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The maths is against hottest circles

Delhi, Mumbai might not make business sense for players due to their exorbitant 2G-spectrum reserve price

Surajeet Das Gupta  |  New Delhi 

For telecom operators, especially those whose licences had been cancelled, expenditure on securing spectrum in the traditionally-attractive circles of Mumbai and Delhi might not be a viable business proposition after all.

Reason: The exorbitant base price for these circles fixed by the government. The seven circles, which include Tamil Nadu, Andhra Pradesh, Karnataka, Gujarat and Kolkata, account for a staggering 75 per cent share of the pan-Indian 2G spectrum base price. Yet, their share of the total telecom revenue pie is only 47 per cent.

In contrast, the remaining 15 circles enjoy a 53 per cent share of the total telecom revenue. But, because the reserve price for 2G spectrum fixed by the department of telecom (DoT) in these is reasonable, or even low, their share is under 25 per cent of the pan-Indian 2G spectrum auction reserve price.

The government is to auction 2G telecom spectrum which it secured after the cancellation of unified access service licences by the Supreme Court. The floor auction price for the spectrum is Rs 14,000 crore for 5 MHz.

The eight circles of UP east, Bihar, Rajasthan, Madhya Pradesh, Kerala, Punjab, West Bengal and Haryana account for 34 per cent of the total telecom revenues, but their share of the base price for 2G auction is only 12 per cent. And, the average telecom penetration in these circles at 89 per cent gives ample opportunity for growth. Those seeking value for money might eye these circles.

How badly skewed the total price of spectrum in Delhi and Mumbai is can be gauged from the fact they together account for a staggering 39 per cent of the pan-India reserve price. Yet, their share in the total mobile revenue is just 15 per cent. And, with teledensity in Delhi of 238 per cent, there is hardly scope for a new player to snatch subscribers from existing operators.

The skew in the seven hot circles has arisen because DoT has arrived at the share of each circle in the 2G spectrum base price in proportion to what their share was of the 3G-auction-discovered price held some years before.

However, the business case for 3G, based mostly on revenues from data, obviously make Delhi and Mumbai (which account for 25 per cent of total data revenues) and the other five circles the most attractive. Operators had bid aggressively, with spectrum prices hitting the roof in these circles. However, the business case for 2G is based on voice, and is very different, with revenues much more dispersed across circles.

Two, the logic of DoT that with the proposed unified licence regime, operators can use 1,800 MHz 2G spectrum also for 3G as well as 4G services, so they should pay the same, is flawed. For new players who cannot give a 3G network without an underlying 2G network, there is no choice but to use the spectrum even under the new unified licensing regime only for 2G.

So they will end up paying 3G like spectrum prices but offering 2G services making their business case unviable from the beginning in such circles.

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First Published: Tue, September 18 2012. 00:50 IST