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Auction Outlook: Aggressive bidding expected in biggest spectrum sale yet

February 04, 2016
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The Indian telecom industry will have to wait a little longer for the 2016 spectrum auction as the government is now contemplating a mid-year date for conducting it. This change of plan comes after the realisation that the government is likely to surpass its budgetary revenue target of Rs 428.65 billion for 2015-16 even without the spectrum auction revenue. Earlier, the finance ministry had been keen on holding the auction before the close of the current financial year as the funds would have helped it meet the 2015-16 fiscal deficit target. During the previous auction in March 2015, it had mobilised a whopping Rs 1 trillion, which played a big role in plugging the 2014-15 fiscal deficit. However, the government’s revenue is now turning out to be substantial. An amount of Rs 370 billion has already been realised till December 2015; this is expected to go up to Rs 490 billion by the end of the fiscal year.

The upcoming auction is likely to be the biggest in the industry yet as the government is expected to put all available spectrum up for bids across different bands. In its recently released recommendations, the Telecom Regulatory Authority of India (TRAI) has suggested that the government auction Rs 6 trillion worth of airwaves, more than five times the value of spectrum sold in the previous auction.

In addition, this round will mark the debut of the 700 MHz band, which will be put up for sale for the first time. This band is considered to be highly efficient for delivering 4G services across the world. As per TRAI, operators using the 700 MHz band can deliver services at about 70 per cent lower costs than in the 2100 MHz band. The 700 MHz band also requires fewer telecom towers and lower investments.

In the 2015 auction, bids came in over a 19-day period across 115 rounds. The top three operators, Bharti Airtel, Vodafone India and Idea Cellular, along with cash-rich new entrant Reliance Jio Infocomm Limited (RJIL), emerged as the star performers, accounting for nearly 85 per cent of the winning bids. In the 2016 auction, too, these operators are expected to do battle to enhance their respective spectrum footholds. The threat of losing out on premium holdings and the need to bridge gaps in portfolios to stay ahead of the competition will compel the top players to spend big. However, the incumbents could face the heat this time round as RJIL would have entered the market by then, putting serious pressure on their margins. The high spectrum prices recommended by TRAI could also be a deterrent. With the introduction of spectrum sharing and trading norms, operators are not starved for spectrum like they were a year back.

The following is a look at what the forthcoming spectrum auction might have in store for the industry…

Massive quantum of spectrum on sale: It is expected that airwaves in the 800 MHz (36.25 MHz), 900 MHz (22.2 MHz), 1800 MHz (25.4 MHz), 2100 MHz (pan-Indian, 345 MHz), 2300 MHz (320 MHz) and 2500 MHz (pan-Indian, 600 MHz) bands will be put on the block. In addition, 770 MHz of spectrum will be auctioned in 22 telecom circles in the 700 MHz band.

Even though the government is yet to take a final call on how much spectrum will be available for sale, this is expected to be the biggest auction round yet. In the 2015 auction, which was considered a grand success, 418 MHz of spectrum across the 800 MHz (108.8 MHz), 900 MHz (177.8 MHz), 1800 MHz (99.2 MHz) and 2100 MHz (85 MHz) bands was sold.

Returns to take a hit: The auction promises to offer a significant quantum of spectrum across various bands, making it hard for operators to resist making purchases. It is likely to feature the largest quantum of spectrum to be sold at one go, with an estimated value of Rs 6,000 billion.

While it remains to be seen how much of the spectrum will be taken, even the partial success of the auction will seriously damage returns in an already debt-laden market. The Indian telecom industry has already invested enough money in acquiring spectrum in the 2015 auction, and a massive amount is being pumped into the roll-out of 4G services. The ability of operators to pay for spectrum will be constrained as the realised rates for voice and data are not growing.

700 MHz spectrum makes a debut: Spectrum in the 700 MHz band typically provides the best range and penetration and is thus considered premium 4G spectrum. Its propagation characteristics also make it ideal for rural areas and in-building coverage in dense metro areas. Consequently, this band’s airwaves alone have been pegged at $45 billion-$49 billion, which is more than 50 per cent of the estimated $70 billion gross value of all airwaves across bands.

However, the ecosystem for this band is underdeveloped in India, and this factor, along with its premium pricing, will not attract many takers. Operators are more likely to have their eyes on spectrum that can help them expand 3G and 4G services for the time being.

Potential respite from call drops: The increase in spectrum availability will bring about an improvement in operator network performance, which is still far from optimal and results in dropped calls.

Spectrum sharing and trading: The introduction of spectrum sharing and trading rules in 2015 was a landmark policy move. Though such deals are yet to gain traction, it is an effective way for operators to enhance their spectrum foothold without participating in the auction. Idea Cellular has been quick to capitalise on the spectrum trading norms as it acquired spectrum in the 1800 MHz band from Videocon Telecommunications in two key circles where it did not have spectrum. In fact, Idea has reportedly stated that it might give the auction a pass and buy airwaves through secondary sales when it needs frequencies. While the larger impact of spectrum sharing and trading remains to be seen, it will definitely lead to a lot of cherry-picking by operators as their options have now broadened.

The way forward

TRAI’s December 2015 consultation paper was released for soliciting suggestions on the base price for all available airwaves across bands. The regulator’s recommendations for the same are receiving flak from the industry on account of the exorbitant reserve prices. It has pegged the value of spectrum in the 700 MHz band at four times the price of 1800 MHz band spectrum in the March 2015 auction, a calculation that is not going down well with operators as they believe it is flawed. According to Rajan S. Mathews, director general, Cellular Operators Association of India, the market scenario is not the same as when the 1800 MHz band’s price was determined.

TRAI is using the auction price achieved in March 2015 as the reserve price for the new auction. In March 2015, for the 800 MHz band, the government had received around Rs 54 billion per MHz, which was about 1.8 times higher than the band’s reserve price in that auction. Instead of pegging its 2016 reserve price relative to the reserve price fixed in the 2015 auction, TRAI has increased the 2016 reserve price to around Rs 59 billion. Similarly, in the 900 MHz band, the auction price achieved in 2015 (which was just under twice the reserve price in that auction) has been made the 2016 reserve price. This principle of making the new reserve price equal to the price achieved in the previous auction has been followed in the 1800 MHz and 2100 MHz bands as well.

TRAI has recommended that the 800 MHz band be put through a reassignment exercise to ensure the sale of all spectrum in the band. It has also suggested that the Department of Telecommunications (DoT) coordinate with the defence forces and operators to harmonise 1800 MHz band spectrum. All these recommendations will now be sent to DoT for perusal. A nod from the Telecom Commission will be required as well before the cabinet gives its final approval.

 
 
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