As the 2G auctions commence this Diwali week, we should not expect too many fireworks. For months both the GSM and CDMA players in the industry have pleaded that using the 3G auction outcomes of 2010 as a reference point to set 2G spectrum pricing today is not realistic. Ultimately the reserve prices for next week’s auctions were set at 84% of the 2010 levels. That translates to over INR 1500 per capita of population in Delhi, in a country where the average spend is only INR 100 per month. Now the CDMA players have withdrawn from the auction completely. And we can expect nothing more than a few flutters to top up spectrum in selected circles from the GSM players who remain.
So there is going to be no repeat of the staggering figures we saw at the 2010 auctions: $34bn spent chasing limited amounts of 3G spectrum by players who felt they absolutely had to have a piece of the action to be relevant for a data services revolution in India in the future. There was so little on offer and so much to play for, that offering such high prices made rational sense at the time.
This time around, low auction participation may be a silver lining in the cloud of regulatory uncertainty that hovers above the industry, because there are three risks arising from spectrum costs going even higher for service providers. First: any additional cost burden on operators will result in further price hike considerations. This is because operators are not generating enough profits to absorb new cost increases. Second: price hikes would result in some drop-off in usage for low-end, price sensitive users. Finally: further margin decline for operators will result in more of a slowdown in conquering the final frontiers of Indian coverage – rural – where penetration is still sub 40%.
If you’re looking for fireworks this week – stick to the Diwali celebrations! Happy Diwali!