Aggressive price wars that pushed some calls below a penny per minute in India may be catching up with wireless carriers.
Mountains of debt could hinder their bidding for airwaves in next month's auction, potentially blowing a $74 billion hole in the government's plans. One operator already said it will sit out the sale starting Sept. 29, and some competitors likely won't spend on certain wavelengths.
India plans its biggest sale of the spectrum that can reduce buffering on videos and speed up downloads for 1 billion-plus users in the world's second-largest smartphone market. The government wants to raise 5.6 trillion rupees ($83 billion), yet companies may bid only a small fraction of that because they bought bandwidth the past two years and need cash to fend off billionaire Mukesh Ambani's newest venture.
"We believe that the spectrum auction is going to be a failure," said Chris Lane, a Hong Kong-based analyst for Sanford C. Bernstein. "Overall, we don't see carriers bidding like they did in previous years."
The nation's 12 wireless companies carry more than $61 billion in debt, and their average revenue per user is declining as customers replace voice calls with apps that use data plans, according to company earnings. That total debt increased 41 percent since March 2014, according to credit rating agency ICRA Ltd.
Phone calls already are the cheapest among the world's major economies, Lane said, averaging about 2 cents a minute now after dropping below 1 cent.
Further price cuts loom as Ambani's Reliance Jio Infocomm Ltd. prepares to begin commercial operations, touting a network offering only fourth-generation, or 4G, service. Jio has spent at least 1.5 trillion rupees on coverage across the nation. The company declined to comment concerning the auction.
In anticipation, carriers including Bharti Airtel Ltd., the nation's largest, and Idea Cellular Ltd. slashed data charges. Some also added spectrum after the government eased rules to allow sharing or trading in airwaves.
"Carriers are stuck in a hard place," said Suniil Pachisia, vice president at brokerage Pratibhuti Viniyog Ltd. in Mumbai. "With the entry of another operator, the price wars may get fiercer, and carriers may not want to put more money on spectrum but rather on ensuring their survival."
As a result, carriers may spend just 650 billion rupees, or $9.7 billion, in the upcoming auction, ICRA estimated.
That doesn't bode well for the government, which needs money for salary increases taking effect this month. A payout of about 849 billion rupees is due to 10 million workers and pensioners, and Prime Minister Narendra Modi's administration expects about 31 percent of non-tax revenue to come from communication services in the fiscal year through March.
An auction falling short of expectations would tighten the squeeze on what is Asia's widest budget deficit, according to data compiled by Bloomberg.
Last year's auction generated $18 billion, and one held in 2014 raised $9.8 billion.
"Carriers have already accumulated debt from bidding in past auctions," said Harsh Jagnani, vice president for corporate ratings at Gurgaon, India-based ICRA. "If they bid for more spectrum, it will increase their indebtedness and that will constrain their financial flexibility."
This year's auction covers seven bandwidths -- from 700 megahertz to 2,500 megahertz -- and could increase available spectrum by about 55 percent. Lower frequencies improve coverage range and penetration, while higher frequencies such as 2,300 megahertz and 2,500 megahertz have greater capacity to carry data, making them good for more intensive applications and videos.
Half the money the government wants to raise is through the sale of 700 megahertz spectrum, which supports voice calls over LTE networks.
Yet there may not be any buyers because the government set reserve prices too high, Lane said. The government's price for that band is quadruple the price of the 1,800 megahertz frequency, making it unaffordable for indebted carriers.
Idea Cellular, the third-biggest carrier, is cautious about bidding after responding to Ambani's challenge by offering as much as 54 percent more data for the same price. The company views the auction as a way to upgrade its coverage and add customers.
"You've got such a large competitor coming in with such deep pockets that it's bound to shake up the industry," Idea's billionaire chairman, Kumar Mangalam Birla, said in an Aug. 11 interview. "We're hoping that we'll fill in the gaps that we have in our spectrum but one has to wait and see what auction prices are like."
Telenor ASA, which ranks eighth among carriers, won't bid because proposed spectrum prices "do not give an acceptable level of return," the Oslo-based company said in its second-quarter earnings report July 19.
Improving coverage is crucial as more Indians text, watch videos, shop and bank via their mobile phones. India will have an installed base of 600 million smartphones by 2020, International Data Corp. estimates.
Smartphone shipments in India increased by 15 percent in the second quarter from a year earlier, compared with 3 percent globally, according to Counterpoint Research.
Some carriers already topped up on spectrum before the auction. In March, Bharti Airtel announced it was acquiring airwaves from a unit of Videocon Industries Ltd. in six areas, and a month later followed with a deal with Aircel Ltd. for spectrum in eight areas. Bharti Airtel declined to comment on the upcoming auction.
"We've moved from a spectrum shortage to a spectrum glut," Himanshu Kapania, chief executive officer at Idea Cellular, said at an Aug. 9 earnings press conference.
Yet not all carriers are sitting out. Vodafone, India's second-largest, may be the biggest spender at the auction. The carrier, which is preparing to go public, may spend as much as 163 billion rupees, Bernstein estimated, to boost scanty 4G service.
The carrier will bid for spectrum, Sunil Sood, the managing director of Vodafone India, said without elaborating.