India?s telecom companies forked over $14.6 billion to the Union government for the coveted 3G mobile spectrum. The question now is: Will they ever get their money?s worth? The most challenging task for these companies would be converting customers to 3G in a nation whose workforce is still dominated by small farmers. It is also not clear whether most Indians would want 3G spectrum, as the mobile market is yet to mature. The industry boasts of adding 20 million users a month but many of them, particularly in rural areas, have little use for the fancy data services, video calls and high-tech graphic applications that 3G makes possible.
The availability and affordability of handsets are also a critical factor in 3G adoption. The problem is that if cheaper versions are not available, India?s rural population will be shut out. It will take at least three to four years after the rollout of 3G services to make the revenues take off.
The argument that companies will have high service charges (to recoup licence fees) on users, completely misses a point. Traditionally, network operators set their prices as high as they can to maximise profits, but now they will be constrained by competition. On the other hand, government intervention also influences the cost to the customer and to the operators. Heavy licensing fees and other strict requirements can only lead to the enormous capital costs.
It will also have a negative impact on the credit metrics of most private telecom operators in the short to medium term. The high spectrum fees would significantly raise net debt levels for most Indian telecom companies and the financial leverage can accordingly be expected to deteriorate as they funded their purchases at the auction through debt.
Contrary to popular perception, a shift to 3G is not just a hardware or software upgrade on the existing infrastructure. Poor infrastructure can be a stumbling block; the Indian telecom companies need to really possess the risk appetite to make inroads into regions suffering from poor infrastructure.
In Europe, overbidding nearly bankrupted many operators. India?s state-owned BSNL, which the government allowed to launch 3G a year ago, offers service in 300 cities, has just seven lakh customers and has cut tariffs at least twice.
Therefore, increasing competition, lower margins,?substantial cash outflows and all-time low tariffs will take a toll on the profits of telecom companies. High initial investments, long gestation periods and very few business successes in 3G have all spoiled the party.
Capturing the Indian market is thus not going to be easy. Unlike what many other countries have not seen, India may have its own unique challenges. It is not easy to predict these challenges.
The author is MBA (batch 2011) student of IBS Bangalore. Email: anshikaphokela@gmail.com