India's 3G spectrum auction

India's 3G spectrum auctions have moved beyond (already wild) expectations.

When such things happen, I start to wonder about the economics of the situation. India's public is very fiscally-tight and the entire telecom market in India is cut-throat.

When 3G licenses touch regions of USD 3.3 billion (Approx Rs 150, 000, 000, 000 - 150 billion / 15,000 crores) for a single PAN India license, I begin to wonder how telecom companies can recoup their outlay in what is possibly the world's most competitive market.

For an example, a couple of prominent telco's claim that they have a subscriber base of over 100 million (one hundred crores). On the face of it, that means they can cover their license requirements by just earning Rs 150 (Approx US$ 3.40) from each customer. In terms of reality, it is not so simple.

First, the market is so competitive that earning Rs 150 from every customer is a daunting task, especially when you consider that there are some customers for whom this value is the total monthly bill, and in some cases (especially "lifetime" prepaid accounts) possibly the annual outlay.

Second, I assume the claimed subscriber base covers defaulters, inactive accounts, accounts sold but not activated, etc.

One can say that given the new features that can be unlocked with 3G, mopping up excess revenue may not be such a tall order after all; however, it is unlikely that there is going to be a great demand for 3G services, at least immediately.

India is a slow adopter of technology, and 3G is no exception. BSNL / MTNL (Government run telcos) have been offering 3G for about a year now, and there are very few takers for it, essentially because the advantages of 3G are neither economically viable nor visible to the common man. Most of India uses mobile phones to talk or text; MMS and Internet usage is marginal at best.

Taking advantage of 3G requires a new handset, new plan, new number and, for the most part, is not affordable when compared with available EDGE / GPRS plans.

Further, after spending so much on spectrum licenses, the telcos will also have to spend on additional infrastructure and advertising for 3G. They then cannot price the technology at a premium, because it will inhibit adoption, but I don't imagine they can deliver it cheap enough for people to want it, given all the financial outlay.

Some may argue that having got 3G spectrum, the players are in a whole new league, and can attract many more customers; but if I was one of the losers in the spectrum auction, all I would do is handout the money earmarked for the auction as discounts to new and existing customers; targeting those that don't want or don't care about 3G services, of which there are bound to be a huge majority.

The only real winner here is the Government, who will use this to mop up deficits in their budget. This too is a Pyhrric victory, because it will encourage further fiscal indiscipline.

3G in India is nothing but a buzz word to most of the public; the IT crowd and tech-savvy may go for it, but the bulk will simply shrug their shoulders and walk on. They may admire the results, but I don't believe they will adopt it.