And so, our worst fears regarding the 3G auctions have come true. Our happiness for the government—the extra money it gets from the auctions will help it balance its books better, though we are afraid it could also encourage some profligacy—is offset by our concern for the telecommunications industry. Ingredients such as a large and growing market, intense competition, a scarce commodity that is a prerequisite for doing business, and a far-from-clear policy regime are a recipe for the economic equivalent of a flambe.
The telcos will end up spending more than the close to Rs70,000 crore they will have to pay the government. Equipment makers decided, several years ago, that they would engineer equipment for data-rich third-generation networks that would, largely, not work along with equipment that run existing second-generation telecom networks. So, rolling out a 3G network is not going to be simply about adding some equipment to an existing network. Then there are marketing and customer acquisition costs to be considered.
All this is likely to make 3G services expensive and customers who have got used to the lowest telecom tariffs in the world will be surprised by just how steeply priced some data-intensive applications are. That will, in turn, limit the number of people who will want 3G services. Consequently, the profitability of telcos operating in India will likely take a hit. Some may simply go under or be bought by other telcos. This newspaper had predicted a situation where telcos approach the government for a relief package after a few years, much the way they did in the late 1990s after realizing that they had, in a fit of irrational exuberance, bid way too much for permission to offer telecom services (now, why does that sound familiar?). Much as we would like to be proved wrong on this one, it does seem to be the way things will go.
Given the likelihood of all this, the telcos will also find it difficult to line up finance to pay for the spectrum and then, in the second stage, roll out 3G networks. It will be interesting to see how the telcos finance their requirement. Indian banks are flush with funds but the magnitude of financing is more than they are used to; the crisis in the euro zone makes it next to impossible to raise foreign debt; and equity investors, judging from the performance of listed telecom stocks in India, are already reacting badly to the possibility of eroding profitability and higher debt.
Illustration by Shyamal Banerjee/Mint
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