3G Economics - Indian Perspective

Posted in Finance Articles, Total Reads: 4784 , Published on 30 October 2010

India is one of the few countries which have not rolled out 3G services to its fullest. Recent auction of 3G spectrum saw Indian telecom companies doling out close to $15 billion as license fees. The numbers may look exorbitant but telecom companies would have estimated its potential while paying so high license fees.

3G -Economics

What is 3G?

3G is a third generation technology for mobile communications which brings to the table advantages like 128 kbps speed when on the move and three times that when stationary. Enhanced audio and video streaming, video conferencing support, IPTV support, web and wap browsing at higher speeds are some of the enhancements over 2G.

The biggest question to be asked is whether such high investment by Indian telcos will fetch high returns. If potential of 3G is considered, then there are 600 million mobile users of India waiting to be tapped. But the question to be asked is how many of them will be using 3G services.  India has fewer than nine million wireline broadband connections measured by the government’s definition of “anything above 256 kbps is broadband”. By such yardstick India has 200,000 truly broadband connections. This presents huge opportunity for 3G networks. The weakness of wireline broadband service could be one of the determining success factors for 3G services.


The countries telecom operator estimates 177 million people access the internet through mobile devices of which 30 million do so as often as at least a week. A small growing segment of 10 million users use high speed internet through wireless USB. Back of the envelope calculation suggests that there are approximately $200 million who are 3G ready. If we assume telcos which have already spent around $15 billion in license fees, will spend another Rs 2.5 trillion to set up 3G equipment and networks. Assuming they will sign up all 3G ready 200 million customer and have them spend Rs 100 on data alone the industry will have to wait for 14 years and six months. To put things into perspective, the average revenue per user in India is Rs 120. So in order to recover their investments, the telecom companies will have to charge these services at a premium which will make these services affordable to only elite class.  So technology is ready to offer 3G services but what is more important is delivery of these services at affordable price.  It comes down to game of economics rather than technology.

Another issue is the price of 3G enabled handset. The proliferation of 3G service will depend on price of 3G handsets. Considering the price of 2G handsets spiralled downwards as the industry matured, same can be assumed for 3G handsets. But the high price of 3G handsets at present puts entry barrier for the average Indian user to enter this market. The telecom operators will have to understand the difficulties of profitably operating a 3G business. Charging for network usage and access gets commoditised and loses premium very quickly but charging for services delivered on the network makes lasting premium, even if it is a slightly difficult business model to execute.

It clearly remains to see when these services will take off in India. Will the economics of 3G restrict it to a pocket of users or will it be initially for the rich till that one operator comes along and slashes price for everyone to follow the suit. Only time will tell.


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