Tuesday, January 12, 2010

3G: Boon or a Bane?

As the telecom heavyweights gear itself up for the 3G auction on the second week of Feb, licking their lips in anticipation for the 25 Mhz of spectrum, let me crisply put it across as to why 3G would emerge as a significant factor for all those telecom biggies.

The third generation technology or 3G as it’s widely known, gives one the high-speed access to voice and data technology, raising transmission speeds from 9.5K to 2Mbps. It also offers advancements on the 1G and 2G networks such as multimedia applications like video and broadband services.

Coming to growth, the wireless subscription has an overall growth of 9-10% quarter-on- quarter in FY09. With the growing penetration of 11.50% in the rural segment and 6.84% in the urban segment, telecom players look forward to capture the rural market. But, the increasing subscriber base in the rural areas is creating a lot of congestion in the 2G space leading to low quality of service (QoS) for urban subscribers, which is one of the critical reasons for the biggies to jump over and occupy the 3G space. Moreover, 3G is an absolute requisite to push high Average Revenue per User (ARPU) group to better class of service and free up the 2G service spectrum to tap a wider base of users at the lower end of the ARPU spectrum.

(Source: TRAI)

Not just that, as you can clearly see in the chart above, a declining trend in ARPU due to humungous increase in the number of low revenue subscribers and heavy competition from all the telecom players. This makes value added services (VAS) extremely critical for the telecom companies survival, since it would be the VAS that would help them increase the ARPU, once the industry reaches a matured stage from the current growing stage.

The response of 3G services can be compared with the countries already using 3G. The first few countries to implement this service were Japan and South Korea, where 3G now accounts for nearly 70% of the networks. The list adds on with Europe, North America and specifically companies in the United Kingdom and United States have implemented this service to a bulk of their subscribers. Such being the case, 3G could be a phenomenal success in India that boasts of a population that’s growing younger and as a result could be a shot in the arm for all those telecom biggies.

However, on the other side, there are major hurdles against the emergence of 3G.

* Supporting infrastructure will require major capital investment beyond the winning-bid investment, pretty much in line to be tagged a winner’s curse.

* Real returns will start after 3-5 years, which implies that there would be no short term profits for operators and they should be sustain effectively during that period.

* Huge gap in perception as foreign investors are allowed to invest 100% equity to acquire 3G license. On the contrary, the TRAI guidelines allow a maximum of 74% equity stake only.

* Delay in the Auction date, whether it is due to government policy or because of the delay in defense releasing the spectrum.

* Operators are just given 15 days timeline to pay the entire fees which is too less a time to arrange for such hefty amount. Where 25% of the bid amount will have to be paid within 5 days.

* The real usage of the spectrum by the players can not be started immediately. They will be able to use it only by September 2010.

Though the hurdles seem to be pretty tough to jump across, the telecom biggies with their financial muscle power and princely access to the rejuvenated capital markets, can see off the initial troublesome phase without much of a hitch.


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