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Telecom
India
3G ICR ban – tangible impact: negligible, sentiment impact: priceless. News flow
suggests that the Department of Telecom (DOT) has asked operators to terminate their
3G ICR arrangements with immediate effect. We see negligible tangible financial
impact of this ruling on operators at the EBITDA level. Nonetheless, aggressive stance
adopted by the incumbents on this issue (‘allow 3G ICR or take 3G spectrum back‘) is
bound to impact sentiments.
What is ICR or intra circle roaming?
Before getting into the implications of 3G ICR ban, we try and explain what 3G ICR is by
comparing it to normal (inter circle) roaming –
Normal (inter circle) roaming – allows an operator’s subscribers to connect to another
operator’s network outside his home circle. For example, let’s say operator A has a commercial
network in circle 1 and does not have one in circle 2. A normal inter-circle roaming
arrangement would allow operator A’s subs in circle 1 to connect to another operator’s
network in circle 2 when they travel to circle 2.
Intra-circle roaming (ICR) – allows an operator to offer commercial services (sell own-branded
connections in other words) in a circle where it does not have its own network. Continuing with
the above example, ICR arrangement with another operator would allow operator A to sell
connections to subs in circle 2, where it does not have its own network.
To illustrate with a practical example, normal roaming would allow Idea’s 3G subs in let’s say
Kerala to roam on Vodafone’s network in Mumbai (where Idea does not have 3G spectrum,
Vodafone does). ICR allows Idea to sell ‘Idea 3G connections’ to subs in Mumbai.
We have been amused with incumbents’ aggressive stance on 3G ICR
Principle-based objection to DOT’s stance on 3G ICR aside (more on this later in the note), we have
been struggling to understand the aggressive stance adopted by the incumbents on the issue. We
explain our view with a simple example.
Let’s say there are two operators (A and B) and two circles (1 and 2). These operators competed
for 1 block of 3G spectrum in each circle. Operator A won spectrum in circle 1, while operator 2
won it in circle 2. Here’s how the consumer surplus (you can define surplus as revenues, EBITDA or
FCF) from 3G would look like in a non-ICR regime
3G surplus (operator A, circle 1) = data surplus (own subs converted to 3G) + voice surplus
(operator B’s subs switching to A for 3G) + data surplus (operator B’s subs switching to A). Let’s
call this surplus (A, 1)
3G surplus (operator B, circle 1) = (-) voice surplus (operator B’s subs switching to A for 3G).
Let’s call this surplus (B, 1)
Total system surplus in circle 1 = surplus (A, 1) + surplus (B, 1) = data surplus (A, 1, converted) +
data surplus (switched from B, 1).
On similar lines, total system surplus in circle 2 would be surplus (A, 2) + surplus (B, 2) = data
surplus (B, 2, converted) + data surplus (switched from A, 2).
Total surplus for operator A = system data surplus (circle 1) + voice surplus (switched from B,
1) – voice surplus (switched from A, 2). Total surplus for operator B = system data surplus
(circle 2) + voice surplus (switched from A, 2) – voice surplus (switched from B, 1). In
essence, operator A gains from own sub conversion and competitor’s subs switching in circle
1, while operator B gains from own sub conversion and competitor’s subs switching in circle
2. Total system surplus across the two circles = system data surplus (circle 1) + system data
surplus (circle 2).
Now, in an ICR scenario, here’s how 3G surplus would build up
3G surplus (operator A, circle 1) = data surplus (own subs converted to 3G)
3G surplus (operator B, circle 1) = data surplus (own subs converted to 3G)
Total system surplus (circle 1) = data surplus (A, 1, converted) + data surplus (B, 1,
converted)
3G surplus (operator A, circle 2) = data surplus (own subs converted to 3G)
3G surplus (operator B, circle 2) = data surplus (own subs converted to 3G)
Total system surplus (circle 2) = data surplus (A, 2, converted) + data surplus (B, 2,
converted)
Total system surplus = system surplus (circle 1) + system surplus (circle 2).
We see little tangible impact of 3G ICR ban on financials and/or valuations
The whole purpose of the above-detailed surplus discussion is that the total system
surplus in both ICR and non-ICR scenarios is the same IF subscribers who want 3G
switch for 3G. In case they do not, system generates lower 3G surplus – this is
probably what the incumbents’ aggressive stance on 3G ICR is suggesting – it is a
tacit admission that enough subs are not switching for 3G and hence, it is better to
share and accelerate 3G growth.
Essentially, each individual operator gains in some circles and loses in some others from ICR
arrangements. However, higher (or accelerated, if one assumes any sub who wants 3G
would make the switch at some point) 3G market growth makes it a valuable proposition
for everyone to share spectrum and grow the market larger. We have always believed that
ICR is at best a short-term measure to accelerate 3G adoption. Hence (1) our surprise at the
incumbents making it sound like a ‘life or death’ issue, and (2) our view that 3G ICR ban has
little, if any, tangible impact on financials or valuations.
