3G launch in India faces uncertainty

Back in August 2007, when India announced plans to auction off licenses for superfast 3G phone service, the country's mobile-phone companies cheered. It was at a time their stocks were at all-time highs as more than 8 million new customers signed up every month. These companies thought, 3G would surely make them richer, faster.

Now, after several delays, the auctions are likely to take place in coming months, perhaps as soon as March. The reaction of India's mobile carriers? More fear than cheer. While the government still hopes to collect a total of $5.5 billion for four national and 22 regional licenses, a price war has driven calling rates to well under 1 paise per second, slowing the industry's profit growth and denting stock prices. Carriers will need cash to bid on spectrum, and building a nationwide network will cost each as much as $4 billion. "Operators need to be realistic and not overbid," says an analyst.

The 3G track record doesn't inspire confidence. In Europe, overbidding nearly bankrupted many operators. India's state-owned BSNL, which the government allowed to launch 3G a year ago, now offers service in 300 cities, has just 700,000 customers, and has cut tariffs at least twice. BSNL's 3G record certainly doesn't encourage rivals.

While market leader Airtel with 116 million customers is eager to offer 3G to the Indian masses an executive within the company grumbles, "now we have to spend billions of dollars on a network that 2% of the country will use?" It's not like everybody in a village is carrying a BlackBerry".

The auctions may lead to consolidation and greater foreign control of India's cellular business. The top three operators hold just over half the market, while dozens of smaller players scramble for the rest. Foreigners, meanwhile, are eager to buy in. In 2008, Japan's DoCoMo paid $2.7 billion for 26% of Tata Teleservices, the country's No. 4 operator, and Russia's MTS bought 74% of Shyama TeleServices. Norway's Telenor took an interest in another small player last year.

To raise cash for the auctions, Essar Group, which owns a third of No. 2 carrier Vodafone Essar, is in talks to sell an antenna tower subsidiary to Boston-based American Tower for $420 million. Aircel, a smaller player controlled by Malaysia's Maxis Communications, on Jan. 14 sold 17,500 of its towers to a Mumbai company for $1.8 billion. Idea Cellular, the third-largest carrier, says it has raised $2 billion in cash and loans for the auction―a move designed in part to squelch rumors that the company may be a takeover target.

Most Indians seem content to use phones for voice calls and texting. Only 40,000 or so iPhones are being used in the country, and smartphones make up well under 5% of the handset market, India's government estimates. Of India's 530 million-plus subscribers, only 2 million regularly use the mobile Net, mostly to download pictures of cricket players and Bollywood stars, according to the Internet & Mobile Association of India, a trade group.