2G or not 2G, that is the question

All over the world, governments come and go. But the policy decisions they enact outlast them, and over a course of time these policies become a body of law, institutions, rules and regulations?evolved over time into what we call the pillars of society and commerce.

Not so in Indian telecoms. India?s most exciting industry after Bollywood and IPL, the telecom sector has recently been more used to policies not being passed (reference, the National Telecom Policy) than being passed, and decisions being overturned (reference, the cancellation of 122 licences in February 2012) rather than being built upon.

The captains of India?s telecoms industry cannot be blamed for complaining about ?regulatory uncertainty?, nor can they be faulted for fighting each other in the market for customers, but speaking in one voice when it comes to requesting the government to give the industry a baseline to plan around.

Twenty years is a long time, we are told, for operators have to recoup the weighty ?one-time? investments they are being asked to make in the auctions for 1800 MHz spectrum and 900 MHz refarming, for which recently the Trai proposed reserve prices at 1.08x and 2.0x 3G spectrum fees in 2010, respectively. The Trai may see a rationale for such pricing from the view that the spectrum this time may be utilised for 3G as well as 2G, that operators will only be expected to pay 25-33% upfront, enjoy a payment moratorium for two years and pay nothing after ten.

Two decades? While CEOs make noises about uncertainty, the CFOs back in the office are trying to work out how they can make ends meet. None of them have a spreadsheet which confidently predicts business in 2022, and nothing for 2032.

The year 2017 is probably as far as most will go with any degree of certainty. This is not because it is too hard to predict futures 20 years? out; extrapolation techniques can let us assume growth factors for years hence?look at how we confidently predict the world population in 2050. The issue is that the telecoms industry is changing too quickly to predict along linear growth factors.

Smartphone penetration has risen from 5% of the user base to close to 30% in two years, and the banked and credit-card using population is increasing very quickly. Within a few years, mobile networks will be carrying many times more data than they do today, at much higher cost for about the same revenue. Figure 1 shows how by 2013 we may expect an operator?s traffic to be 90% data, whereas only 15% of its revenue is generated from charging for it.

Players such as Google, Flipkart and Apple will be enabling transactions on their systems accessed by users of mobile networks, meaning that revenue growth will leak away from operators and accrue to the ?over the top? players. In short, while telecom operators? costs will rise, their revenues will leak to other industries. This is the dreaded ?dis-intermediation? that telecom CEOs in Europe and North America already have sleepless nights over.

India is on the cusp of maturing from a voice-only market to a data-driven growth market, and the problem is that while much of the future growth will be enjoyed by non-telcos, the cost will be borne by telcos. Even if the government is right to associate huge revenues with the sector, it is surely mistaken in believing such revenue growth will all sit with the operators.

If the reserve prices for spectrum are set too high, as Figure 2 indicates, operators will react in three ways. Firstly, they will limit their participation in the auctions to the circles where they value the spectrum they require the most. Larger players with 900 MHz spectrum already will be forced to spend first on retaining this, and will therefore not target 1800 MHz except in specific circles.

On the other hand, none of the smaller players with 1800 MHz spectrum today are likely to be able to afford targeting 900 MHz. This will limit the competitive intensity of auctions and jeopardise the dynamic needed to create a healthy round of bids that instill industry confidence.

Second, by spending on frequency, operators may ration the funds available for other investments, such as in rural telecoms or innovation: highest social need, but usually the first areas to be cut. In 2010-11, after the 3G auctions we witnessed a major slowdown in investments to expand the network, as shown in Figure 3. Finally, operators may be forced to go to the debt market and reschedule their payments, since the major players are all quite indebted already.

The government has overseen a miraculous, decade-long wave of growth and now isn?t the time to replace that with the misery of further uncertainty and the threat of a damp squib of failed auctions and slowdowns in innovation and growth of mobile services for the masses. Bharat, India Inc and frankly the world-at-large need and deserve more.

The author is leader-telecom, PwC India