Right in the middle of the 3G auction, the government announced that 2G operators having more than 6.2MHz of spectrum will have to pay spectrum fees decided based on 3G auction prices. This announcement makes absolutely no sense - it will spell the end of the mobile revolution in India - because 2G operators would be forced to jack up prices. And if prices are jacked up, then we wont see 20M mobile users per month being added.
The reason why Indian operators are able to succeed at such low costs, is because they dont care about ARPU - they just care for overall revenues to be high, which they acheive by increasing penetration. In the current scheme of things, license costs are a percentage of revenue - 10%, 8% and 6% of revenues depending on the circle. So as long as the fixed costs are covered by the revenue, operators are profitable. But the moment they are forced to pay massive costs for spectrum, this model will not be viable - the amount of revenue they have to make to get profitable would go up dramatically. This means they can no longer be ambivalent about falling ARPU - they would be forced to increase ARPU. At higher ARPUs, significant number of customers would be priced out of the market.
Quite obviously, this is a bad policy for the government to adopt - so the only reason they are doing this, is because this will make 3G spectrum more valuable. If 2G operators ANYWAY have to pay for the spectrum at the same rates as the 3G spectrum, they might as well bid for 3G spectrum - so operators who chickened out of bidding at the higher levels would now consider bidding for 3G.
I expect that soon after the auction concludes, we will see a rethink by the government, and they will leave 2G spectrum pricing untouched. But the winners of the 3G spectrum would be in trouble, because they would have already bid extremely high for 3G spectrum, and cant back out just because 2G spectrum is not being charged for!
At these high prices, the 3G winners would find that they have to price 3G data access prohibitively high - and will not be able to attract large number of customers for 3G, and so they are stuck in a very unprofitable situation. If they price it low, they can attract a lot of customers, but they might still find it difficult to service the debt that they took on to bid for the 3G spectrum.
In a lot of ways, this is similar to killing the goose that lays the golden eggs.
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