Analyst Angle: Pan-India BWA spectrum slot could cost more than 3G spectrum slot : India designs stop-gap measure for import of Chinese telecom gear

The BWA spectrum auction under way in India continues to be an intensely competitive affair. By the time it concludes, a pan-India BWA spectrum slot could end up costing as much or more than a pan-India 3G spectrum slot – principally, because the broadband wireless access spectrum holds tremendous significance for the future of both market players and technologies.
After eight days and 62 rounds of bidding yesterday, the price for a pan-India BWA spectrum slot – across all 22 operating areas, or circles, as they are known in local parlance – was nearly five times the reserved, or base, price of INR 1750 crores – roughly $390 million. By comparison, the price of a pan-India spectrum slot after eight days (and 46 rounds) of bidding was only 1.7 times the reserved price of $780 million.
In short, at the end of eight days of bidding, the price of pan-India BWA spectrum slot was considerably higher in absolute dollar amount than the price of a pan-India 3G slot – $1.91 billion, as compared to $1.35B for the 3G spectrum slot.
For the record: In the 3G case, there were three (paired) spectrum slots and nine contenders, while for BWA, there are two (unpaired) spectrum blocks and 11 contenders. Equally significant, one 3G slot consisted of 2X5 megahertz spectrum in 2.1 GHz band, while one BWA slot consists of 20 megahertz spectrum in 2.3 GHz band.
Ain’t seen nothing yet!
The fact that, in the case of BWA, there are more contenders and less spectrum slots, only partly explains the intensity of bidding which, in my view, will continue to drive prices through the stratosphere. I believe we ain’t seen nothing yet!
In my last column, arguing that the spectrum mud-wrestle in India will continue, I had noted that intense bidding would be driven as much by the fungibility of spectrum as by the market uncertainty created by the sector regulator TRAI’s spectrum recommendations that have only served to further muddy the telecom waters in India.
However, there are some other market realities and competitive dynamics that, I believe, will serve to fuel the bidding wars. Chief among these are paucity of spectrum, the imminent deployment of mobile number portability, the pent-up demand for mobile broadband, and the struggle between TD-LTE and WiMAX.
Paucity of spectrum
Let’s start with the basics. Spectrum is spectrum, and the necessary condition for all that is mobile and wireless. It does not lend itself to halfway measures. A player either has it and, therefore, has a future – or he does not, and hasn’t. And, as I have often said before, you can’t be rich enough, thin enough, or have enough spectrum.
In India, the spectrum situation – actually, the spectrum problem – is very acute, and very complex. While the number of Indian mobile subscribers, or at least subscriptions, may be growing at a clipped rate – 16.9 million in April 2010 alone, per the sector regulator – the Indian mobile operators are among the most “spectrum starved” players in the world, operating at between one-third and one-half of the global average, by most estimates.
As a result, most mobile operators currently face a huge capacity crunch in most markets – even with respect to voice services. Dropped calls are not an uncommon phenomenon, especially in the metropolitan areas.
My conversations with leading 3G spectrum holders suggests that while they will surely deploy 3G networks and services quickly – and possibly, HSPA+ from the get go – they will first seek to use the new-found 3G capacity to shore up their voice revenue streams.
There is a general euphoria in India at present that the allocation of 3G spectrum will ineluctably translate into a whole plethora of new data services very quickly. Consumers might eventually learn that the euphoria, driven as much by the intentional hype of paid commentators as by their poor understanding of market and technology realities, might have been misplaced.
The 3G spectrum auctioned by the government is not going to cut it. To remain viable, operators will need more spectrum. Given the absence of a clear spectrum roadmap, it only makes sense that operators bid intensely to get their hands on the 20 megahertz offered under BWA, especially given the fungibility of spectrum.
Further, one must remember that no mobile operator was able to garner a nationwide spectrum slot in the recently concluded 3G auctions. Most settled for what they perceived as markets of strategic interest – either for future growth or for alleviating the current spectrum crunch.
Six of the key mobile operators who acquired a patchwork of 3G spectrum are also participating in the BWA auction. While some will be looking to broaden their geographic footprints, other will be seeking to strengthen their spectrum positions in circles with most opportunity. Given their differential revenue potential, some of the key circles – the metros and the “A” circles in particular – are seeing greater demand than some other circles.
Mobile number portability
And then there is the issue of mobile number portability, currently scheduled for implementation by June 30.
Mobile number portability, not unlike the recently concluded 3G auctions, has been scheduled and rescheduled several times. It was originally scheduled to be implemented in metros and category A circles by Dec. 31, 2009, and across the rest of the country by March 20, 2010. After being first pushed back by three months to March 31, the deadlines were revised again.
The current June 30 deadline will also likely be deferred. State-owned incumbents BSNL and MTNL have yet to install and test the network gateways necessary for an MNP implementation, although vendors Telcordia and Syniverse are ready with the solution. Coincidentally, these state-owned incumbents are also likely to see the most churn following an MNP implementation.
Interestingly, most Indian commercial operators tend to discount MNP as a non-issue in India – for arguably sound reasons. They point to the fact that India is a highly price-sensitive market that, in any case, sees a considerable amount of churn on a monthly basis. Customer loyalty is virtually non-existent, and absent device subsidies, there are few tools available to operators to create a customer lock-in. (The operators’ offer of a lifetime number constitutes a meaningful exception.)
