Call it the great 3G spectrum rip off. Or call it a short-sighted bid to garner money for the government. Howsoever mobile services companies see it, one thing is clear -- a huge controversy has erupted, with the mobile services industry split down the middle.

The bone of contention? Should the government charge mobile services companies for providing 3G (short for third generation) spectrum (or the airwaves through which mobile phone services are provided -- in this case, mobile services which will offer high speed Internet services and data services)? Or should spectrum be free?

The row broke out a fortnight ago when Tata group chairman Ratan Tata shot off a letter to Communications Minster Dayanidhi Maran urging that 3G spectrum should be paid for.

Tata said that the Tata group would be willing to fork out Rs 1,500 crore (Rs 15 billion) for spectrum. Alternatively, the venerable Tata suggested, this scarce resource could be auctioned.

He is right, in a manner of speaking. Why should the government hand out spectrum free to mobile service companies?

Most countries around the world have resorted to two ways of giving spectrum -- they either auctioned it or held a so-called beauty contest, with the handing out of spectrum linked to roll out and other obligations.

Among the exceptions to this rule was Finland, one of the first nations where 3G services were available. In Finland, spectrum was given free.

The finance ministry has now got into the act. It has written to the department of telecommunications asking it to auction spectrum -- and has quietly rapped the Telecom Regulatory Authority of India on its knuckles, pointing out that TRAI does not have the power to decide on the pricing of spectrum.

Tata's letter queered the pitch for most mobile service companies. They had been quietly lobbying the government for free spectrum.

Indeed, Bharti group Chairman Sunil Mittal made it plain that while most mobile service companies were ready to pay for spectrum, doing so was not viable and he was opposed to it.

He said that the Prime Minister's Relief Fund was always available to anyone who wanted to donate money. Telecom Regulatory Authority of India chairman Pradeep Baijal too backed Mittal and implied that auctioning spectrum would be a recipe for disaster.

Argues Baijal: "If you don't give 3G spectrum free to the existing operators, you will choke their growth."

The mobile services industry's case for free spectrum is voiced by Cellular Operators Association of India secretary general T V Ramachandran.

"The Tata proposal will only make telecom services unaffordable as the cost has to be passed on to consumers," he declares. Ramachandran cites several reasons for contending that spectrum should be given free.

First, 3G licences were auctioned in Europe and bidders paid huge, huge prices, leading to a financial bloodbath and delays in rolling out 3G services.

Ergo, auctioning licences and spectrum is not help the industry grow.

Secondly, if mobile service companies have to pay for spectrum, the prices of services will only go up, making these unaffordable.

Thirdly, their current licences allow mobile service companies to provide all kinds of data and voice services, including 3G services.

So auctioning spectrum is out of the question. Some of COAI's members in fact privately threaten to go to court if the government forces them to pay for spectrum.

Finally, COAI contends that 3G services will help usher in a telecom revolution in rural India where broadband through 3G services will become a reality.

Says Ramachandran: "Also, 3G spectrum can give five times more voice capability than 2G spectrum. This will help us in obtaining more subscribers."

Such arguments can be seen as self-serving. But the issue has become divisive. Cellular service companies like Spice Telecom and the C Sivasankaran- promoted Aircel which operates in Tamil Nadu and Chennai back Tata.

Says Sivasankaran: "If we want to reach the 200 million subscriber numbers by 2007, we need to auction 3G licences." On the other side of the technology divide, the Association of United Telecom Services Providers of India, which represents the interests of code division multiple access (CDMA) companies Tata Teleservices [Get Quote] and Reliance [Get Quote] Infocomm, backs free spectrum and opposes Tata's suggestion that they should pay for it.

Still, many are outraged by the idea of providing 3G spectrum free. Exclaims B K Syngal, a former Videsh Sanchar Nigam Ltd [Get Quote] chairman who's now vice chairman of BPL Communications argues in his private capacity (though he says that BPL Communications in its presentation has made it clear that spectrum should be paid for): "Giving spectrum free would be a disaster. It is a limited resource. Tell me in which other industry do companies not pay for their raw material? It's like giving away your iron to Posco free of cost."

