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India's mobile carriers head into US$14b survival fight
[NEW DELHI] What happens when a wireless operator with millions of customers loses the airwaves it needs to provide service? We may soon find out thanks to an unusual government auction taking place in India.
The government will open the bidding on Wednesday for airwaves already in use by the biggest carriers, including Bharti Airtel Ltd and Vodafone Group Plc. They'll have to compete to keep their licenses in the auction against Mukesh Ambani, who is India's richest man and has signaled his determination by making the largest deposit of the competition.
India's approach, which is unlike what happens in the US, could mean seismic change for the world's second-largest smartphone market. The airwaves up for auction serve more than 300 million customers and account for almost half of the US$19 billion in combined revenue for the four largest operators.
"For some of the telcos, renewal of spectrum is a key for survival," said Nitin Soni, a director at Fitch Ratings in Singapore.
Bharti, India's biggest carrier, and second-ranked Vodafone could each spend as much as US$4.5 billion for the spectrum, Mr Soni said.
Ambani's Reliance Jio Infocomm Ltd submitted a 45 billion- rupee (US$726 million) bank guarantee, the most of any carrier, to participate in the auction, according to data from Mjunction Services Ltd, which is running the sale. Bharti Airtel was second with 43 billion rupees, and Vodafone gave a guarantee of 37 billion rupees.
India adopts a staggered approach to spectrum, selling 22 regional "circles" of coverage with different expiry dates. Last year, the government raised 612 billion rupees from airwaves in cities including Mumbai and New Delhi.
The government said Jan 6 it expects to raise 648.4 billion rupees from this year's sale. A Supreme Court judge considering challenges to the procedures will rule on the final result, with the next hearing scheduled for March 26.
This year's auction includes 20 circles covering 1.1 billion people, with the bidding starting Wednesday and lasting as long as two weeks.
Almost 40 per cent of the spectrum for sale is in the 900 megahertz band, one of the most coveted by operators for voice calls because signals travel farther and require fewer towers to be built.
It's also the band currently held by the nation's four largest operators, a group that also includes Idea Cellular Ltd and Reliance Communications Ltd., the carrier controlled by Mukesh Ambani's brother, Anil.
Reliance Jio, a unit of Mukesh Ambani's oil refining and retail empire, secured 1,800 Mhz spectrum in last year's auction to add to the 2,300 Mhz airwaves it acquired in 2010. Both are suited to high-speed data.
The billionaire, who said in June he is building "the largest broadband network that the world has ever seen," is now probably eyeing the 900 Mhz band to add voice services, said Aliasgar Shakir, an analyst at Elara Securities (India) Pvt. in Mumbai.
"They'll be looking to acquire 900 Mhz because it's the most compatible for both voice and data," Mr Shakir said. "If they only wanted to do pure data, they could have done it already."
For Bharti Airtel, the six coverage areas up for auction bring US$803 million in quarterly revenue, or 35 per cent of the company's total cellular phone service revenue, according to government filings.
Vodafone has seven circles at risk, accounting for 44 per cent of revenue, while Idea Cellular has 73 per cent of its cellular phone service revenue coming from circles up for auction, according to the filings.
"Idea has the most at stake in this auction, that's for sure," Mr Soni said.
Shares of Bharti Airtel fell 0.4 per cent to 347.50 rupees as of 10.27am in Mumbai. Idea Cellular gained 1.6 per cent and Reliance Communications added 0.5 per cent.
Spokesmen for Vodafone, Idea, and Reliance Jio confirmed that the companies are bidding in the auction, yet declined to comment on their expectations. Spokesmen for Bharti Airtel and Reliance Communications didn't respond to phone calls or e-mails seeking comment.
India's spectrum sales have been affected by scandal in the past, and the country changed the rules in 2012 to redistribute airwaves every time they expire.
The Supreme Court canceled 122 permits sold in 2008 after ruling they were granted illegally.
The nation's auditor said the permits were sold at "unbelievably low prices" and may have cost the government as much as US$31 billion in missed revenue.
Guidelines for this year's auction have set goals including stimulating competition, avoiding hoarding and promoting the rollout of services.
While Prime Minister Narendra Modi plans to use the money to help narrow the nation's budget deficit, it comes as his government tries to implement its Digital India policy, an US$18 billion program to expand high-speed Internet access and offer government services online.
The auction could raise US$14.5 billion, Standard & Poor's domestic unit Crisil Ltd. estimated in a February note to investors. That's about 45 per cent more than the government has projected.
While that would help the government, it's also likely to drive up prices for consumers as carriers try to repay debt they add to pay for spectrum. The average monthly phone bill in India is about US$2.
Shutting Business Data and calling rates may rise by about 0.05 rupees per minute, according to Crisil. That would suggest a 13 per cent increase on Bharti Airtel's average voice rate.
Crisil expects wireless operators to add about 700 billion rupees in debt, or about a one-third increase from current levels.
If Reliance Jio enters the voice business, raising rates will be difficult for the incumbents, said Sudip Sural, senior director of Crisil in Mumbai.
Any company losing previously held airwaves will probably have to shut down business in that region and abandon any investments or infrastructure it's made. Companies also will lose revenue if they can't switch to other bands, a move that would probably require new towers or technology.
If companies shut down their business in a particular circle, their subscribers will have to look for new cellular operators, said Rishi Tejpal, an analyst at Gartner Inc. in New Delhi.
"For some operators, it's a do-or-die situation," Mr Tejpal said. "And with Reliance Jio in the picture, nobody knows their strategy."