Analysts believe that the amount paid by operators for pan-Indian licences in the last round of licensing was a pittance, considering it came bundled with spectrum. The question therefore arises whether 2G spectrum should be auctioned instead, so as to arrive at a competitive price for this scarce resource. To resolve these and other issues, the government is reportedly considering a revision of the New Telecom Policy (NTP), 1999. Industry analysts share their views...

Is a review of the NTP, 1999 required? What would be the implications of such a move on the 3G spectrum auctions?

Sourabh Kaushal:  The NTP, 1999 has significantly influenced the way the Indian telecom industry has shaped up, with multiple pro-consumer initiatives. As a result, the Indian telecom market has witnessed significant growth. Subscribers have grown from 3 million in 2000 to over 440 million today, a compounded annual growth rate (CAGR) of over 74 per cent. From a teledensity of less than 1 per cent in 1985, we have now approached a teledensity of over 43 per cent. Competition has intensified with the number of operators increasing from a handful to more than nine per circle today. However, given that the next stage of growth is fast approaching, it is time to review the current policy to remove any existing loopholes. Ambiguities over issues such as spectrum/licence allocation and pricing, and merger and acquisition (M&A) guidelines need to be addressed to formulate a definite policy for the next phase of growth. With a clear road map for the future, the impending 3G auctions might witness higher participation from new (domestic and foreign) carriers, in turn generating higher revenues from the auction for the government.

Romal Shetty: The NTP, 1999 can be rated as the most significant development in the telecom industry in the past 15 years. The dramatic expansion of the industry in the past 10 years had its genesis in this landmark policy. Most operators and industry observers would agree that the NTP, 1999 has served the industry extremely well.

However, as an entire decade has passed, in which India has become the world's second largest telecom market, it is imperative that this policy is reviewed and a new policy framework established to aid the next generation of services and subscribers.

NTP 1999 was developed as a growthbased policy to enable a new industry to develop in a well-regulated and protected cocoon. Today, the industry has broken out of its protective shell and is trying to survive in a rather turbulent world. Even with excessive tariff competition and spectrum issues, the industry is relatively healthy as compared to its confused state in 1999. However, the current turbulent times need a steady policy hand to ensure that things do not get out of control.

A relook at the policy is required. But as the 3G auctions are round the corner, the timing at this point would be inconvenient. The current political scenario with the telecom licence issuance investigations may make any changes to policy unnecessarily contentious.

Prashant Singhal: As of now, no review has been proposed. Even if any such process starts, it will be a long-drawn one and is unlikely to be completed before the scheduled auction of 3G spectrum in January 2010. Therefore, it will not impact the auction.

Dr Mahesh Uppal: Whether a new telecom policy is required is a moot point; but what is really needed is a new spectrum policy and a new licensing policy. There are two critical issues here: the allocation and pricing of spectrum and the licensing of new players. In fact, if the new policy includes some specific provisions that will lead to market pricing of spectrum, then even licensing may not besuch a critical issue as most players would then go the wireless way. We will discover that when spectrum is priced according to market principles, as is the practice the world over, it will be a sufficient deterrent for non-serious players and provide clarity for those who still want to enter the sector.So, if the new policy is largely focused on spectrum, it will be useful and will impact all services, including 3G, in a healthy way.

Should 2G spectrum be auctioned and licences delinked from spectrum?

Sourabh Kaushal: The existing subscriber-linked criteria for 2G spectrum allocation have led to issues such as operators overstating subscriber numbers to acquire/hoard more spectrum. In addition, 2G licences (bundled with spectrum) are currently allotted at prices fixed way back in 2001. Recent stake sales and acquisitions have proven that spectrum is more valuable than what fixed prices stipulate. International examples also prove that the best way to arrive at a fair valuation of spectrum is through an auction-based allocation process.

Delinking spectrum from the licence will also be a good move. It will especially have a major impact on 3G auctions. If the government delinks the two by announcing the price for a 2G licence without spectrum, new players will be able to take a plain vanilla licence without 2G spectrum and then bid for 3G. Otherwise, new players will have to pay Rs 16.5 billion to just participate in the 3G auction.

Romal Shetty: Many industry stalwarts believe that the fee paid for pan-Indian licences the last time round was a pittance considering it came bundled with spectrum.

Spectrum being a scarce national resource should be sold on a market price system so that only long-term players operate. Even if auctions are applied, consumers will benefit from good prices due to the intensity of competition in India.

Prashant Singhal: It seems unlikely that the government will opt for an auction of 2G spectrum. The auction would help identify the true value of the spectrum. But considering that spectrum was provided to operators based on the rates in 2001, it would be difficult for the government to justify an auction of 2G spectrum in the future.

One way out is to delink spectrum from licence. The value of the licence, per se, would then fall. However, spectrum value could rise. At that point, the government should introduce a transparent bidding process for spectrum. Till the time no spectrum has been allocated, there will be no rollout obligations on the licence holder.

Many countries are looking to refarm spectrum in the 800/900/1800 MHz bands while also opening up the 700 MHz band. It is time India too started thinking on such lines.

Dr Mahesh Uppal: There can be no two ways about delinking spectrum from licensing. In fact, it is precisely the link between licensing and spectrum that has created the many anomalies in the market that have come back to haunt the sector. Spectrum should be delinked from licensing and firms should have to acquire spectrum at market prices. They should also be able to dispose of it in some supervised way or based on certain guidelines to eligible operators.

With several new players entering the sector and the subsequent price war that has taken place, what will be the likely impact on operators' revenues?

