Spectrum irrationality: Earlier it was telcos’ turn, does it need to be govt’s chance now?

Within seven days of Business & Market first suggesting that a leading telco like Bharti Airtel should better refrain from participating in the upcoming 2G auctions, the business media was yesterday abuzz with the possibility that telcos like Bharti Airtel and Vodafone could skip the upcoming 2G airwave auctions (See: http://economictimes.indiatimes.com/news/news-by-industry/telecom/Incumbent-telecom-firms-like-Bharti-Airtel-Vodafone-may-skip-2G-spectrum-auction/articleshow/15577218.cms#write).

On August 14, 2012, Business & Market had posted referring to Airtel, “It would be better to avoid participating in an upcoming spectrum bid if the prices don’t appear to make sense.” (See: http://www.businessandmarket.net/2012/08/5-steps-that-could-bolster-airtels.html).

Now that a similar advice has reportedly come in the form of a brokerage note, from a UBS analyst, hopefully the telcos would be listening more, first in their own reasonable interests and consequently in their subscribers’ interests too.

Having said so, there actually is not much else that telcos could do, lest they have a somewhat suicidal intent to stretch themselves too far on thin ice.

Yet, it may not be easy for the government to see the impossibility of a 2G auction becoming successful at the current 2G reserve prices, on grounds that industry would find the prices unsustainably high. The government could be finding it hard to accept that the astronomically high bids that came in for 3G airwaves were driven by irrationalities displayed by telcos and were not scientifically determined by market potentials such as actual latent demands.

In bidding phenomenally high for the 3G airwaves, Indian telcos erroneously chose to ignore history of just about a decade ago, when their European counterparts had been severely burdened from incurring abnormally high expenses on 3G spectrum.

Pressured by an ultra-competitive state of the industry that had around 15 operators competing in a market best trademarked with falling ARPUs, the large operators were then desperately looking for new revenue streams, certainly beyond voice.

They seized upon 3G as a savior, and in doing so, assumed unthinkably high returns on their investments. That was reflected in the proportionately high 3G pricings, which later had to be slashed by up to 80 percent when the ultra-price-conscious Indian subscribers refused to consume the services at earlier price points.

A large part of that ‘great 3G folly’ may have emanated from the relatively sound cash situations at some of the large telcos, fueled by a globally acclaimed success of a 2G era.  

The assumptions that went into building 3G cases at telcos often got driven more by that 2G success of the past and the state of 3G in developed markets. While concerns were still moved against paying more for 3G airwaves, the prevailing ‘feel-good’ factor seemed to override the rational thoughts.

It is not easy for the government to see such reasoning, since its vision would understandably be influenced by the high hopes it would have pinned on the 2G auctions as a further exchequer booster, with 3G auctions providing an endearing parameter.

Just as the industry acted irrationally in the past, so would the government. And just as the industry is learning lessons the hard way, the government could too (after a readying-to-fail 2G auction).