Foreign mobile operators including Etisalat will have a tough time making a go of it in India unless its regulator eases restrictions on acquisitions and roaming, industry experts say. India is the second fastest-growing mobile market in the world behind China, with a record 20.3 million new users added in March, figures from the Cellular Operators Association of India (COAI) show. The world's second-most populous country had 621.28 million mobile subscribers as of last month, about one account for every two Indians.
But the country's fragmented market - with up to 17 operators offering mobile service in a single area - makes it difficult for the companies to build up the scale they want, much less make a profit. India's auction of the promising 3G spectrum earlier this month did not change the outlook despite the rich bidding. No bidder landed a nationwide presence. It wasn't for lack of cash. The bids totalled 677 billion rupees (Dh53.22bn), almost double the amount industry observers had forecast. The auction's big winners were Bharti Airtel, Reliance Communications and Vodafone Essar.
The auction results highlight the potential of the market despite low demand for 3G services, said Bhupendra Kumar Modi, the chief executive of Spice Group, a major mobile phone maker and retailer in India. "3G will be a destructive technology," he said. "You have Vodafone, for example, with half of India and they will destroy the 2G [spectrum] players. But in the areas they do not have 3G, they will be the ones who will be destroyed."
The 3G spectrum allows mobile operators to offer more lucrative services, including internet access, than the older 2G band. Analysts and the companies themselves expect that without national providers, industry consolidation is inevitable. But there are obstacles. What is currently preventing operators from making money "is that there are stringent restrictions on acquisitions for new operators and how spectrum can be shared", said Rahul Matthan, the telecoms partner at Trilegal, an Indian law firm.
"There is the potential for operators to hoard spectrum and increase the value of spectrum. Lots of spectrum is underutilised of which the value could be unlocked." There are other signs of instability in the market, such as weak pricing. Average monthly mobile spending in India fell 3.4 per cent to 150.23 rupees for the first quarter of the year from the previous three months, according to COAI. And the mobile rates offered by new entrants such as Etisalat continue to fall as they battle to establish themselves.
The falling prices mean the Indian government must fine-tune its regulation to spur competition between incumbents as well as new entrants through roaming agreements and acquisition legislation, said Andrew Sharpe, a telecoms partner for the law firm Charles Russell in Bahrain. "[Operators] crippled themselves by choosing an auction where gaming theory teaches us that the main players will bid loads of money," he said.
"The question is how good is the regulator going to be at regulating how competition works in all these different regions." Mr Matthan believes the authorities will act promptly. "There has been considerable movement in the government in the past six months to take a close look at [merger and acquisitions] restrictions and in the next three years, probably regulations will be introduced." The outlook for Etisalat, which operates in India under the Cheers Mobile brand, remains mixed.
The operator did not win any spectrum after India's 3G auction bidding passed the US$2bn (Dh7.34bn) mark, so the money it did not spend in India can be invested elsewhere or on another acquisition, said Irfan Ellam, a telecoms analyst with Al Mal Capital. Mohammed Omran, the chairman of Etisalat, has said for years the company wanted to be a big player in India and would use acquisitions to fuel its growth there.
But Mr Modi, an industry veteran who sold off his mobile operations based in the states of Punjab and Karnataka for 27bn rupees in June 2008, disagrees. Without any 3G spectrum, Etisalat's days in India are numbered, he said. "They paid a high price for their 2G," Mr Modi added. "They wanted to come into the market so badly that they wound up paying a premium for their licence. Now, without any 3G, they'll have a tough time."
dgeorgecosh@thenational.ae