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Vodafone to pay for over-valued market rate

India's 3G licence bidding frenzy results in a big back-dated bill for Vodafone

Posted By Martyn Warwick , 13 May 2010 | 0 Comments | (0)
Tags: mobile Regulation Finance Insanity

The 3G licence bidding farrago that is convulsing the Indian mobile sector is now having a knock-on effect overseas. The latest to be buffeted by the backwash is Vodafone. The UK-headquartered mobile network operator is about to be slapped with an additional and retrospective bill of up to £1 billion for the use the company has already made of spectrum granted to it by an earlier 2G licence. Martyn Warwick explains.

Back in 2007, Vodafone's then chief executive Arun Sarin made expansion into emerging markets a central plank in his corporate development platform. Thus he spent some £4.5 billion in buying a controlling share in the India mobile operator Essar.

At the time it was applauded as a canny move but since then India's mobile sector has become one of the most viciously competitive on the planet with operating costs accelerating up and away and into the stratosphere. The retail cost of a mobile call in India is now less than one penny per minute and is actually continuing to fall. The mobile operators are thus betting their shirts and the their company's futures on a gamble that 3G will be so popular that they'll not only recoup the insane costs of their licence fees but will actually be able to ramp up prices for services in applications. And this in one of the poorest countries on earth where ARPU is tiny and shrinking. So, the industry is locked in a mad buying frenzy as players vie (and massively overbid) to get their hands on a 3G licence. Dream on, I say, but they are going to wake up to a nightmare.

Meanwhile, the Indian government is, of course, laughing all the way to the bank but there's mighty trouble looming for the mobile companies. Corporate collapses, bankruptcies and sectoral consolidation are certain in due course because the entire auction process (bidding for 3G licenses now tops the £3 billion mark and shows little sign of slowing) is out of control. Twenty-six days ago the lunatics took over the asylum.

They show no signs of vacating the premises.

And now, the India telecoms regulator, determined to wring the last rupee out of anyone anywhere near the mobile arena has decided that what it calls "the larger networks (this is code for Vodafone Essar and Bharti Airtel) must pay "market rates" for the spectrum they use to provide their 2G services. And the regulator says market value is determined by the sums being bid for 3G licenses!

Absolute insanity - and it's contagious. The bids being tendered are ludicrous, the greed being exhibited by the regulator and government are shameful and egregious and the mobile market is being distorted out of all recognition. They are killing the goose that lays the golden egg and sooner or later they are going to regret it.

So, back in Blighty, Vodafone can now expect a hefty retrospective bill to land on the doormat - and the company will still have to pay its annual licence fee.

Martin Pieters, the chief executive of Vodafone Essar, says: “The telecoms industry has seen very little revenue growth in the past six quarters and has been impacted by unprecedented price wars. Against this context, it is extraordinary that it is now proposed that the industry should pay additional unjustified fees.”

For its part, Bharti Telecom says the regulator has gone mad and the net result of its back-dated demand will be to destroy value and push players off the field.

However, the Indian government is licking its chops and is reclining on its divan watching the cash roll in. Not only is it not acting to bring the market contagion under some control, they are aloowing it to let rip and then - get this - once the 3G nonsense ends is going to set up another auction to flog-off wireless broadband services.


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