3G auction: How the gameplan could evolve

You say you want a revolution. But what if all the revolutionaries claim to be martyrs even before the first shot is fired? Ask any mobile telecom operator about 3G - super-fast mobile wireless technology - and you will be met with Nordic glumness. "We are in a situation where we are losing money on every call. After the 'per-second' billing, revenues per call have dropped 20%. And you want to know about 3G!" says a senior executive at Reliance Communications. 

Telecom companies used to make 50 paise of revenue for every minute of subscriber talking two years ago. Today they make just about 35 paise a minute. Market leader Airtel's EBITDA (earnings before interest, tax, depreciation and amortisation) per minute has dropped from 20 paise to 15 paise and its market capitalisation has dropped 30% in the last four months. The other large player in this sector, Reliance Communications, has seen a 40% drop in its market capitalisation. These are the guys who are supposed to lead the revolution!

The paradox is that while Indian companies add subscribers by the millions, it is also the most competitive market in the world, according to the Merrill Lynch Global Wireless Matrix dataset. This is primarily because 10 to 12 companies offer mobile services in most parts of India; globally, the average is four. Another key reason is that the government of India has only been able to give an average of 11.4 MHz of spectrum. Telecom experts believe that 20 MHz is the sweet spot and allows for the most cost-efficient operations. The global average is 22 MHz. These two factors ensure that while you and I pay very less for each call, we also suffer from a large number of call drops.

Indian companies have managed to thrive so far through business model innovation. They have outsourced their networks to reduce fixed costs and have opted for a pre-paid model to reduce credit risk and improve cash flow. Unfortunately,  these measures have run their course. Most large Indian operators believe that the government has let them down and forced them into a diminishing returns zone. "The story of Indian telecom is one of tragic-comedy and 3G will not change that," says the head of a telecom firm. The current licenses that the telecom companies hold entitle them to radio-frequencies that are sufficient to transmit voice (2G in other words) and which still account for 90% of the revenues of the sector.