On Tuesday, the ongoing telecom spectrum auction completed 53 rounds of bidding and generated bids worth around 86 percent of what the government got for 3G radiowaves in 2010. The 3G auction in 2010 had fetched the government Rs 67,718.95 crore.
Sanjay Kapoor, former CEO, Bharti Airtel says telecom companies like Bharti Airtel, Vodafone, Idea are simply trying to protect existing revenue. A lot of money in this auction is going into just that. Though the bidding has now reached a point where it may hurt operators, he says.
Going ahead, Kapoor believes operators will perhaps have to pass on the costs to consumers, leading to higher prices, considering the fact that service cannot continue to be cheap when the raw material price is so high. But, Romal Shetty, ED & national head of KPMG says it won’t be that easy for telecom companies to raise prices. He says new entrants will make it tough for existing players to hike prices.
Shetty feels debt levels of telecom companies will increase a lot more.
Below is the verbatim transcript of Sanjay Kapoor and Romal Shetty's interview with Reema Tendulkar and Latha Venkatesh on CNBC-TV18.
Reema: We have already seen bids in the 900 megahertz (MHz) in a couple of circles like Delhi which have reached levels of the previous reserve price in March 2013 auctions which were then rubbished by the telecom operators. Are you getting a sense that perhaps the bidding is now going a little more irrational and the business case it is not perhaps making too much for business case and might be unviable for these operators?
Kapoor: What I would say is that you got to take a broader view of what is happening. When you see the total money being put on the table in this auction, one has to analyse how much of this money is going to create new revenues and how much of it is going to protect existing revenues which means it yields nothing more than what was existing on the ground earlier.
Now you will see that in these auctions when you protect 900 MHz and also when you get some 1800 MHz to replace some of the 900 MHz that you surrender, you are basically protecting existing revenues and that is not an economically very wise investment. But it happens because you have to protect a very large customer base. So from that perspective a lot of money in this auction is going into protecting existing revenues and that becomes absolutely essential for large operators who have millions of customers who they are able to offer good customer experience because of the 900 MHz spectrum.
When you look at the entire portfolio of the industry, you will see that it is only players and operators who have got a mix of 900 MHz and 1800 MHz who make money. Pure play 1800 MHz don't make money because there is physics which does not permeate the signal into buildings and therefore a lot of consumption that happen in building gets really effected and the consumer experience suffers. So considering all this yes it seems that the auctions are moving towards a price point where it will definitely hurt the performance of the operators.
Latha: We have some numbers done by some equity analysts that the total mobile segment has a revenue base of USD 18.5 billion. Already the government through various ways is raking in USD 10 billion. If we extrapolate the current spectrum charges then in a few years the government will take away USD 17.5 billion. So is this a business case that is heading for disaster?
Shetty: There are two cases, one is in terms of what the government is taking, one is in terms of the number of players. If you take both of those cases that is when it becomes a bit unviable because anywhere globally there are only four-five key operators but India having eight-ten operators would typically means that you won't be able to raise prices.
Second is in this auction when it has gone above 50-60 percent which is what they had put a stretch limit you will automatically start suffering significantly. So after some time it will become a problem and in India where the data usage is not as high as if you take Europe especially for 3G and 4G, again it is something that will affect the operators significantly.
Latha: What is your sense, is this only going to be operating at a lower margin or is this going to be red on the books for even most of the big operators?
Kapoor: As far as the operating performance is concerned when the raw material becomes expensive the prices have to become expensive for the market place. I don't think given the current position of the operators in the market, they will be able to bear all this load on themselves, they will have to pass on a lot of this load to the consumers and of course like many people predict, the banks will also play hard because the leverage for many operators will go up. So overall the sort of hyper comparative wounds that the operators have suffered over the last few years don't seem to be coming to a standstill for a simple reason that this is a spectrum hungry industry. If India has to compete globally with other economies, the amount of data that has to flow through wireless will have to be humungous and we are going to be talking about several MHz of spectrum and not 5 or 2 or 10 MHz of spectrum. And if this is going to be the price of the raw material which is being established today, these services are bound to get very expensive in future. So either the operator bears the loss and then has a very poor economic performance or he passes on the load to the consumer and there you have to see how much of load can the consumer take without the volumes getting impacted. So I think it is a catch-22.
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