Friday, February 08, 2013

UK, Germany lost due to auctions! And India?

3G in India is clearly too expensive on a rational and logical basis

The Indian 3G spectrum auction has finally ended after 34 days, 183 rounds and prices close to US$15 billion. The resulting US$ / MHz / Pop (the standard benchmark) for Mumbai, for example, makes the prices paid in the UK and German 3G auctions look relatively good value. If the prices were adjusted for relative differences in GDP per capita, Indian prices would be off the scale. The prices paid in Germany and the UK in the dying days of the dotcom boom are often said to reflect the “irrational exuberance” of the time but has that same exuberance driven prices in India to irrational levels?

Vodafone in the UK, for example, had been enjoying returns on capital employed (ROCE) of 27% (before tax) in the year preceding the auction. However, after bidding close to GB£6 million for its 3G spectrum the company’s capital employed had to grow from GB£2.7 billion to GB£9.6, an increase of 255% to finance the investment. The result was an overnight fall in the ROCE from an impressive value creating 27% to a below the cost of capital 8%. O2, Orange and T-Mobile all experienced a similar fate with the returns for O2 and Orange falling from 6% to 3% and 19% to 13% respectively. After many false dawns only now, 10 years on, are non-SMS data revenues beginning to have a material impact on the top line but for many operators the contribution is still below 10% of total sales. UK and Germany were clearly cases of irrational exuberance but what about India?

Source : IIPM Editorial, 2012.
An Initiative of IIPMMalay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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