Surajeet Das Gupta: Cross connections

The next phase of the telecom battle, the war over radio frequencies or spectrum, has just entered a decisive phase. Tata Sons chairman Ratan Tata threw the cat among the pigeons by offering to pay Rs 1,500 crore for spectrum to be used for offering the next generation (3G) of mobile services (such as video streaming of movies and high-speed data access) despite the telecom regulator, the Telecom Regulatory Authority of India, recommending it be given free.

This prompted rival Sunil Mittal of the Bharti Group to shoot back by saying "there is the Prime Minister's Relief Fund...if someone wants to donate money, he can do it there."

While a divergent view between Tata and Mittal is only to be expected given how they represent two opposite sides of mobile technology (Tata offers CDMA-based mobile services while Mittal uses GSM technology) and the CDMA-lot muscled into a territory that till last year was an exclusive preserve of GSM, there is a complete split even within the GSM and CDMA camps.

The Association of Unified Telecom Service Providers of India (AUSPI), the CDMA group's lobby body has gone public with the demand for free spectrum even though Tata is a member of it. While the Cellular Operators Association of India (COAI), the GSM lobby body, has gone along with Mittal's view, other members of COAI beg to differ.

C Sivasanakaran, who owns Aircel, which offers GSM services in Tamil Nadu and Chennai, supports Tata's view that scarce spectrum cannot be given away free, but has to be bid for.

Adds a senior executive of Spice Telecom which offers GSM services in Punjab and Karnataka, "There is no reason why 3G services should be the monopoly of five or six big players (Bharti, Hutch, BSNL, MTNL, Reliance and Idea). Everyone including new players should be allowed to bid for spectrum and there should be more 3G players. That will ensure competition."

While all those in favour of free spectrum, including some telelcom officials, argue that bidding for spectrum will raise prices and, therefore, slow down the spread of telecom, this is not really borne out by facts.

For one, 3G services are hardly something the ordinary man uses considering 3G phones themselves cost upwards of Rs 20,000 today. And since no one really objects to Bharti and Hutch charging high tariffs for what are really 2.5G services "" Bharti charges Rs 899 per month for its Blackberry services and Hutch Rs 199 for Hutch Access plus upload/download charges, which take it to near Bharti's charges "" there is no reason for them to shed tears for high 3G tariffs.

More important, while Reliance Infocomm paid around Rs 2,000 crore, including penalties for converting its limited mobility licence to a fully mobile one last year and the cellular players paid Rs 1,633 crore for the fourth cellular license, this did not lead to a hike in tariffs "" indeed, they have only fallen after that.

So, it is incorrect to conclude that bidding for 3G services will automatically hike consumer tariffs. To use another example, costs of aircraft and aviation fuel have only gone up, but aircraft fares have only dropped.

The main reason why COAI and large players don't want to bid for spectrum, in any case, may not have too much to do with the cost though that is the reason publicly stated for this.

Considering that the industry already has a revenue of over Rs 40,000 crore and is projecting an annual growth of anywhere between 30 and 40 per cent, a Rs 9,000-crore entry fee (that's roughly what six players would pay assuming each one pays Rs 1,500 crore) doesn't amount to too much once it is amortised over the 20 years of a licence.

And given that telcos are estimating there could be as many as 30 million 3G subscribers by 2008 (roughly 75 per cent of the total number of subscribers for the current level of 2G services today), the money may not be that large. The amount is also not too large given the Rs 20,000 crore to Rs 30,000 crore valuations that each of the big players command.

The real reason, as Spice Telecom puts it, is that once spectrum is auctioned instead of just being given to the existing players, it opens the game up for others as well.

Opening up 3G will give smaller telcos a chance to increase their valuations and could also lower entry costs for new players internationally "" today, their only option to enter the market is through costly buyouts of existing players, but 3G bidding would offer another route. Naturally, this would also affect the valuation of existing players.

Some, such as COAI's T V Ramachandran cite Europe's example and how various firms there went bust after bidding huge sums for 3G licenses, but this may not be too relevant. For one, European telcos bid Rs 75,000 crore for 3G licences while what's being talked of in India is a fraction of this.

In any case, Indian telcos would have learnt from not just the European experience but even their own when, in 1994, they all bid huge licence fees and then had to be bailed out "" which is why, when the fourth cellular licence was auctioned three years ago, the bids were reasonable ones.

Given the furore that Tata's letter has caused, and the fact that the government can, to cite just one possibility, dramatically ramp up telephony in rural areas by using the money it gets from auctioning 3G spectrum, it seems difficult to see how such spectrum can be given away free despite both the telecom regulator and senior officials being in favour of this.