Under the Hammer

Few countries are as congested as India. The roads in its big cities are jammed. Its courts are backlogged. Its trains are overflowing. Even its mobile-telecoms business is crowded by global standards. India has 840m active subscribers—the country is so vast that, to make it manageable, regulators divide it into 22 “circles”, or regional markets. In most circles there are at least eight mobile operators plying for custom. In contrast, other countries have found that between four and six companies is enough to keep prices in check while ensuring a decent level of service.

India’s cutthroat market is a boon to its consumers, who enjoy among the lowest charges anywhere for calls and for data downloads (see chart). But it is not so great for mobile phone operators. Few are profitable. A thinning of their ranks has long seemed inevitable. A big auction of cellphone spectrum, which began early this month, should give the process a shove. Some of the spectrum is new, but much comes from the expiry of 20-year licenses sold in 1995, when the industry was in its infancy.

That makes the auction a fraught affair for the three largest operators, Bharti Airtel, Vodafone and Idea, who together serve 58% of subscribers. Each faces must win auctions in circles where they have no other spectrum to provide a backup. Idea is the most exposed: 72% of its revenue depends on spectrum that is up for renewal, compared with 47% for Vodafone and 35% for Bharti, reckons Deepti Chaturvedi of CLSA, a stockbroker.

By March 16th, after 12 days of bidding, Ms. Chaturvedi reckoned that the average price for spectrum in the prized 900 Megahertz band had risen to 94% above the reserve price—a figure which itself had been deemed too high by some mobile operators. The roots of both the industry’s crowding and the brutal nature of the auction can be traced to 2008, when a bunch of licenses was handed out liberally on a first come, first-served basis. The giveaway spawned a huge corruption scandal. India’s Supreme Court cancelled all 122 licenses issued in 2008. The relinquished spectrum was then auctioned. Public outrage over the affair ensured that the terms of all future sales would be exacting. Those whose licenses date back to 1995 are grouchy at having to hand back their spectrum and then battle at auction to be able to stay in business. It would have been fairer just to renew their licenses and charge them fees linked to the prices paid for fresh spectrum, says Rajan Mathews of the Cellular Operators’ Association of India.

Once it became clear that their franchises were in peril, operators were less keen to invest in relieving the network congestion that causes phones to cut out during calls. But the industry may begin to rationalize, and investment in upgrading the network resume, once the auctions are over.

Weaker ones may be pushed to quit the industry or to merge by their bankers. That will become easier if the telecom regulator’s proposals to permit the trading of spectrum are adopted. After the auction process it should be clearer what spectrum is worth, encouraging such trading, says Prashant Singhal of EY, a consulting firm. They will be hoping that India’s chatterboxes will, in time, be ready to pay extra for data downloads, to watch sport, buy things or keep track of their finances on their phones.

But they should not bank on this, says Alpesh Shah of the Boston Consulting Group: in more mature markets consumers have tended to decide how much they want to spend on mobile services, and then stick to that figure. And some operators’ bosses may find it too painful to face commercial reality, delaying the rationalization, Mr. Shah worries. “As long as everyone hangs in, everyone gets hurt.”

MARCH 21ST–27TH 2015

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