India’s largest-ever auction of telecom airwaves will begin this weekend

Sale, sale, sale!
Sale, sale, sale!
Image: Reuters/Rupak De Chowdhuri
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The next few days are crucial for India’s $50-billion telecom industry.

Starting Oct. 01, the Indian government will sell over 2,354.55 megahertz (MHz) of spectrum—the largest ever auction of electromagnetic radio frequencieswhich could add some Rs5.6 lakh crore to the exchequer. This will include the 700 MHz band, said to be the most efficient for 4G services.

The auctions come in the middle of an ugly tussle among India’s biggest telecom players which began soon after Reliance Industries chairman Mukesh Ambani launched his new 4G telecom service, Reliance Jio, on Sept. 05. Jio’s promise of cheap, super-fast internet has rattled fellow 4G data providers. Jio’s rivals have since slashed rates and introduced new offers to retain consumers.

However, analysts have cautioned that the auction may not evoke strong demand.

For one, the government has set the reserve prices—the base cost above which the telecom firms will bid—quite high. This is especially so for the 700 MHz band. This band alone is expected to bring in some Rs4 lakh crore if all the spectrum is bought at the base price.

The 700 MHz band is also between three and four times more expensive than the other bands, and forms one-third of the spectrum supply, according to an Aug. 30 note by India Ratings and Research. The rating agency expects “limited participation compared to the quantity put on sale,” because of the expensive spectrum.

Then there are debt woes. Most top telecom firms hold massive amounts of debt and they are expected to weigh on the bidding. The total debt in the Indian telecom industry has spiked 41% since March 2014 and is currently at Rs4.1 lakh crore.

This year’s auction, thus, could see the lowest bids in three years, according to Bloomberg.

The opportunity

Nonetheless, India’s telecom companies have put together sizeable war chests. Vodafone India, the country’s second-biggest telecom firm (by subscribers), has received Rs47,700 crore as an equity infusion from its parent Vodafone Plc. These funds will be “used for right-sizing our spectrum portfolio,” Sunil Sood, Vodafone India’s managing director and CEO, said last week.

Jio has invested some Rs1.5 lakh crore ($22 billion) in the business and has already deposited Rs6,500 crore towards the auction. Bharti Airtel has deposited Rs1,980 crore. Such  deposits typically indicate a firm’s spending strategy.

The largest telcos are expected to spend a cumulative Rs1.2 lakh crore ($18 billion) during the current and the next fiscal year, because of spectrum payouts and for network augmentation, according to CRISIL (pdf), a credit rating agency.

Additionally, the industry has the world’s lowest average revenue per unit which measures the revenue generated from each subscriber. This puts tremendous pressure on telcos who are splurging on airwaves.

With revenue from voice calls falling, data is the only feasible option to make money. India is the world’s second largest smartphone market, which means demand for mobile internet is expected to pick up. And India’s demand for mobile broadband is only inching up.

But much depends on the appetites of telecom firms to tap this growing demand, given their high debt and intense competition. The auction results might show some clear trends.