8/14/2019 CASE ANALYSIS ON THE 3G SPECTRUM 2009 BIDS

1/2

Title:

Issues in the Telecom Sector

Objective:

1. F ind out the factors that contribute towards the losses in the f i rst

year of operation.

2. Suggestion for relaxation of norms

Case Description:

1. Bid winner should acquire Universal Access Service License (UASL)by remitting Rs. 1650 crores for which there wi l l be a benef it o f priority 4.4 MHz of 2G Spectrum

2. There is a lot of uncertainty on spectrum sharing, spectrum tradingand l icense fees.

3. Cost of 2G, 3G mobi le operations for any company is US $. 8 15 Bnwhich includes cost of merger and acquisition

4. FDI cap of 74% for global operators.

Analysis:

Reasons for Losses:

1. The f i rst and the foremost factor which contr ibutes to thelosses in the f irst year of operation is the f ixed cost. TelecomIndustry involves huge towers, s ta te o f the art e lect ronicequ ipments and Info rmat ion Technology Spending whichcontribute to the huge costs.

2. The second factor which contributes to the losses is the Costof Customer Acquisi t ion and the promotional expenditures.

The initial year of operation always call for a huge investmentin terms of the advertisement and promotional campaign. Alsothe cus tomer acqui si ti on cos t i s very h igh dur ing theseperiods. At later parts of their operations the companies spendnominal amounts in retaining customers.

3. The ever lowering Tariffs is also a major factor for the losses. The Pareto pr inciple of 20% of the customers del iver ing 80%of revenues no longer works here. Telecom sector in India nowconcentrates on more customers in terms of vo lume and as

small an amount from each customer possible to make up thebottom l ine. In case the desired number of customers is notmet they incur losses.

Suggested Reforms in the Telecom Sector:

1. Government should clear its stands on the Spectrum Allocationprocess and give an assurance that there would be no redt ap es , no c on fus io ns a nd n o c or ru pt io ns i n t he wh ol eallocation process.

8/14/2019 CASE ANALYSIS ON THE 3G SPECTRUM 2009 BIDS

2/2

2 . B asi c I nf ras tr uc tu re i n Se mi ru ral an d r ur al ar eas t o b eincreased. This wil l naturally help the companies to penetratein to these markets.

3 . Ava ilab il ity o f the spectrum is l imited w ith TRAI and DOT.Mil i tary controls most of the Spectrum and has not put i t intouse. A part of this can be freed-up for the use of the telecomoperators

4. Reform Process in the telecom sector to be k ick s ta rted.I mplementatio n of Key Policies by the TRAI and theGovernment should be done without much delay.

5. World over 60% of te lecom revenues come from 3G Services.But in India , 3G spectrum al locat ion charges are very high.Hence the demand for 3G is very less.

6. Government should think before it implements MNP.Government 's initiative on t he MNP (Mobile NumberPortabil ity) can be a great boon to Cellular users but can be a

great threat to the Cel lu la r Operators . Most users in thecountry are not brand loyal . They may choose one te lecomoperator for a number and then on change the operator withina few months to a d if fe rent operator w ith a bet ter tar if f.

Though this wi ll lead to better d i fferentiation amoung theexisting operators, they might incur heavy losses as the costof acquisit ion of the customers would be very high. That costcannot be recurred in a very short per iod of t ime. Moreoverexisting infrastructure has to be planned in such a way that itcan accommodate that traf f ic . I t becomes a chaos i f peoplekeep shift ing from one operator to another. Some operatorsinfrastructure is underutil ized and for some exceeds capacity.

7. Promote mobi le as the pr incipal means of communicating andconnect ing to the internet. Encourage 3G services morewithout a lot of hassles.

8. The FDI Cap o f 74% can be rel axed and the FDI can beincreased. Government can support some Indian partners whoare in cash crunch to meet the 26% requirement.

Conclusion:

A few of the factors contributing to the losses have been analyzed anda relaxation in them has been suggested.