10 Carriers, No Calling Party Pays, Towers must be shared, Annual Spectrum Charges
Indian mobile rates are often a rupee or less per minute, or about two cents, so far below U.S. and European rates that lower wages can't explain most of the difference. The result is almost nine million news users per month, passing 300M as this issue goes out. It's been one of the drivers of India's continuing 10% growth rate, just as the 8M adds each month are one of the props for China's high growth.
In the coming 3G auctions, they will provide 5 slots in much of the country, with plans to eventually provide spectrum to 10 carriers. (Bloomberg)Unlike in the U.S., where the big carriers have dominated the market by buying out the smaller ones, there are limits on buying out Indian companies, especially for the new foreign entrants. Despite competition twice as fierce as in their home countries, AT&T, Verizon, NTT DoCoMo and Deutsche Telecom are ready to bid. Strong competition works.
A second reason the U.S. is lower and India lower in turn is that Europe maintains termination charges (calling party pays.) Cambridge Professor S C Littlefield points out “termination charges reflect monopoly power created by the Calling Party Pays principle”
Customers have a choice in carriers, allowing the market to affect prices. The carriers, however, do not have alternate routes to reach your phone. They must pay whatever your carrier chooses to charge, a “terminating monopoly.” That allows Vodafone or France Telecom to charge more just to receive the call than the total cost of similar minutes in the U.S. While in a theoretically perfect economy, things work out in the long run, telecom markets in the U.S. and Europe are very far from perfect. Robert Pepper and Mike Powell were absolutely right that “bill and keep” lowers rates. Kevin Martin voted against it, possibly essential to getting the job as Chairman. I had it wrong as well, one of my worst errors in analysis. I simply didn't understand the enormous cost of the termination charge.
Another way to guarantee competition, especially in rural areas, is to share infrastructure. BSNL is required to share space on their rural towers with three other companies. The result intended is four companies fighting for customers where otherwise a second might not come. Mandatory sharing of inter-exchange fiber is one reason Japan jumped ahead in broadband. Sharing also avoids wasteful duplicate builds, something the still-poor country can not afford. Ron Dykes, then CFO of BellSouth, pointed to the enormous savings from facility sharing. “We saved hundreds of millions of dollars doing a joint build with AT&T Wireless (then independent.) That's New York City alone.” He added “that's an important reason Cingular doesn't need to buy AT&T Wireless. We can capture most of the savings just working together.” Dykes wasn't wrong about the savings, but underestimated the value of taking a competitor out of the market. If AT&T Wireless and Nextel were still independent, the “headline price” of a U.S. monthly package might be $29.95 a month now instead of $39.95. 255 million in the U.S. spent $139B in 2007 on mobile. If competition made a 5% or 10% difference, the result is not small.
India charges many carriers each year for the spectrum they use, which should have the effect of bringing down the auction prices. Companies would need to adjust their bids down in the auction, but the return to the government and taxpayers should be significantly higher. In most countries, the government can borrow money at less than any companies can. The companies need to account for their higher borrowing costs in their bid. In effect, asking for companies for the money upfront is just an expensive way for the government to borrow money, unless the companies involved can borrow at a much lower cost than the government itself.
More companies can bid at the lower (upfront) requirement. Only two companies bid for the U.S. “D” block, Google and Verizon, and Google pulled out after one round. To even get into the game, you had to put $5B on the table, and expect the national buildout to cost another $5B. The interest on that money until breakeven (easily 4-6 years) and the inevitable losses while coming to scale takes the ante to $12-15B. That's a heck of a lot of money to raise ito be the fifth or sixth competitor. The earlier U.S. auctions allowed payments over time and brought in more new entrants. A quirk in the bankruptcy laws cost the government $billions on Nextel, but more careful regulations could have avoided that.
If limiting competitors keeps rates high, then mobile phone users will pay more. Since mobile phone users include most of the population, that makes higher phone costs effectively a “tax.” In the U.S., the additional net from allowing Verizon to bid on the D-block was almost surely less than the added costs to the American taxpayers in higher mobile bills. That's a corporatist strategy, not a free market one. Jim Prentice in Canada was more dedicated to free market principles, preventing the incumbents from buying all the spectrum. The result will be most Canadians will soon have 5 instead of 3 major mobile choices. (Despite that, the auction still raised far more than expected. On the spectrum that was open for their bidding, Bell and Rogers bid as much as necessary to get others out.
Lower upfront costs are particularly important in poorer countries, because the high payments involved force up minimum prices, Rahul Tongia believes. He calculates that the upfront payment for a mobile license in Egypt requires monthly rates that are unnecessarily high.
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