2G: Now, the hard part

Some new licensees are even willing to return spectrum to the government

Last week, shareholders of Norwegian telecom company Telenor demanded the management quit India. The reason: the Indian operations had made operating losses of $340 million in the last six months — and having launched just nine months, losses were bound to rise. Telenor invested over Rs 6,000 crore to acquire 67.25 per cent and roll out services in Uninor, a company promoted by real estate developer Unitech group and is one of the seven operators given a new 2G licences by the government two years ago.

But, the doling out of these new licences, bundled with scarce and expensive spectrum at allegedly throwaway prices, put Communications Minister A Raja and his departmental officials in the dock. The Opposition says Raja allowed operators to sell stake and make a killing.

Now, however, the wheel has turned full circle. In a new twist, at least three of the new operators are knocking on Raja’s door with an unusual request: they want to return the 4.4 MHz of start-up 2G spectrum as they don’t think they can recover their investments in such a market with over 14 players.

These operators have asked the government to return the Rs 1,650 crore forked out for a pan-India 2G licence, which comes bundled with spectrum. Under current policy, however, there is no reason for the government to do so, but with pressure mounting it might consider their request.

If the government accedes, Raja’s stand that he did not give away spectrum cheaply could well be vindicated. For, if operators are floundering with the current licence fee, they would have gone under if spectrum had been auctioned or priced much higher. But, he will still have to explain how firms like Unitech were allowed to sell equity at a huge premium (to Telenor), effectively pricing their bundled spectrum at the market rate. Critcs argue that this premium should have gone to the exchequer.

So, what explains this unusual volte face by these new operators, many of whom have just undertaken minimal rollouts to meet licensing norms? The answer is simple. New players are increasingly realising that current tariff levels — arrived at after a bruising price war — are too low for them to make money.

Also, potential future international buyers, including telcos, have realised that those who bought out new operators like Telenor and Etisalat are under tremendous pressure and relooking their strategies. Explains telecom analyst Mahesh Uppal: “The new players overestimated the Indian market. Suddenly, they are realising it is increasingly difficult to monetise the licence.”

Tariff wars are good for consumers. But, with average revenues per user (ARPUs) for the new players plummeting to new lows, they are not enough to even recover the cost of acquiring a new subscriber, let alone pay for rollout investments.

A shareholder of one of the leading new players says that the acquisition cost of a new subscriber is Rs 250-300. “Our operating margin on a customer who gives an ARPU of even Rs 100 a month is 15-20 per cent. So, it takes us more than one year to recoup even our acquisition cost of a new subscriber, forget about other investments. Worse, churns are as high as 8-10 per cent a month and by that time the subscriber has gone to a competitor,” says the director of the company.

The problem is accentuated by the fact that high ARPU customers are controlled by older operators. And these subscribers are unlikely to switch after number portability comes into force because by then they would have shifted to the 3G services of their existing operators. None of the new operators, except S-Tel, have 3G spectrum.

The challenge is to get reasonable ARPUs in line with the industry. But, that is where the new operators are faltering. Take Uninor. Based on TRAI data, the company had a turnover of Rs 63 crore for the quarter ended June 30. With an average subscriber base in the same period of 5.6 million, in the same period the company’s ARPU is a trifle under Rs 40 a month — one-third the industry average of around Rs 130.
 

Companies	Subscriber base (Jul ‘10)	% share	Revenues (Apr-Jun 2010)
S-TEL	1.42 million	0.30	11.81 cr
UNINOR	6.87 million	1.47	64.07 cr
ETISALAT  DB	0.02 million	0.01	0.18 cr
VIDEOCON	2.70 million	0.59	NA
Total GSM market: 468.10 million Figures based on COAI and TRAI

Similarly, Sistema Shyam Teleservices might have invested $1.5 billion to roll out its CDMA operations, but its ARPUs based on TRAI data are under Rs 80 a month. That clearly explains why the company has been aggressively pushing data.

Global telcos would rather, like Etisalat, invest in a minority stake in an incumbent mobile player that already has assets, a large network as well as subscribers with reasonable ARPUs. Which explains why Etisalat is talking to Reliance Communications and Idea Cellular rather than focusing on Etisalat DB (formerly Swan Telecom), in which it has 45-per cent stake bought for $600 million. Etisalat DB had a turnover of only Rs 0.18 crore between April-June this year and had only 18,000 subscribers in June.

Also new operators bring nothing to the table. Says the CEO of a telecom company that has been looking at an acquisition: “What do we buy? They do not have customers or assets, only spectrum. But they want high premiums.” And, clearly, there are no takers for that.