The ban does impact the ‘already-negative-on-regulations’ sentiments, though
Notwithstanding the incumbents’ stance which suggests 3G ICR is critical to their fortunes,
we see 3G ICR ban a non-event on balance (in isolation i.e.; the operators could be thinking
of deriving some benefits in future auctions, with this as the precedent – we do not know).
The ban does serve as another ‘anti-incumbent’ regulatory development, worsening the
negative sentiment on regulations. This was evident in the Street’s immediate reaction to the
3G ICR ban news flow – the event, even if viewed as negative, was sure not negative to the
tune of the US$1 bn+ downtick in Bharti’s market cap seen intra-day. PV of 3G ICR for a
Bharti is nowhere in the vicinity of US$1 bn, even with the most benign set of assumptions.
Also, more importantly, the 3G ICR ban can be seen as policy inconsistency by the DOT. In
response to various queries in the pre-3G-auction Q&A session, the DOT had indicated that
ICR was a licensing issue and hence, any rules applicable to 2G ICR would remain the same
in case of 3G. This interpretation also forms the basis on the principle-based and likely legal
arguments of the operators. We discuss this in little more detail below.
A word on the ‘legality debate’
As mentioned above, operators are in the right on the interpretation that DOT’s response to
some of the questions in pre-3G auction Q&A note suggested that 3G ICR would be
permitted. We reproduce these questions from the 3G Q&A document in Exhibit 1.
We do believe that comparison with 2G ICR is not strictly like-on-like. In nearly all cases, 2G
ICR is being used by operators in circles where they have been allotted 2G spectrum already.
2G ICR is primarily being used for faster time-to-market and/or filling coverage holes. Also,
operators employing 2G ICR have to fulfill their roll-out obligations separately. We note that
2G ICR has not been employed by any operator to roll out commercial 2G services in circles
where they do not have 2G spectrum – for example, a TTSL or Uninor has still not rolled out
2G GSM services in the Delhi circle.
What happens now? Is there a near-term financial impact, however marginal?
Operators now have the choice of appealing against DOT’s order in the TDSAT and
subsequently the Supreme Court. Implementation of the order would have to be immediate,
unless the operators get a stay order from the TDSAT. Implementation of the order would
clearly inconvenience subscribers who had taken 3G connections from operators without 3G
spectrum in a particular circle.
We believe EBITDA-level impact of this move would be marginal for most operators. It would
however impact revenue as well as cost estimates built into the numbers as ICR revenues
and ICR costs both go down. If the operators do not accrue ICR revenues and costs in
3QFY12E, we believe both RPM and CPM could be 0.5-1 paise/min lower for Bharti and Idea,
leaving EBITDA per min broadly unchanged.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Telecom
India
3G ICR ban – tangible impact: negligible, sentiment impact: priceless. News flow
suggests that the Department of Telecom (DOT) has asked operators to terminate their
3G ICR arrangements with immediate effect. We see negligible tangible financial
impact of this ruling on operators at the EBITDA level. Nonetheless, aggressive stance
adopted by the incumbents on this issue (‘allow 3G ICR or take 3G spectrum back‘) is
bound to impact sentiments.
What is ICR or intra circle roaming?
Before getting into the implications of 3G ICR ban, we try and explain what 3G ICR is by
comparing it to normal (inter circle) roaming –
Normal (inter circle) roaming – allows an operator’s subscribers to connect to another
operator’s network outside his home circle. For example, let’s say operator A has a commercial
network in circle 1 and does not have one in circle 2. A normal inter-circle roaming
arrangement would allow operator A’s subs in circle 1 to connect to another operator’s
network in circle 2 when they travel to circle 2.
Intra-circle roaming (ICR) – allows an operator to offer commercial services (sell own-branded
connections in other words) in a circle where it does not have its own network. Continuing with
the above example, ICR arrangement with another operator would allow operator A to sell
connections to subs in circle 2, where it does not have its own network.
To illustrate with a practical example, normal roaming would allow Idea’s 3G subs in let’s say
Kerala to roam on Vodafone’s network in Mumbai (where Idea does not have 3G spectrum,
Vodafone does). ICR allows Idea to sell ‘Idea 3G connections’ to subs in Mumbai.
We have been amused with incumbents’ aggressive stance on 3G ICR
Principle-based objection to DOT’s stance on 3G ICR aside (more on this later in the note), we have
been struggling to understand the aggressive stance adopted by the incumbents on the issue. We
explain our view with a simple example.
Let’s say there are two operators (A and B) and two circles (1 and 2). These operators competed
for 1 block of 3G spectrum in each circle. Operator A won spectrum in circle 1, while operator 2
won it in circle 2. Here’s how the consumer surplus (you can define surplus as revenues, EBITDA or
FCF) from 3G would look like in a non-ICR regime
3G surplus (operator A, circle 1) = data surplus (own subs converted to 3G) + voice surplus
(operator B’s subs switching to A for 3G) + data surplus (operator B’s subs switching to A). Let’s
call this surplus (A, 1)
3G surplus (operator B, circle 1) = (-) voice surplus (operator B’s subs switching to A for 3G).
Let’s call this surplus (B, 1)
Total system surplus in circle 1 = surplus (A, 1) + surplus (B, 1) = data surplus (A, 1, converted) +
data surplus (switched from B, 1).
