If he bets big, billionaire Mukesh Ambani will emerge from this week`s Indian airwave auction armed with spectrum that could make his Reliance Industries Ltd a formidable rival to market leaders Bharti Airtel Ltd and Vodafone Group PLC .
New Delhi: If he bets big, billionaire Mukesh Ambani will emerge from this week`s Indian airwave auction armed with spectrum that could make his Reliance Industries Ltd a formidable rival to market leaders Bharti Airtel Ltd and Vodafone Group PLC .
Even if he bids modestly, Asia`s second-richest man can walk away with airwaves that would allow his Reliance Jio to compete in the cut-throat Indian market for basic phone services. The company plans to offer 4G services but has yet to launch any.
Neither prospect is attractive for carriers that have been enjoying increasing pricing power after years of razor-thin margins. Shares in India`s biggest cellular carriers lost between 4-7 percent in a single day after Reliance threw its hat in the ring for this week`s auction and have yet to recover.
At the end of the first day of bidding on Monday, the government received $7 billion worth of total bids and looked set to top its minimum target of raising $1.8 billion initially.
"Reliance will get into voice, there is no doubt about that," said Naveen Kulkarni, analyst at PhillipCapital India.
"With Reliance Jio entering, the competition again hots up. That will mean a decline in tariffs. That essentially will mean inability of incumbents to take tariff hikes," he added.
Reliance, which generates most of its $70 billion revenue from energy and refining, returned unexpectedly to telecoms in 2010 by acquiring nationwide 4G permits. It has invested roughly $5 billion in the business to date without seeing a return, to the annoyance of some of its investors.
Reliance has disclosed little about its plans for 4G, but with $14 billion in cash and telecoms in his blood, no one in the industry is taking Ambani lightly.
India is auctioning airwaves in both the 1800 megahertz and 900 megahertz bands, and Reliance has unexpectedly opted to compete for both, sources have said.
Spectrum in the 1800 Mhz range would enable Reliance to offer voice services and improved coverage for its 4G Internet service and bidding for the spectrum is expected to be relatively modest given that there is plenty of it and it is less efficient than the 900 Mhz bandwidth.
The real competition will be for 900 Mhz, which is in short supply and is being auctioned in just three cities, including Delhi and Mumbai, the two most important markets. The stakes are especially high for Vodafone and Bharti which use 900 Mhz, but which will see their rights to it expire in November unless they buy in the auction.
It is possible that all three could end up with 900 Mhz spectrum, but that would mean the valuable bandwidth is divided three ways instead of two. Idea Cellular , India`s No.3 carrier, is also expected to bid for 900 Mhz spectrum.
If Bharti or Vodafone loses out on 900 Mhz in a city where they currently have it, they would need to build costly new infrastructure to remain there.
"What gain it brings to Reliance is a different thing. It causes a big loss to incumbents," said Kulkarni.
Bharti Airtel, the market leader, has more than $9 billion in net debt and would dread an expensive bidding war or the need to rebuild infrastructure in three key cities.
Individual company bids are not disclosed before the end of the auction. Companies need to pay a quarter to a third of the winning price upfront and remainder through 2026.
Prices for 900 Mhz bandwidth in Delhi rose about a fifth from the floor price on Monday. Mumbai`s rose 44 percent and Kolkata`s was higher by 39 percent, signalling an intense fight in the auction that could run into next week.
BACK TO THE FUTURE
Mukesh Ambani founded what is now Reliance Communications , India`s fourth-biggest mobile carrier, but ceded control to younger brother Anil after the bitter 2005 split of the business empire they inherited from their father.
"They have the capability to do anything. Let`s be very clear about it," said B.K. Syngal, who headed a state carrier and worked for Reliance`s telecom business before the split and is now a senior principal at New Delhi-based Dua Consulting.
Reliance did not reply to an email seeking comment on its bidding and spectrum plans.
Reliance Jio plans to offer 4G service based on the TD-LTE standard, which is different from what most western carriers use for 4G, meaning fewer available devices and handsets.
Some observers have questioned the case for a 4G-only network without voice in a market where more than 80 percent of revenue is from basic phone calls. Reliance last year acquired a permit enabling it to provide voice on 4G, but with an untested technology.
The 1800 Mhz spectrum would complement Reliance Jio`s existing 4G LTE technology as there are 4G networks in other countries using that spectrum band. Getting hold of 900 Mhz does not help in 4G for now and would signal a drastic change in approach.
"It doesn`t make any sense to go for the 900 band unless they say we are shifting our strategy and we`ll go for a 3G model," said Pankaj Agrawal, director at telecoms advisory firm Capitel Partners.