is likely to impact operators’ profitability.
Graphic: Ahmed Raza Khan/Mint
No single firm has a pan-India 3G licence. Is that good or bad?
It is a blessing in disguise for the industry as operators’ average outlay on 3G licence is Rs8,800 crore. Operators can make better investments in network, infrastructure and innovative applications. The spread of the market is such that it would result in healthy competition. Most of the players appear to have followed circle-specific bidding strategies, attempting to defend core markets, which is evident from the (current) revenue contribution (to them) from winning circles.
What impact will the higher-than-expected 3G licence fees have on tariffs?
3G will be adding substantially to the operators’ investments. Operators will focus on premium data services for high Arpu (average revenue per user) subscribers. For the mass market, affordable data services have to be developed.
The success of 3G will largely depend upon how quickly telcos roll out applications, primarily of mass appeal.
What will 3G do to the ongoing tariff war?
The industry observed slower decline in tariffs in 2007. The tariff war resumed in 2009, with new entrants using the pricing tool for incremental market share.
Considering the significant upfront cost for 3G licences and capex for network rollouts, 3G could have a positive bearing on falling tariffs.
Additionally, pricing could stabilize in FY11 with new operators beginning to exhaust their spectrum, which would prompt them to bring an end to tariff cuts and focus on driving revenue growth. However, upsurge in tariffs may need to wait till the next phase of industry consolidation.
Less than 5% of the handsets in India are 3G-enabled. Will this limit the ability of telcos to expand their 3G footprint?
3G services will initially cannibalize existing high-end 2G subscribers. Smartphone penetration is estimated to triple in the period 2009-14, and number of smartphone users will grow 5.5 times by 2014. Handset manufacturers are geared up to seize the 3G mass market opportunity by lining up new launches and cutting entry level handset prices to just over Rs4,000.