While all of this may be true, it is difficult to imagine that Indian operators are not going to seek to create “stickiness” as they roll out higher-end mobile data networks and services. While one voice customer may be relatively easily replaced by another, operators might find it more difficult to replace a high-paying data user with another equally high-paying user. And with the data user, they are also likely to lose a voice customer.
Having access to the BWA spectrum will ensure that operators remain viable in the future and have the wherewithal to offer higher-end data services that can create stickiness, should the 3G data capacity prove to be insufficient – as it will.
Anticipated demand for BWA
Currently, India boasts more than 600 million mobile subscriptions – subscriptions, not subscribers. But the numbers for broadband subscriptions are pathetically low – 9 million in April 2010, according to the latest figures published by TRAI.
Given that less than 1% of the Indian population has an Internet connection, there is a huge potential demand for mobile broadband. This potential will translate into actual demand (in the economist’s sense of the word) as a wide panoply of high-end mobile devices – from smartphones
to smartbooks and laptops, and everything in between –
become more readily available at affordable prices and a culture of mobile data consumption sets in.
The demand for mobile broadband is also likely to be driven by the needs of large corporations as well as small and medium enterprises. Policy interests pertaining to governance, medicine and education are likely to further buoy the demand for mobile broadband, not to mention the growing interest in M2M services.
This anticipated demand will further fuel the bidding for the BWA spectrum.
WIMAX / TD-LTE rivalry
The WiMAX/TD-LTE rivalry will add to the drama in its own way, and drive up the price for a BWA spectrum slot.
WiMAX has been under pressure for some time, and Qualcomm’s decision to enter the BWA spectrum race in India has served to ignite a global interest in TD-LTE and intensify the debate whether TD-LTE or WiMAX will triumph in the unpaired TDD spectrum across the world.
The recent announcement by Russia’s Yota, till recently the one of the world’s two famous poster children for mobile WIMAX, that it plans to deploy LTE instead of WIMAX in five Russian cities has served to further erode the legitimacy of the technology as a serious long-term play. Earlier in the year, Clearwire, the other famous poster child for mobile WiMAX, had signaled an interest in building bridges to LTE starting the erosion.
I do not intend to rehash the arguments I have made in an earlier column pertaining to the WIMAX/TD-LTE issue. (In a nutshell, I fear WiMAX may have squandered a major opportunity in India.) Suffice it to note here that the outcome of BWA spectrum auction in India carries the potential to lay the WIMAX/TD-LTE debate to rest – for good.
But whatever the outcome, there is still sufficient interest in WiMAX in India to result in a serious spectrum bidding war. Qualcomm, having tossed its hat in the auction ring, will surely bid aggressively for the BWA spectrum. At the very least, the company’s presence in the auctions is going to carry that presumption, and invite an aggressive response from WiMAX backers. Under auction rules, bids are identified, not bidders.
All of these four vectors of influence – paucity of spectrum, mobile number portability, pent-up demand for mobile broadband, and the TD-LTE/WiMAX rivalry – are likely to continue to drive BWA spectrum bids higher and higher. As a consequence, a BWA spectrum slot could well end up generating more revenues for the public exchequer than a 3G spectrum slot.
Footnote on Chinese vendors
In an earlier column, I had mentioned that India, citing security concerns, had effectively banned the import of telecom gear from China, much to the consternation of ZTE and Huawei as well as domestic mobile operators.
Following lobbying by the Chinese vendors, in concert with Indian domestic operators – whose network deployment plans were placed in jeopardy—the government has consented to take a more flexible stand.
The government has designed a stop-gap measure to allow domestic mobile operators to import telecom gear from China. Such telecom gear will now have to be certified by independent international security audit firms. The measure will be in place for the next 12 months, till the country builds its own certification lab.
The stop-gap measure would require the security audit firms to visit the manufacturing plants of the vendors and give security clearance per prescribed – but still to be articulated – criteria. Further, mobile operators importing telecom gear from China will be required to give a bank guarantee to the Department of Telecommunications. If any security threat is detected in the gear, operators could forfeit their bank guarantees and face criminal proceedings.
The current flexibility is good for India’s mobile operators, given the potential positive impact on their capex. And, it bodes well for Huawei’s and ZTE’s expansion plans in India. The Chinese vendors have more than 120 network equipment contracts with Indian commercial operators – from Uninor and Tata Communications to Bharti Airtel, Idea, Spice, Vodafone Essar, and Aircel. There is little clarity at present if state-owned incumbents BSNL and MTNL will allow the Chinese vendors to participate in their tenders any time soon.
While the government’s new-found flexibility is a positive development, and will go far in helping the Asian giants retreat from the brink of what could be an ugly trade war, the new rules do place an uneven regulatory burden on both operators and their Chinese vendors. The high transaction costs of this new requirement could still dampen the enthusiasm for Chinese telecom gear.
Dr. Shiv Bakhshi is founder and principal analyst of Mobile Perspectives, a research and analysis firm serving the mobile industry. He can be reached at [email protected]. You can also follow him on Twitter @ShivBakhshi