On similar lines, total system surplus in circle 2 would be surplus (A, 2) + surplus (B, 2) = data
surplus (B, 2, converted) + data surplus (switched from A, 2).
Total surplus for operator A = system data surplus (circle 1) + voice surplus (switched from B,
1) – voice surplus (switched from A, 2). Total surplus for operator B = system data surplus
(circle 2) + voice surplus (switched from A, 2) – voice surplus (switched from B, 1). In
essence, operator A gains from own sub conversion and competitor’s subs switching in circle
1, while operator B gains from own sub conversion and competitor’s subs switching in circle
2. Total system surplus across the two circles = system data surplus (circle 1) + system data
surplus (circle 2).
Now, in an ICR scenario, here’s how 3G surplus would build up
3G surplus (operator A, circle 1) = data surplus (own subs converted to 3G)
3G surplus (operator B, circle 1) = data surplus (own subs converted to 3G)
Total system surplus (circle 1) = data surplus (A, 1, converted) + data surplus (B, 1,
converted)
3G surplus (operator A, circle 2) = data surplus (own subs converted to 3G)
3G surplus (operator B, circle 2) = data surplus (own subs converted to 3G)
Total system surplus (circle 2) = data surplus (A, 2, converted) + data surplus (B, 2,
converted)
Total system surplus = system surplus (circle 1) + system surplus (circle 2).
We see little tangible impact of 3G ICR ban on financials and/or valuations
The whole purpose of the above-detailed surplus discussion is that the total system
surplus in both ICR and non-ICR scenarios is the same IF subscribers who want 3G
switch for 3G. In case they do not, system generates lower 3G surplus – this is
probably what the incumbents’ aggressive stance on 3G ICR is suggesting – it is a
tacit admission that enough subs are not switching for 3G and hence, it is better to
share and accelerate 3G growth.
Essentially, each individual operator gains in some circles and loses in some others from ICR
arrangements. However, higher (or accelerated, if one assumes any sub who wants 3G
would make the switch at some point) 3G market growth makes it a valuable proposition
for everyone to share spectrum and grow the market larger. We have always believed that
ICR is at best a short-term measure to accelerate 3G adoption. Hence (1) our surprise at the
incumbents making it sound like a ‘life or death’ issue, and (2) our view that 3G ICR ban has
little, if any, tangible impact on financials or valuations.
The ban does impact the ‘already-negative-on-regulations’ sentiments, though
Notwithstanding the incumbents’ stance which suggests 3G ICR is critical to their fortunes,
we see 3G ICR ban a non-event on balance (in isolation i.e.; the operators could be thinking
of deriving some benefits in future auctions, with this as the precedent – we do not know).
The ban does serve as another ‘anti-incumbent’ regulatory development, worsening the
negative sentiment on regulations. This was evident in the Street’s immediate reaction to the
3G ICR ban news flow – the event, even if viewed as negative, was sure not negative to the
tune of the US$1 bn+ downtick in Bharti’s market cap seen intra-day. PV of 3G ICR for a
Bharti is nowhere in the vicinity of US$1 bn, even with the most benign set of assumptions.
Also, more importantly, the 3G ICR ban can be seen as policy inconsistency by the DOT. In
response to various queries in the pre-3G-auction Q&A session, the DOT had indicated that
ICR was a licensing issue and hence, any rules applicable to 2G ICR would remain the same
in case of 3G. This interpretation also forms the basis on the principle-based and likely legal
arguments of the operators. We discuss this in little more detail below.
A word on the ‘legality debate’
As mentioned above, operators are in the right on the interpretation that DOT’s response to
some of the questions in pre-3G auction Q&A note suggested that 3G ICR would be
permitted. We reproduce these questions from the 3G Q&A document in Exhibit 1.
We do believe that comparison with 2G ICR is not strictly like-on-like. In nearly all cases, 2G
ICR is being used by operators in circles where they have been allotted 2G spectrum already.
2G ICR is primarily being used for faster time-to-market and/or filling coverage holes. Also,
operators employing 2G ICR have to fulfill their roll-out obligations separately. We note that
2G ICR has not been employed by any operator to roll out commercial 2G services in circles
where they do not have 2G spectrum – for example, a TTSL or Uninor has still not rolled out
2G GSM services in the Delhi circle.
What happens now? Is there a near-term financial impact, however marginal?
Operators now have the choice of appealing against DOT’s order in the TDSAT and
subsequently the Supreme Court. Implementation of the order would have to be immediate,
unless the operators get a stay order from the TDSAT. Implementation of the order would
clearly inconvenience subscribers who had taken 3G connections from operators without 3G
spectrum in a particular circle.
We believe EBITDA-level impact of this move would be marginal for most operators. It would
however impact revenue as well as cost estimates built into the numbers as ICR revenues
and ICR costs both go down. If the operators do not accrue ICR revenues and costs in
3QFY12E, we believe both RPM and CPM could be 0.5-1 paise/min lower for Bharti and Idea,
leaving EBITDA per min broadly unchanged.
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