The high bid prices in the recently concluded 3G spectrum auction in India surprised everyone, as did the identity of the winners. Given the current global economic condition, and the state of the Indian telecoms market, the industry expected that the final bid price for spectrum would be in the range of
2.1–3.0 times the reserve price (which was USD761 million). At least one operator was expected to emerge as a pan-India player. However, as the auction ended, the price for pan-India spectrum was significantly higher than that, at USD3.64 billion (4.8 times the reserve price). As many as seven operators won spectrum for different circles (service areas), but none won pan-India spectrum.1
As the auction bids went above anticipated levels, operators started to concentrate on circles in which they had leadership positions, in terms of revenue and/or subscriber market share (see Figure 1). The strategy in these circles, therefore, is to retain high-end subscribers and to enhance revenue from them through high-speed wireless data services (additional dongle/modem subscriptions) and usage of multimedia-based value-added services (such as video-based entertainment).2 Accounting for 8–15% of the existing subscriber base, 25–30% of the revenue and 45–50% of the profit margins, high-end subscribers are of obvious value to operators. In the current hypercompetitive market, which has led revenue per minute to drop below USD0.01, it becomes even more important for operators to focus on these subscribers for future growth.
Figure 1: 3G spectrum winners and their market shares of revenue,
FY 2010 [Source: Analysys Mason, 2010]
There were a few exceptions, however, when non-leaders won spectrum in some circles. For example, Aircel won spectrum in the Punjab circle, where it has not yet launched its 2G operations. This can be attributed to the strategy of non-leaders attempting to attract high-end subscribers away from operators that have not managed to acquire 3G spectrum in that circle.
In circles in which operators have not managed to win spectrum, they could still offer 3G services to their subscribers through inter-circle roaming (ICR) agreements with operators that do have 3G spectrum. Looking at the spread of 3G spectrum and at existing operator relationships, Airtel, Vodafone and Idea Cellular are best positioned to form an ICR partnership, with their joint holding infrastructure subsidiary, Indus Towers, playing the role of nodal agency. This would not only help operators to retain their high-end subscribers in circles where they do not have 3G spectrum, but also present an opportunity for revenue enhancement for 3G spectrum winners, improving the overall business viability. The public sector units BSNL and MTNL can also play the role of pivot 3G operator in such agreements, as they are the only operators with pan- India coverage.3
We estimate that high-end subscribers in metros (Delhi and Mumbai), Category A, Category B and Category C circles, constitute 15%, 10%, 8% and 5%, respectively. Comparing the price paid for spectrum with these proportions, incumbent operators have paid as much as USD1500 per high-end subscriber in the metros (see Figure 2). In some cases, such as Aircel in West Bengal and S Tel in Bihar, the price per high-end subscriber is higher because these operators have not yet launched, or have only recently launched, services in these areas. These operators are, therefore, making a long-term bet on 3G.
Figure 2: Price in US dollars paid per high-end subscriber for 3G spectrum in different circles [Source: Analysys Mason, 2010]
Our analysis indicates that leading operators will be able to recover their investments in spectrum in as little as 61 months in metros, and in 28 months, 8 months and 16 months in Categories A, B and C circles, respectively (see Figure 3). However, in order to recover their investments, operators will need to retain their high-end subscribers for long enough and to increase their overall ARPU (by 50%, 20%, 10% and 5% for metros, Category A, Category B and Category C circles, respectively). They can do this through innovative bundling of high-speed wireless data and multimedia-based value-added services, in addition to voice.
Figure 3: Number of months to break-even for spectrum winners [Source: Analysys Mason, 2010]
1 The Indian wireless market is divided into 22 circles. A separate licence is required to operate in each circle.
2 High-end subscribers are defined as those with ARPUs of USD22, USD15, USD13 and USD11 per month in metros (Delhi and Mumbai), Category A, Category B and Category C circles, respectively.
3 As public-sector companies, BSNL and MTNL were together allocated one pan-India slot of 3G spectrum.