After a prolonged bidding process, stretching over 34 days, India’s 3G spectrum auction has finally ended with a pan-India bid amount of around Rs16,800 crore. This is nearly five times the reserve price of Rs 3,500 crore. The aggressive but selective bidding indicates players’ focus is on servicing high-end subscribers and managing the 2G spectrum crunch.
We believe that, for 3G investments at this level by any operator to be value-accretive, the operator will need to garner a total of 2.5 crore 3G subscribers by the fifth year, and charge an ARPU (average revenue per user) premium of 35% over 2G services.
In our view, 3G services would be margin-dilutive in the near term, but could eventually lead to a significantly higher margins. Over the longer term, we believe that the availability of 3G spectrum can be a game-changer by catalysing consolidation in the telecom industry.
Initially, we expect 3G spectrum to be primarily used for voice services, enabling operators to address the spectrum shortage that characterises the sector today. 3G technology, which is at least twice as spectrally efficient as 2G, will enable operators to service more subscribers with the available spectrum, without compromising on quality of service. This is critical given the lack of clarity on further allocation and pricing of 2G spectrum.
However, the commoditised nature of voice services provides little scope for operators to differentiate in this arena. Therefore, to gain an edge, we believe players will gradually leverage 3G technology and provide differentiated value-added services such mobile TV, videoconferencing and high-speed internet browsing. This will enable them not only to improve their ARPUs, but also to ease the pricing pressure that they face on account of intense competition in 2G services.
The benefits of 3G spectrum will become even more pronounced once mobile number portability (MNP) is implemented. The presence of 3G offerings will allow operators to retain their premium subscribers and attract subscribers from competing networks; ARPUs for these subscribers are nearly four times the industry ARPUs, resulting in significantly higher profitability.
Despite the large investments both for acquiring 3G spectrum and subsequently rolling out the services, operators will aim at aggressive roll-outs to attain higher market share. This will also help them reduce network congestion, and thereby cater to more 2G subscribers as well.
For the first couple of years, 3G services would be margin-dilutive because of the increased network operating costs and sales and marketing expenses, without a commensurate revenue increase. Subsequently, with a pick-up in the 3G subscriber base and higher usage of data services, we expect 3G services to help the operators improve their margins significantly. By 2013-14, we expect an operator that provides 3G services to enjoy a 500-700 bps advantage in EBDITA margins over one that does not.
However, the net margins of operators that have acquired 3G spectrum will be strained over a longer period of three to four years. This will be because of increased capital charges (the interest outgo on account of debt raised for 3G network rollout, and the amortisation of 3G spectrum charges). This would place additional pressure on operators’ bottom lines, especially for relatively small players.
We also believe that the launch of 3G services will result in a structural shift in the Indian telecom industry. Given that no single player has acquired pan-India 3G spectrum, we believe that the process of industry consolidation would be hastened.
The significant pressure on profitability, and the need to gain scale, could induce players without 3G spectrum and new entrants to actively look to merge. In our opinion, the number of players in the mobile services sector could well reduce to around eight to a circle, from the current level of 10-12.
We believe that, for 3G investments at this level by any operator to be value-accretive, the operator will need to garner a total of 2.5 crore 3G subscribers by the fifth year, and charge an ARPU (average revenue per user) premium of 35% over 2G services.
In our view, 3G services would be margin-dilutive in the near term, but could eventually lead to a significantly higher margins. Over the longer term, we believe that the availability of 3G spectrum can be a game-changer by catalysing consolidation in the telecom industry.
Initially, we expect 3G spectrum to be primarily used for voice services, enabling operators to address the spectrum shortage that characterises the sector today. 3G technology, which is at least twice as spectrally efficient as 2G, will enable operators to service more subscribers with the available spectrum, without compromising on quality of service. This is critical given the lack of clarity on further allocation and pricing of 2G spectrum.
However, the commoditised nature of voice services provides little scope for operators to differentiate in this arena. Therefore, to gain an edge, we believe players will gradually leverage 3G technology and provide differentiated value-added services such mobile TV, videoconferencing and high-speed internet browsing. This will enable them not only to improve their ARPUs, but also to ease the pricing pressure that they face on account of intense competition in 2G services.
The benefits of 3G spectrum will become even more pronounced once mobile number portability (MNP) is implemented. The presence of 3G offerings will allow operators to retain their premium subscribers and attract subscribers from competing networks; ARPUs for these subscribers are nearly four times the industry ARPUs, resulting in significantly higher profitability.
Despite the large investments both for acquiring 3G spectrum and subsequently rolling out the services, operators will aim at aggressive roll-outs to attain higher market share. This will also help them reduce network congestion, and thereby cater to more 2G subscribers as well.
For the first couple of years, 3G services would be margin-dilutive because of the increased network operating costs and sales and marketing expenses, without a commensurate revenue increase. Subsequently, with a pick-up in the 3G subscriber base and higher usage of data services, we expect 3G services to help the operators improve their margins significantly. By 2013-14, we expect an operator that provides 3G services to enjoy a 500-700 bps advantage in EBDITA margins over one that does not.
However, the net margins of operators that have acquired 3G spectrum will be strained over a longer period of three to four years. This will be because of increased capital charges (the interest outgo on account of debt raised for 3G network rollout, and the amortisation of 3G spectrum charges). This would place additional pressure on operators’ bottom lines, especially for relatively small players.
We also believe that the launch of 3G services will result in a structural shift in the Indian telecom industry. Given that no single player has acquired pan-India 3G spectrum, we believe that the process of industry consolidation would be hastened.
The significant pressure on profitability, and the need to gain scale, could induce players without 3G spectrum and new entrants to actively look to merge. In our opinion, the number of players in the mobile services sector could well reduce to around eight to a circle, from the current level of 10-12.
