Reliance Squeezed by Spectrum Crunch

Reliance Communications Ltd. (RCom) is forging ahead with plans to expand its GSM network while the Indian government debates the legality of its dual-network strategy -- but it could ultimately be thwarted by a shortage of spectrum.

The carrier, which operates India’s largest CDMA network, recently submitted an application for GSM spectrum and has now applied for GSM licenses in four of India’s smaller telecom "circles," or regions. At the same time, its Reliance Telecom subsidiary, which already offers GSM services to around 2 million customers, said yesterday it plans to add 250 new towns and cities in northeast India to its footprint during the third quarter.

Reliance has said it intends to run GSM services alongside its CDMA network, which has around 20 million subscribers -- a move that has sparked internal wrangling within the Department of Telecom. (See Reliance Dabbling With Dual Networks.) “The licenses are technology neutral, but it's debatable whether [the DOT] would give both GSM and CDMA spectrum to Reliance,” Lehman Brothers analyst Sundeep Bihani told investors earlier this week.

Having spoken to officials from Reliance and other carriers as well as the Department of Telecom, Bihani told a conference call that despite conflicting press reports as to whether Reliance will be permitted to run dual networks, the DOT has yet to give any detail, and "we don’t see any clarity coming until the Department of Telecom decides." He added that a resolution is expected within the next two or three months.

India’s rapidly growing subscriber base has caused a major spectrum crunch for operators that are fighting for more capacity. Bihani said the unavailability of spectrum is likely to be the biggest hurdle to Reliance's plans. He said India's defense forces are sitting on a "huge amount" of spectrum that the government is working to free up for mobile services, and the DOT hopes to clear 45 MHz by the end this year.

The problem for Reliance is that it's at the back of the queue. The government intends to dole out 20 MHz for GSM capacity this year and set aside the rest for 3G services, for which it'll grant licenses in the first half of 2007. India’s three largest GSM carriers -- Bharti Cellular Ltd. , Bharat Sanchar Nigam Ltd. (BSNL) , and Hutchison Essar -- will each get 5 MHz, leaving only 5 MHz for the carrier next in line.

The growth of alternative operators like Aircel Ltd. and Idea Cellular Ltd. means there are more players jostling for spectrum, particularly in “circle A” markets like New Delhi and Mumbai, and Bihani pointed to IDEA as one carrier that's been applying for more spectrum in Mumbai for a long time.

With the Telecom Regulatory Authority of India (TRAI) in the process of considering carrier recommendations for 3G spectrum allocation, Bihani predicted the contentious issue of spectrum could “open up a can of worms leading to a lot of litigation.”

Reliance is likely to have better luck in the “C circle” markets where it has applied for licenses, because they still have spectrum available, which Bihani said could be granted within three months. In that scenario, Reliance could begin rolling out a GSM network in September or October, since it already has CDMA infrastructure in place it can use, and then start offering commercial service by January.

Despite the spectrum crunch, Reliance still benefits by focusing on GSM rollout because CDMA carriers are given spectrum in increments of 2.5 MHz, compared with the 5 MHz allotted to GSM operators.

Bihani also noted that GSM services in India have an average customer turnover rate of 6 percent per month -- with a total of 78.5 million GSM subscribers in the country at the end of June, that translates to 4.7 million mobile users always available for rival operators to pick up.

Reliance already holds a 70 percent share of the smaller CDMA market, and the nature of CDMA devices means that subscribers cannot switch networks without also changing handsets, resulting in a lower churn rate. That's particularly the case in developing countries like India, where the price of a mobile handset is equivalent to one or two months' salary.

Although Reliance is still working out its GSM strategy, company executives told Bihani the CDMA network still has capacity for 30 million to 35 million new subscribers, allowing Reliance to shift its capex budget to the GSM network. The carrier intends to reserve the CDMA network for low-end subscribers, and roll out a national GSM network, which Bihani noted will give it a migration path to W-CDMA.

Reliance said “in FY08 it might revise its guidance upward to justify having two networks,” according to Bihani, and while “we thought they would have economies of scale problems” when dealing with two different types of equipment, Reliance expects to save money by making use of parts of its CDMA infrastructure to build out GSM.

— Nicole Willing, Reporter, Light Reading

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