beyondbrics

Compared with the embarrassment of the 2008 Indian 2G spectrum auction – which resulted in a scam that is alleged to have deprived the government of $39bn – 2010’s 3G spectrum auction was a wild, lucrative success for the government and, notably, cleanly run.

With his announcement on Wednesday that the government is intent on launching an auction of 4G spectrum sometime this year, telecoms minister Kapil Sibal seems to be hoping to for something along the lines of the latter, rather than the former.

Sibal said that the government will also auction some of the spectrum it recovered after the Supreme Court revoked 122 licenses of 11 companies allocated during the ill-fated 2G auction. “[But] we don’t think that we are going to put all the spectrum for auction… The idea being that we should come up with enough spectrum to get reasonable price for ourselves,” he said at the Mobile World Congress in Barcelona.

But analysts told beyondbrics that if the government focuses solely on making money from the auction – as it did with 3G, which garnered the government around $15bn – it will squander a great opportunity to bridge India’s massive digital divide.

“The challenge essentially with 3G is that the spectrum that was auctioned was extremely limited,” said Kalmesh Bhatia, research director for telecoms at Gartner. “The price [operators] paid for 3G pretty much killed the business case for providing affordable 3G services.”

The UK’s Vodafone and Indian rivals Bharti Airtel and Reliance Communications paid between $1.8bn and $2.6bn for 3G spectrum.

As the FT reported, Bharti criticised the auction process at the time. “The auction format and severe spectrum shortage along with ensuing policy uncertainty drove the prices beyond reasonable levels,” said Bharti. “As a result, we could not achieve our objective of a pan-India 3G footprint in this round.”

Based on Sibal’s comments, the 4G price is likely to be quite high, which means India’s two largest carriers, Airtel and Vodafone, may be the only two companies with enough money to bid.

But that doesn’t mean they will be the only telecoms providers with 4G facility: Mukesh Ambani’s Reliance Industries acquired its own 4G spectrum through its purchase of the company Infotel in 2010, and has been making concrete moves toward a rollout, including striking a content-sharing deal with Disney’s Indian business. US chipmaker Qualcomm paid $1bn for broadband wireless licenses in four areas in 2010, while state-owned companies MTNL and BSNL were allocated spectrum.

Such data services, and Internet access in general, remain the preserve of the urban rich in India. The country has only 5.1 internet users for every 100 people, compared with 39.2 for Brazil and 28.5 for China, according to 2009 data published by the World Economic Forum. Only a small minority of the country’s 900m mobile phone subscribers use data services.

“Once 4G comes up for auction, I think the government needs to evaluate what they want out of 4G and need to make sure that the objective is not solely around getting the most returns from the auction,” Bhatia said.

“Instead they should leave enough on the table for the operators to use 4G to enable the bigger change which is essentially around bridging the digital divide in India and making sure that there is higher broadband penetration,” he added.

But Bhuvnesh Singh, head of equities research in India for Barclays Capital, said that if the government decided against maximising its returns, it would open itself up to accusations similar to those that led to the 2G scandal – that it was offering up the country’s resources at cut-rate prices.

“I understand the concept, but then we go back to the same problems with the way that 2g spectrum was given away in 2007, which most believe was given quite cheaply – wouldn’t the same problems come up? How do you decide at what price is reasonable for 3 or 4g?” he said. “And why should government subsidise private industry?”

“Let the market find its own feet, design the auction in a correct fashion,” he added, “and let the Bhartis and Reliances of the world fight it out to see who can give the best returns to the government and best returns to the consumer.”

Related reading:
Indian telecoms ripe for consolidation, FT
Operators braced for India licence fallout, FT
Indian court pulls 122 telecom licenses, beyondbrics