Saturday, May 15, 2010

India's 3G Telecom Licenses Auction

How Do Experts See Day 1, Road Ahead for the 3G Auction? 
CNBC TV (India, April 2010)
The much anticipated 3G auctions kicked off today. In a CNBC-TV18 exclusive interview, telecom minister A Raja said that the bidders were showing high motivation in the auction and that govt may allocate additional spectrum to winners based on TRAI's recommendations.
The official press release from the Department of Telecom while summarizing the activity of the auction for Day 1 says that five clock rounds were completed today. The total bids received in value terms, is Rs 16,000 crore. All 22 circles on offer for 3G have received bids.
Delhi, in the fifth round saw a bid of Rs 373.29 crore while Mumbai comes next in terms of the level of demand at Rs 362.66 crore.
In an interview with CNBC-TV18, Bundeep Singh Rangar, Indusview and Kunal Bajaj, MD, BDA Connect gave their perspective on the opening day of bids for the 3G auction.
Here is a verbatim transcript of the interview. Also watch the accompanying video.
Q: What have you made of the Rs 16,000 figure on Day 1 particularly with Delhi raking in about Rs 373 crore?
Bajaj: Basically because of that 80% activity figure that we are seeing right now, bidders are esssentially strategically holding back what their strategy for the coming weeks is going to be. It's only when the auctioneer raises the requirement to say 90% activity and 100% activity will we actually see all the eligibility points getting used up at the same time. So even though Delhi today for example they are saying that demand matches supply it is clearly not going to stay that way for a very long time.
Q: It is a one of a kind auction that the industry and the government is trying to learn from. What have you made of the kind of perhaps global best practice when it comes to such auctions that perhaps is being replicated here?
Rangar: I guess one of the key things of course is prevent collusion amongst bidders because you don’t want people colluding and keeping the price artificially low. The government's biggest interest is in generating the maximum amount of revenue from this and of course cutting down its current deficit.
So the best practice of course is clearly to allow the best price with the lowest possible chance of collusion. And you see that happening here. Remember this is day 1. This is a 2 week process and with most auctions the ultimate rush to the finishing gear is in the last few days, is in in fact the last few hours. So we have a long way to go and I think this is a good process that is in place for getting the maximum value.
Q: Are you therefore saying as you heard Bundeep saying it is going to be, probably the real rush is going to happen in the last few days. So are you saying that the first day number Rs 16 thousand crore seems on track to get us closer to the Rs 40,000–Rs 45,000 crore number that the minister talked of this morning?
Bajaj: Yes absolutely. For example if you look at the way the eligibility point system is structured since operators only have to use up to 80% of their eligibility points, which means 80% of activation or activity today, they are going to hold their cards back and essentially wait to see what other people are doing, people who maybe have fewer eligibility points or they are going to distribute their bids around the various circles.
Once we get a little bit further down and eligibility increases to 90% then people will start driving those prices up. The provisional winners that are going to be declared today internally on the system even though we don’t have access to that information, I think all them will know that they clearly aren’t in a safe position to expect to win in the future.
So as we move forward, when the auctioneer changes some of the rules around activity, when the auctioneer continues to raise the prices, a lot of the big players will probably re-enter the auction at that point, at those higher level of prices. Day 1 to have gone up this much and to have completed 5 rounds of activity, I think that’s pretty good.
Q: In terms of the fact that five rounds have been completed what does this really indicate – are we sort of moving much faster than earlier expectations and does it mean that the two week timeline that really seems to be the consensus for completing the auction is perhaps going to finish earlier than thought. What about the C category circles which are seeing a minus figure attached to all of them?
Bajaj: Basically given that we have already completed five rounds today that means definitely in some of the circles you had advances of 10-15% of prices because of the way the price advances are structured. If demand is largely in excess of supply then you are going to have more than a 5% jump in that circle price.
The way to think about it is that yes we've moved quickly, but because everyone is not participating in every place that they intend on being, when they do participate we make a pattern situation where demand starts far outstripping supply.
It is too early to say exactly what everyone’s strategy is going to be. But maybe two weeks is not what they can take. If they continue doing 6-7-8 rounds per day moving forward, we may be wrapped up within a week’s time because the eligibilty requirements is what is going to determine how quickly we get to the finish line.
Q: While the auction process is going on right now you got all the India’s top telecom companies taking part in the auction process, will the kind of money that has been invested right now justify the returns in the long term?
Rangar: That has been a key debate. Every country would have had particularly 3G license auctions and the huge investment just in the spectrum because typically to get the license and the spectrum bundled together in the 2G licences.
But in almost every case there is definitely a return on investment scenario. As in India's case in particular, given the fact that you have got a market dynamic where you have got 500 million users, 92% of which is voice driven revenue, of that only 127 million, about 25% of the users today have Internet enabled phones and 10% have used the Internet in the last year and 1% of the population have used the Internet on average of once a month.
So the frequency of usage beyond the novelty factor is very low. If you want to make India a truly broadband country you need a critical mass of about 25% of the population. So the 25% reach into India’s overall population particularly to remote areas, areas outside the key metros is going to be through wireless spectrum. It is not necessary just a phone.
In England for example we use phones for 3G, there is iPhone for 3G and a lot of us carry 3G dongles, which allow our PC and our laptops to connect to 2MBPS wireless access. I believe the return on investment scenario is partly driven by mobile phone usage.
A huge amount is just providing broadband wireless access and therefore the various access revenue, the bundled on services revenue and an ecosystem that generates from an Apple Appstore like further e-commerce revenues is really where the return of investment lies for both the carriers and people sitting on top. This is a 20-year license. So the return on investment will be spread over that period of time. I do believe the investment is justified in that case.