3G Spectrum allocation is finally over after the 34 days of hectic bidding and has given government a hefty amount of about Rs. 68K Cr (USD 14.6 billion). Good welcome cash for government which is passing through the tough phase of economic cycle. Our fiscal deficit was about 6.9 % (16-year high) in 2009-2010 and will cool down to less then 6 % by this money. However we have a bigger question, why the auction had surpassed all the predictions, was it a 3G auction which could result in the 3G services in INDIA or there was some other reason behind it.

Answer is the scarcity; service providers are already struggling with 2G services in terms of service efficiency and subscriber addition. So it is less likely that service providers would rollout 3G services at the Pan INDIA level. 3G spectrum would be used mostly to improve the 2G services (with the limited 3G services) except the Delhi and Mumbai circle. These two circles have good penetration of premium customers and probably are only circles where we can see full 3G rollout in near future (May be that was the reason of higher bidding price of these circles). Now this is time for government to think about of creating new circles i.e. Kolkata, Chennai, Bangalore, Hyderabad and Ahmadabad. May be this can result in more revenue for the government in future and good for service providers also if they want to invest in the limited geography.

Now let’s look at the service provider’s balance sheet – Airtel has lost about 20 % of the stock price from the start of the allocation and story is very much same for other providers also. So it seems investor community does not look at this investment as a positive NPV investment. However service providers are confident about their return that resulted into the higher bidding amount and it is upto the Indian consumers to decide the fate of this investment. Apart from spectrum cost, additional immediate expense would be to upgrade of the network for 3G services. Most of the service providers are having only one SGSN and one GGSN only except Airtel so the impact of upgrading the core network would not going to be more then USD 100 million. But upgrade of the towers for the 3G services would be somewhere around 100 million per circle on an average which could further dent the balance sheet of big service providers more then 1 billion USD. So total effect on balance sheet would be more then 4 billion USD for big service providers (including the cost of the spectrum www.queryhome.com).

Let’s look at options which are available in short terms. One simple option would to upgrade the core network for the 3G services which already have a support of the 2.5G by exercising revenue sharing model to reduce the risk of investment. But when it comes to access network i.e. tower upgrade then this is a costly operation even after exercising the revenue sharing mode. Higher spectrum efficiency along with putting more subscribers at the same spectrum is the key to success. Spectrum inside a building is a personal space and does not require a license to use which can be used with the help of the FAP (Femto Access Point) solution. Use of FAP can increase the capacity of network by more then 100 % if planned at country level and will also distribute some risk of the investment at consumer (assuming that consumer will pay for the FAP box). Only thing is required from the service providers is favorable policy which can promote FAP in INDIA and cost reduction of FAP solution. Let’s wait and watch may be we can see some traction in INDIA too for FAP solution.