Valuation trigger for dual spectrum rush

Expectation of higher valuation has been the key reason for CDMA service providers, such as Reliance Communications and the Tatas, to rush for GSM spectrum. Last week, the government has permitted existing licensees to be granted dual spectrum.

Industry experts, however, point out that the key reason for a higher valuation emanates from the lopsided policy of the government which gives CDMA operators only half the amount of spectrum given to GSM players.

Says telecom expert Mahesh Uppal, "One of the key elements of determining valuation is the amount of spectrum you have, and due to the differential spectrum policy in India, GSM players get more spectrum, which has also been a contributing factor for higher valuation."

For instance while GSM players get an initial spectrum allocation of 4.4 Mhz, CDMA operators are given only 2.50 Mhz.

Analysts say that is reflected in the fact that the valuation per subscriber for the top GSM players is around 10 to 15 per cent higher than those of top CDMA operators, a clear indicator as to why CDMA players also want to get into GSM.

Secondly, GSM players, thanks to their seven year headstart over CDMA, have been able to grab a larger chunk of the high-value mobile customers.

As a result, the blended average revenue per user (ARPU) of a GSM operator at around Rs 297 per month (in June 2007) is much higher than just Rs 206 of a CDMA operator. That again has a direct bearing on getting better valuation.

However, some analysts argue that the difference will get bridged sooner than later, especially with GSM players now moving aggressively in rural India to get new customers, which will see a substantial drop in their ARPUs. They argue that the gap between the two might become even smaller in the next 24 months.

Operators, of course, give other reasons too. Globally, there are more GSM players than CDMA who are interested in India (many of the key CDMA players are in Korea, China while some are in the US).

"In case you want to look for a strategic partner as a GSM player, you will get much more valuation than by just being a CDMA player," agrees a senior executive of a CDMA company.

Large global companies such as AT&T, for instance, have made it clear publicly that they would pursue only GSM across the world.

Some operators also point out that capital costs for laying GSM networks is lower than putting a CDMA network impacting valuation.

They point out that operators have to fork out a fixed royalty fee to Qualcomm for the proprietary technology indirectly through higher cost of the mobile phone, their acquisition cost of a customer is higher as they have to bundle it with a phone (as they don't have SIM-based phones), which is heavily subsidised.

But analysts challenge this argument. "The capital cost for CDMA is lower as you need virtually half the number of towers for CDMA because of its spectral efficiency. And mobile phone cost for CDMA (on which the royalty is paid to Qualcomm) is already down to as low as $40 in line with GSM phones. So there is no real difference in costs," says an analyst.