Sourabh Kaushal: New operators launching services in an already competitive space is resulting in highly publicised pro-consumer initiatives such as per-second billing and slashed STD rates. While these moves might help new operators attract an incremental subscriber base, the resultant price war will not be beneficial for operators. With revenue per minute falling to Re 0.50 per minute, operating costs reaching Re 0.40 per minute and other costs, operator margins will be under pressure. If existing GSM carriers adopt the per-second billing model, they will see their EBITDA margins for incremental subscribers drop from the current 31 per cent to 19 per cent (given the same minutes of usage).

Romal Shetty: Irrespective of the current price war, the entry of new operators over the next 12-18 months, combined with other aspects such as mobile number portability, will exponentially expand the field of fire. Margins are going to succumb to pressure in the short to medium term. In the past 12 months, ARPU and EBITDA have been under constant pressure, either through the emergence of new pan-Indian operators or the entry of new operators. We could see a further reduction of 15 to 20 per cent in ARPU levels and 5 to 10 per cent in EBItDA levels in the short term, irrespective of how much efficiency operators are able to squeeze out of their existing businesses.

Prashant Singhal: The entry of new players has resulted in a whole new range of plans being offered to consumers. The most radical one has been the one paise per second billing plan. There will be an impact on operators in the short to medium term. However, in the longer term, it is unlikely to cause much of a flutter. A first glimpse of the impact of this plan will be visible when the results for the third quarter are out in January 2010. But despite the fall in tariffs operators have managed to maintain their EBITDA margins.

Dr Mahesh Uppal: The short-term impact will be quite severesince prices have come down quite drastically. New players are competing on what they know best –­ price. In the long term, one could expect the price wars to lead to a degree of consolidation because once revenues begin to dip, only some players will be able to take the heat, while others will be forced to merge with their competitors.

Is a cap needed on the number of operators per circle?

Sourabh Kaushal: A cap is not required. In the long run, the industry will see consolidation and only those players would survive who achieve significant opex optimisation in order to serve low-end incremental customers with ARPUs of less than $2. The primary driver for this will be scale. The industry is expected to see a wave of consolidation in the next two to three years as the market starts saturating, and the government should ensure a healthy facilitation for such M&As.

Romal Shetty: Many studies have been conducted to identify the optimum level of competition. India clearly is way above the suggested limit. Any limitation on the number of operators will pull the government into several rounds of legal wrangling, though a limitation is in the industry's best interests.

Even though excessive competition aids consumers, in the long run, excessive competition leads to lower ability to invest in new technologies, resulting in lower service levels. In most European countries where competition is restricted, operators are steadily moving towards next-generation networks and providing a high quality of services such as super high speed broadband through optical fibre. In the current competitive scenario, it is quite unimaginable for an operator to make such investments. A balance between price wars and pricing for consumer needs is necessary for the benefit of an investment-heavy industry. This balance may be brought about by a fair regulator.

Prashant Singhal: Today there are 8-10 service providers in most circles. Over the next few months, as new operators roll out services, it is likely to rise to more than a dozen in each circle.

China, which has a slightly higher population than India, has 700 million subscribers compared to India's 471 million. However, there are just three large operators –­ China Mobile, China Unicom and China Telecom. In the US, there are close to 280 million mobile subscribers across four large operators –­ AT&T, Verizon Wireless, Sprint and tMobile. In Russia too, there are three large operators –­ MTS, Vimpelcom and MegaFon. Even if one compares telecom markets that are of the same size as India, there are not many operators. The UK has five operators, while Germany and France have four each.

There is no need to cap the number of operators. Instead, the government should allow M&As. Then, market forces will ensure that there are an equitable number of operators. India would be back to five to six operators in each circle.

Dr Mahesh Uppal: No, if we carry out appropriate reforms in the spectrum policy, we do not need a cap.With a proper policy framework in place, companies will know the effective cost of entering an already saturated market. In fact, most countries do not have caps; the market itself is able to explore/ensure that only a certain number of players consider it worth risking the kind of money and investments the sector requires.

What is the justification for the government's lock-in clause for new entrants?

Sourabh Kaushal: Since the allocation of fresh licences in 2008, the sector has witnessed several instances of new licensees selling stake to foreign operators at very high valuations, making significant profits. For example, Swan Telecom was valued at over $2 billion by Etisalat, in spite of paying less than $400 million for a licence in 13 circles. The three-year lock-in period for new operators is important in the wake of such developments. It prevents fly-by-night operators from entering the field and offloading stake at overblown valuations. It prevents promoters from offloading stake without issuing fresh equity for three years. It ensures that only serious players enter the market.

Romal Shetty: When the names of the new licensees were announced, it was clear that certain names had entered the business purely to exploit a timing issue in the market. Subsequent licence sales or the so-called "joint ventures" clearly indicated that some of the licence winners were sitting on a pot of gold. A lock-in period for the licence, ensures that applicants have a clear intent and ability to be in the telecom business and not treat the licence as a pure capital asset to be subsequently sold to the highest bidder.

Prashant Singhal: The idea of a lock-in period is to ensure that operators invest in a network rather than leverage the licence. What operators can do is to join hands with an international operator by expanding their equity base, as has been done by some operators. It is only after the lock-in period is over that operators can exit. This will ensure that only serious investors seek a licence.

Dr Mahesh Uppal: It is entirely counter-productive. The lockin period may be able to prevent some companies from making windfall gains. But the larger problem is the number of players being imposed on the sector. Having nonserious players in the market, is not a particularly desirable situation. Ideally, the policy for licensing should have been able to prevent this kind of unbridled entry into the market. Having failed to do so, we should now actually facilitate their exit as soon as possible.