(Tony Worthington is the Global Head for Telecoms, Media & Technology at Standard Chartered Bank. The opinions expressed are his own)
The process for the auction of 3G licences in India kicks off in January 2009. What valuation levels are likely to be achieved?
The key point to understand with regard to the 3G licence process is that there are two distinct forces at work. Firstly, there is the business case for 3G services in India.
Secondly and most importantly, there is the issue of spectrum scarcity in the country.
Let me address the business case for 3G services first. In simple terms I do not see a profitable standalone business case for pure 3G services for any operator in India. Evidence from around the world is overwhelmingly against such a 3G business case.
In Europe in 1999 and 2000 many bankers, including me, were scratching our collective heads and attempting to work with consultants and operators to build 3G business cases. These business cases resulted in licence costs of in excess of $8 billion in the UK and Germany.
Coupled with the bursting of the dotcom bubble, these excessive valuations drove the telecoms sector into a period of remission for the next three to four years.
Operators were overgeared and the business case for 3G — which included real-time football and cricket matches, online gambling and adult entertainment – just never materialized.
Part of the problem was a lack of available 3G handsets. This is very different today, but 3G handsets are still typically over $250, well beyond the reach of the substantial majority of mobile users in India.
The specialist 3G company 3, owned by Hutchison, quickly realized to its credit that it had to change its business case to a 2/2.5G company. Finally 3 is having some success in the UK with around 5 million subscribers.
Is there any hope for the pro-3G advocates? Well let’s look at Hong Kong, the city with the perfect environment for 3G.
For the first time Hutchison now has more WCDMA (3G) subscribers there than GSM. Sadly all of the other operators’ 3G subscribers are lagging their GSM subscriber base significantly.
If Hong Kong cannot be a 3G dominated market then most other markets have no chance.
India’s main structural issue in mobile telecommunications is not users wanting to view real-time IPL on their expensive 3G handsets. It is a chronic shortage of spectrum availability in many circles at peak times. This is a problem largely unique to India.
We currently have operators busy modelling their investment and business cases. But 3G services are not the key issue in these models. Rather a detailed analysis of capital expenditure and revenues through additional 2 and 2.5G subscribers are at the forefront of operators’ thinking.
Of course there will be a limited number of high-profile, high ARPU 3G subscribers. But these will be in the significant minority.
So look at the recent 2G spectrum process and resulting M&A transactions for clues on the licence values likely to be achieved. Two start-ups (Swan and Unitech) were able to generate valuation levels for their business in excess of $1 billion and over twice the cost of the spectrum initially acquired. This sets reference points on a pan-India basis for the spectrum in the 3G licence process.
The 3G licence process in India will be a success. But the underlying reason will be a 2G one.
(You can contact Tony Worthington at firstname.lastname@example.org)