Third-generation fiasco

With barely a month to go before the Lok Sabha elections notification is issued, it is evident that the much awaited 3G spectrum auction will not take place at least for another one year. Let us do a stock taking of the consequences of this policy failure on the telecom front.

In a 10 million-per-month growth mobile telephony market, what is so special about the third generation (3G) mobile services that we need to worry about? The current 2G mobile services are limited to voice communication and slow speed data communication. It is true that for large segments of our population, this by itself is a boon. Why then 3G?

What 3G does is to offer voice communication with a much greater spectral efficiency, that is, for the same amount of spectrum many more customers can be accommodated. In fact, discussions with existing 2G service operators clearly reveals that the immediate motive of these operators to bid for 3G spectrum is to be able to deploy the more efficient 3G equipment for providing voice services, since the prospect of getting any more 2G spectrum is almost non-existent.

Since 3G networks also offer high-speed data services such as high-speed Internet, and video conferencing, they will attract high-end heavy users of mobile communication services. This would lead to reducing the pressure on the existing 2G networks, thereby not only opening the possibility of providing services to many more voice telephony customers, but also improving the present abysmal quality of service offered on these networks. Thus, the immediate impact of delaying the auction of 3G spectrum is that our existing overloaded 2G networks will continue to amble along with pathetic quality of service, while we bask in the glory of monthly addition of world record 10 million customers.

Let's look at the monetary implications. In the normal course with a shortage of spectrum, one could have expected the auction to fetch good returns to the government. (It is a different matter that high upfront payments are not as beneficial to the government and the sector as low upfront payments and regular increasing tax revenues from services provided. Recall the increased revenues the exchequer has received as a result of moving to the revenue share model for 2G networks in 1999).

Even under the depressed economic situation, the stakes associated with 3G spectrum for the long-term players are so high that irrespective of the reserve price, good returns to the government were virtually guaranteed. These will not now accrue this year. In addition, the 3G broadband services fetch a much higher ARPU for the service provider and they, therefore, lose this revenue. Without the auction, the country will have only MTNL and BSNL providing these services. It is indeed a great opportunity for them to grab the first mover advantage.

However, for the consumer it implies that the 3G services will be offered in a non-competitive monopoly environment and therefore the tariffs of the services offered will not be driven by market forces. In fact, according to one press report the average anticipated expenditure for a consumer using 3G for both voice and data services such as Internet and video conferencing in Delhi is likely to be upwards of Rs 1,200 per month.

Such tariffs are definitely not likely to boost the popularity of 3G services in the country. The introduction of 3G services by private operators was expected to bring in more FDI. Quite evidently this is another loss to the sector and the economy.

Growth of broadband services in the country has only lately picked up a bit. With limitations imposed by the number of broadband capable fixed line pairs and in the absence of Local Loop Unbundling, wireless broadband is the only recourse open. With the deferment of 3G spectrum auction, the possibility of private operators setting up WiMax-based broadband wireless networks is also deferred. While this has obvious implications for urban area and enterprise broadband connections, the implication for growth of Internet and video-based services in rural areas is even more devastating. Once again the only player is likely to be BSNL. While BSNL's record in catering to the needs of rural population has been outstanding, the whole idea of the liberalised telecom sector was to boost the rate of growth and provide affordable services through the presence of multiple operators.

Besides the above considerations, it has been well established by international bodies that each broadband connection has twice the impact on GDP as compared to a voice connection. Thus the bottom line is that by delaying the 3G spectrum auction, we have lost out on an opportunity to improve the efficiency of commercial activities and to quickly boost the growth of economy, particularly when there is a general slowdown. The policy makers would have done well to concentrate on bringing in wireless broadband services through 3G auction, rather than wasting their time and effort on trying to bring in more 2G operators in a scenario of scarce spectrum availability.

In contrast we have to doff our hats to China, with whom we always compare ourselves, in taking decisions with such clarity despite pressures for development of their own 3G standards. 3G services in China will start any day now with three technologies.