Why India doesn’t need new wireless moguls

Why India doesn’t need new wireless moguls

By the time the Indian government stopped taking applications for new licences this week, it appeared that a lot of companies wanted to be just that: telecom moguls.

At least four homegrown property developers are in the fray, and so is one television manufacturer. AT&T Inc. is seeking a licence to return to India where AT&T Wireless Services Inc., now a part of Cingular Wireless Llc., used to be a partner in a cellular-phone company until 2005. Hinduja TMT Ltd, which exited a similar venture in 2006, is also looking to come back. Everyone’s pumped up by Li Ka-shing’s success. Hutchison Telecommunications International Ltd, the mobile-phone company controlled by the Hong Kong billionaire, made a gain of HK$69.3 billion ($8.9 billion) by selling its stake in India’s third largest mobile service operator to Vodafone Group Plc. in May.

What’s not so evident is why India needs new operators when most of the 22 regions (or circles) for which the government is going to issue new permits already have between five and eight service providers. While it’s true that the top four firms control three-fourths of the market, the objective of competition—low prices—hasn’t been compromised. The Indian wireless market, the world’s fastest growing, is alrea-dy extremely competitive. A cellphone call costs under two US cents a minute, among the cheapest rates in the world. Allowing more service providers won’t help the customer.

The new entrants, as long as they aren’t foolish enough to spend $7.5 billion on rolling out nationwide networks, will make almost risk-free money. With some luck, they will be given spectrum, a shortage of which is beginning to hurt existing providers. The quality of calls is deteriorating.

A few years from now, investment banks will earn fat fees consolidating an industry that’s being allowed to become unnecessarily fragmented.

Until now, the Indian government has granted a maximum of 10MHz of radio frequency to any operator that uses the global system for mobile communications, or GSM, technology. This is half the international average; and even to get this much spectrum, a licence holder has to first reach one million subscribers.

According to research by Tucker Grinnan, an analyst at HSBC Holdings Plc. in Hong Kong, Bharti Airtel Ltd has met the subscriber norms in all the 22 regions; therefore, India’s biggest mobile-phone service provider is eligible to receive additional spectrum everywhere.

However, the airwaves are already occupied. Defence services are being lobbied hard by the communications ministry to release at least 45MHz of electromagnetic frequency this year. On Wednesday, the government said it would ease the shortage of airwaves by November.

Most other countries where government departments control a large chunk of the spectrum have settled the issue. In 1993, the US Congress passed a law that required the Commerce Department to identify and give up at least 200 MHz of frequencies then allocated for use by the government. These radio frequencies were allotted to commercial services by the Federal Communications Commission. The same law permitted the FCC to start auctioning frequencies.

In India, the situation is more complicated. The state simply doesn’t have a mechanism to put a price on spectrum. India’s experiment with auctioning telecom licences in the 1990s resulted in bidders overestimating their value. By May 1999, service providers ended up owing the government $880 million in unpaid fees. Alarmed by this state of affairs, the government migrated to a revenue-sharing arrangement.

Under the current dispensation, a new licence comes bundled with some spectrum. It is obtained by merely paying the government an “entry fee," which bears no relation to the actual value of the spectrum to a service provider. In other words, a resource that has a very high cost for incumbent operators will be given away to new entrants rather cheaply. This is a good way to create new billionaires with a government subsidy.

“Giving spectrum preference to new players over incumbents will lead to increasingly fragmented spectrum allocation, which might result in a long-term spectrum crisis," HSBC’s Grinnan wrote in a 7 September note to investors.

At present, a new firm created by a merger of operators can’t have more than 15MHz of total spectrum in large cities such as New Delhi and Mumbai. The telecom regulator wa-nts to drop this limit. Investment banks should be delighted.

Of course, it’s quite possible for a new operator to win a licence and not get any spectrum because the government has none to give. That has happened to Idea Cellular Ltd.

The Telecom Regulatory Authority of India says it’s perhaps time to reassess the entry fee through a market mechanism. Still, much as the policymakers may like to revert to the auction method for granting new licences, the law may not allow the rules of the game to be changed midway for the so-called second-generation, or 2G, phone services.

Rather than spending its energy on bringing more competition to an overcrowded arena, India should concentrate on starting a third-generation mobile-phone service. Auctioning 3G licences, as recommended by the telecom regulator, can fetch the government tens of billions of dollars.

As for plain-vanilla services, what consumers need now is more spectrum, not new moguls. BLOOMBERG