Adds Mahesh Uppal, the telecom consultant: "If you consider spectrum an economic resource, there has to be a price for it. If auctions failed in Europe it was because the design of the auctions was not right, not because auctions were wrong per se."

The argument that auctions would force companies to over bid, as happened here in 1995, is rubbished. In 1995, telecom wannabes forked out over Rs 15,000 crore each for an all India licence for 10 years.

But in 2005 when bids were again sought, they paid only around Rs 1,600 crore for a 20 year licence -- 5 per cent of what was paid during the 1995 bidding.

Says a telecom expert: "This clearly shows that the market has matured and there is no reason to believe that operators will overbid and that there will be a crises like in Europe."

Also, he notes, those who argue that by paying for spectrum 3G will become unviable should steer clear of the bidding.

In Europe, auctions lead to overbidding only in the UK and Germany. In Austria and Australia, the bids were reasonable and no one really went bankrupt.

• Overbidding canard: In Europe, auctions lead to overbidding only in the UK and Germany. In Austria, six bidders paid 832 million euros -- they'd been expected to bid a collective 3 billion euros. In Australia, the six bidders together forked out US $580 million -- far below the government's expectation of US $ 2.6 billion
• No free spectrum: In Hong Kong, the four licensees were given 3G spectrum after they paid a minimum reserve price for 5 years, after which they would share their revenue with the government. Singapore scrapped the auctioning process because of lackluster response, but offered all the three existing mobile companies 3G spectrum at a reserve price of US $ 55 million
• Beauty contests: Sweden and Malaysia resorted to these. Licences were given based on commitments to coverage, expansion, investment and so on.

Says a senior executive of a 3G equipment company in Europe:" In many of these countries, the auction process was undertaken to get some new players in to offer 3G services."

In India that route is closed to new companies. Baijal says that only existing companies should be given 3G spectrum, at least right now, because there is already enough competition in the market.

He adds that new companies will be allowed in only when consolidation happens and the number of mobile service companies goes down from six to three.

Baijal's position doesn't go down well with the smaller cellular service companies. Says Umang Das, head of Spice Telecom: " There is no reason 3G spectrum should be given only to a few players. There should be open competition and other players should also come in. That is the only way to ensure competition." Spice Telecom, however, has not yet taken a position on the matter.

COAI's contention that 3G will help cellular service companies to provide wireless broadband and connectivity to rural India also comes under fire.

First of all, 95 per cent of the spectrum in rural India remains unutilised and despite low handset prices mobile service companies have a negligible number of rural mobile subscribers.

Asks a senior executive at a telecom company: "Why does COAI expect the villager now to buy a cake (3G handsets) when it admits that bread is not selling?" He says that the "rural bogey" COAI is raising does not stand scrutiny considering the poor record of private fixed line companies in meeting their rural telephony obligations.

Instead, as many experts argue, that the cash collected from auctioning spectrum (around Rs 9,000 crore) could be used to increase both teledensity and rural telephony.

Rs 9,000 crore (Rs 90 billion) is more than the Rs 7,225 crore (Rs 72.25 billion) the government has collected as USO, used to fund rural telephony, in the last three years.

The money could also pay for the access deficit contribution (which is given to Bharat Sanchar Nigam Ltd) to keep rural phone rates at their current low levels for the next four years without burdening urban fixed line and mobile service subscribers. Long distance phone rates would also fall.

Baijal and COAI say that paying for spectrum would only make 3G services more expensive. But that is not reflected in ground realities.

The Reliance group paid the government Rs 2,000 crore (Rs 20 billion) for its wireless in local loop limited mobility service to become a fully mobile service but its tariffs fell.

GSM companies paid nearly Rs 1,400 crore (Rs 14 billion) for an all-India licence during the fourth round of bidding --but tariffs fell after they started operations.

So the government would do well to ignore arguments that charging for 3G spectrum would hit the growth of the mobile services market.

Perish the thought -- it should keep subscriber interests in sight and simply allow other companies to enter the 3G services market, so ensuring that tariffs remain low.