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Spectrum on Sale - TRAI attempts a balancing act, but concerns persist

October 15, 2006
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It was never going to be a straightforward consensus on the tricky issue of spectrum allocation. End-September 2006, therefore, when TRAI's recommendations on 3G spectrum allocation and pricing were released, there was some difference of opinion. While GSM-based mobile operators expressed unhappiness on spectrum pricing, CDMA operators were pleased that the recommendations had done away with the existing subscriber-linked formula for additional spectrum allocation.

However, even as GSM and CDMA operators slug it out, the industry at large feels that TRAI's proposition of a mix of base/reserve price and auction for allocating 3G spectrum to five bidders in each circle is fair. The emphasis on broadband wireless and a National Frequency Management Board to oversee spectrum allocation too has its merits. In other words, the telecom industry believes that TRAI's recommendations will help kickstart 3G services in the country in a logical manner.

The pricing of spectrum could, of course, be viewed as a concern and a point of debate. Spectrum auctions ran into billions of euro in Europe. In Europe, spectrum licensing fees were collected years before 3G service was developed. Also, huge investments were required to build 3G networks, hitting mobile operators' margins. However, in Japan and South Korea, spectrum licensing fees were not applicable as the focus of these countries was national IT infrastructure development.

In India, as Minister for Communication Dayanidhi Maran has stated: "3G cannot be perceived as an automatic extension of 2G or 2.5G and would need to be viewed as a kind of standalone service for specialised needs. The spectrum requirement for 3G would, therefore, have to operate on its own merit in a resourcescarce and competitive environment."

TRAI did a balancing act by recommending 3G spectrum auctions, fixing the base price at Rs 800 million for Delhi and Mumbai, Rs 400 million for Chennai and Kolkata and a reserve price of Rs 150 million for Category C cities.

Now, a bidder seeking 3G spectrum to offer nationwide high speed internet and streaming video will start at a reserve price of Rs 10.5 billion for every two blocks of 5 MHz spectrum, with the lowOverall, the industry feels that TRAI's proposition of a mix of base/reserve price and auction for allocating 3G spectrum to five bidders in each circle is fair. The pricing of spectrum could, however, be a point of debate. est bidders dropping out till the number of bidders equals the number of licences. Further, the reserve price for every successive round will be that of the second lowest bidder.

According to TRAI, auctioning therefore is a solution. After all, there is a question of availability. As TRAI states, "In the 2.1 GHz uplink band, 25 MHz spectrum needs to be vacated for 3G services, which is currently being used by the defence services and security agencies." This involves costs. Therefore, it is important to take into account the intended use of the scarce resource.

Considering the higher revenue potential of 3G services, analysts feel that the pricing of spectrum is reasonable. Besides, an open auction route will be far more transparent.

The contention, however, is over the base price. Operators, especially those who are GSM based, find TRAI's recommendation of the base price too high, which may translate into operators bidding for only major circles.

Claims T.V. Ramachandran, chairman of the Cellular Operators Association of India (COAI): "To start the auctions at such a high reserve price will kill the product and make 3G a rich man's toy." According to him, the high initial fee and a revenue share percentage is tantamount to triple taxation as it will include an entry fee, a base charge on the entire 2G and 3G revenue as well as an incremental 1 per cent revenue foregone to the government. "This will overburden companies," he points out.

There is also a lack of clarity regarding the recommendation on 1 per cent of the revenues accruing to the companies for every 5 MHz of spectrum going to the government. This kind of a hybrid model has not been used in either the US or UK auctions. But, as far as the reserve prices for spectrum being too high, the Ministry of IT and Communications states that this may not be the case, as it is estimated that the number of mobile subscribers will increase more than threefold over the next four years. The increase in the market capitalisation of mobile players that will result from this is likely to be many times the cost of 3G spectrum –­ which will make this growth possible.

There is a risk of overbidding, but TRAI has tried to put the brakes on this by proposing stringent rollout obligations and monitoring to avoid hoarding of spectrum. At the moment, however, the more serious consideration seems to be the time it would take to get the defence services to vacate the required spectrum.

On the whole, TRAI has tried to be even-handed with both GSM and CDMA operators. It has allocated some spectrum in the 800 MHz band for CDMA operators as GSM operators are in a better position to roll out 3G services in the 2.1 GHz band. Further, it has set aside 450 MHz at half the reserve price for rural circles.

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