The outcome of India's recently concluded spectrum auction might be seen as a good thing for the government, but it could also be a harbinger of price rises for consumers. Incumbent operators Bharti Airtel, Vodafone India, Idea Cellular and Reliance Communications are expected to gradually increase their tariffs as a means of recovering the $17.5 billion they spent on procuring airwaves. (See Idea, Airtel, Vodafone Splash Out on Indian Airwaves and India's Mega Spectrum Sale Garners $17.5B.)
"This high cost is credit negative for the country's telecom operators because it will increase their debt and costs and reduce their ability to fund future expansion," said global credit rating agency Moody's in a statement.
"Although we expect that the companies will raise tariffs in an effort to recover their spectrum costs, we believe the increases will be gradual, leaving the companies' debt levels bloated for some time," it added.
India has some of the lowest voice tariffs in the world and any increase usually meets with strong resistance from subscribers. Cutthroat competition is a further constraining force on tariffs. Yet Bharti Airtel Ltd. (Mumbai: BHARTIARTL), Vodafone India and Idea Cellular Ltd. all managed to increase voice tariffs in a few circles (or service areas) last year, suggesting that some pricing power was returning to the incumbents.
By strengthening their market positions while weakening their balance sheets, the recent auction could augur further price rises in the coming weeks. In a recent statement, the Cellular Operators Association of India (COAI) argued that service providers would be forced to increase the tariffs by as much as 12% to 15% as a result of auction spending.
"I strongly believe that incumbents are in a position to hike voice tariffs given that regulatory overhang has come down significantly post-auction and the price that almost all incumbents have paid for spectrum is based on internal business cases that assume, for the right reasons, an increase in voice tariffs," says Rohan Dhamija, the head of India and South Asia for consulting firm Analysys Mason.
The situation has evidently changed since operators tried charging a premium for 3G services and were disappointed by the response. This time round, competition has clearly been weakened, with smaller operators failing to procure much spectrum during the auction process.
Even so, various factors will make it hard for operators to increase tariffs as much as they would like. The recent introduction of a calling feature by WhatsApp, a popular instant-messaging application, could prove to be a particular hindrance given WhatsApp's popularity in India. By the end of October, the web player claimed to be serving around 70 million active subscribers in the country.
Meanwhile, competition from Reliance Jio, which aims to build a pan-Indian 4G network, could similarly prevent operators from charging much higher fees for Internet access. "I think the increase in data tariffs will be less significant and the monetization will basically come from increased usage," says Dhamija.
Moreover, a few operators that did not participate in the auction -- or that failed to win any new spectrum -- could also mount a competitive challenge to the main players in specific circles. Those include the likes of Aircel Ltd. in Tamil Nadu.
"The tariff hikes may not be very easy to actually execute, as there would be competitive pressures, especially from the players who are not participating in these auctions," said a recent report from CARE Ratings, a market-research organization. "Furthermore, spectrum price has never been the single most driving factor that decides tariffs."
Operators are likely to pursue a circle-specific strategy when it comes to increasing prices, and that means a particular service provider's tariffs could differ substantially from one circle to the next.
— Gagandeep Kaur, contributing editor, special to Light Reading