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Auction Outlook: Price pain, but many gains

March 23, 2016
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The Telecom Regulatory Authority of India (TRAI) has set the wheels in motion for the June 2016 spectrum auction by releasing its recommendations on spectrum pricing. The key highlights include the large quantum of spectrum being put up for auction across the 700 MHz, 800 MHz, 900 MHz, 1800 MHz, 2100 MHz and 2500 MHz bands. The introduction of the efficient 700 MHz band and its high reserve price has drawn criticism from industry veterans. With the present recommendations, operator dynamics at the upcoming auction could differ from previous auctions as they will bid for spectrum to enhance 3G and 4G services. Industry experts assess the impact of TRAI’s recommendations and share their views on the relevance of the auction given the high reserve prices and spectrum scarcity…

Pankaj-Agrawal-Director-Capitel-PartnersHemant-M-Joshi-Partner-Deloitte-Haskins--SellsInderpreet-Kaur-OvumMahesh-Uppal_Award 

What are the main positives from TRAI’s recent recommendations on the pricing and valuation of spectrum? Will the additional spectrum in the auction resolve the issue of spectrum scarcity?

Pankaj Agrawal

The availability of additional long term evolution (LTE)-capable spectrum will improve data capacity and user experience, especially on bands like 1800 MHz and 2100 MHz (for 3G/LTE). The key questions are regarding the technical and commercial aspects, the spectrum roadmap, and the returns from deploying the spectrum. The availability of additional spectrum will be helpful, but all other factors also need to come together to ensure a successful auction.

Hemant Joshi

The auction of the 700 MHz band is a positive move by TRAI as it is the most efficient band and can lower the cost of delivering mobile services by 70 per cent. Countries like the US, Canada, France, Germany, the UK and Australia have already conducted auctions in the 700 MHz band and are trying to speed up the development of the ecosystem. Meanwhile, 800 MHz band spectrum for 4G services will be allocated in 19 circles, which will help in the faster development of 4G. The 3G spectrum price remains almost the same as the old price, which is likely to lead to better 3G services in India at affordable tariffs.

Inderpreet Kaur

Looking at the spectrum that TRAI has proposed to put on sale, only the 2100 MHz, 2300 MHz and 700 MHz bands offer large blocks of continuous spectrum, which operators will find useful for offering data-led services. The remaining bands have fragmented spectrum offered in small quantum blocks. Therefore, the 800 MHz, 900 MHz and 1800 MHz bands will be desired only by operators who will cease operations in selective circles if they fail to acquire/renew spectrum.

While the 700 MHz band stands to be the most efficient for 4G and has reduced capex requirements, the 2100 MHz and 2300 MHz bands are likely to garner more operator interest. TRAI has decided to opt for APT700 frequency division duplex (FDD) for deploying LTE services as this has been widely adopted in the Asia-Pacific countries and other continents (except the US). However, looking at the available LTE user devices, the majority operate in the 2100 MHz and 2300 MHz bands. Operators investing in the 700 MHz band will see a situation similar to the 2010 auction of 2300 MHz spectrum, where they bought spectrum but could not use it for many years.

On the pricing side, TRAI has set the reserve price for the 700 MHz band on the basis of the reserve price for the 1800 MHz band, while the 2300 MHz band price is linked to the May 2010 price for the same band. Linking reserve prices to past auctions could be misleading as they could have been influenced by a multitude of factors that have changed with time. As a way of benchmarking, the 700 MHz reserve price set by the regulator is much higher compared to what we saw for Australia, Germany and France.

Dr Mahesh Uppal

The key positive is that more spectrum is being released. However, the extent to which this will ease the pressure on spectrum is difficult to estimate at the moment because we expect a very high growth in data services, which in turn will put pressure on spectrum. What we need is spectrum for data, and it remains to be seen how much the extra spectrum will ease that problem. My fear is that it will do so only to a certain extent, partly because spectrum scarcity and the pressure on spectrum are not even across India. For example, there are few very severely congested areas, while in places like small towns and rural areas, there is virtually no problem with spectrum because the market is nascent and just beginning to grow. I think that this problem is expected to worsen before it improves in the business centres of most cities.

What is the relevance of the 700 MHz band in the Indian 4G ecosystem? Is it the right time for this spectrum to be auctioned?

Pankaj Agrawal

•           700 MHz is a high quality band for coverage, with 10 MHz blocks providing good LTE capacity

•           It can be used for improving indoor coverage in Tier I markets as well as for addressing semi-urban and rural mobile broadband opportunities

•           The device ecosystem, device pricing and spectrum pricing will have an impact on operator interest in purchasing 700 MHz spectrum.

Hemant Joshi

The 700 MHz band is the most efficient spectrum band for mobile services as it can reduce service delivery costs by 70 per cent in comparison with the 2100 MHz band. It is five times more efficient compared to the 1800 MHz band, which has a coverage of 37.71 square km for rural areas, and twice as efficient as the 900 MHz band. Its low cost of operations and wide coverage can help reduce tariffs, make network utilisation more efficient and minimise diesel consumption because of the reduced number of cell sites.

The ecosystem for the 700 MHz band is at a nascent stage and evolving rapidly. Countries like Canada and Australia have already auctioned it while the European Union is encouraging the use of the 700 MHz band by mid-2020. The timing of the auction should be carefully considered so that all players can participate effectively. At present, they are busy rolling out services for the spectrum acquired in the previous auction and grappling with the challenges of servicing debt and maintaining healthy profitability and cash flow.

Inderpreet Kaur

•           The 700 MHz band offers better coverage and in-building penetration capabilities for LTE than any other band. It also has lower capex requirements in comparison with the 2100 MHz and 2300 MHz bands. In Europe, we have seen that the 700 MHz band is pivotal for improving the coverage of mobile broadband in rural areas and ensuring more universal 4G coverage. In India, the 700 MHz band will be instrumental in meeting the broadband coverage targets defined under the 2012 national telecom plan, especially in terms of bridging the rural-urban divide

•           While the APT700 FDD band plan has been adopted in over 40 countries, largely in the APAC region, only a handful of devices are capable of supporting LTE in this band. Moreover, as 4G is still at a nascent stage, it will not be before 2017-18 that 4G represents an accountable share in India’s total mobile subscribers. All these factors point to a long wait before operators see any revenue from 700 MHz spectrum.

Dr Mahesh Uppal

700 MHz spectrum will play a significant role in coming years, but not immediately. In 2300 MHz 4G, many observers have pointed out that it has taken at least five years for that ecosystem to even look manageable. It is the sixth year after the auction of 2300 MHz 4G spectrum and not even 1 per cent of users are 4G users. So, 700 MHz will pose an even bigger challenge in terms of the ecosystem. The successful deployment of any technology on a commercial basis requires several pieces to come together. These include, inter alia, access to the necessary network equipment, the choice and affordability of handsets, access to services at acceptable prices, and the demand for available content. They have barely come together for 2300 MHz spectrum and will take longer for 700 MHz.

Which spectrum bands are likely to be of more importance and in significant demand given the recommended prices in the upcoming auction?

Pankaj Agrawal

Bands that can support LTE and have a good existing or emerging device ecosystem will have higher demand, including 2100 MHz for its potential use in LTE. Moreover, with the expected demand for capacity in urban markets, bands like 2300 MHz are also likely to see higher demand than in the 2010 auction.

Hemant Joshi

3G spectrum, or the 2100 MHz band, is likely to generate high demand because of its almost unchanged prices and the rising adoption of 3G in the past two years. 4G spectrum, or the 800 MHz band, which is priced 60 per cent higher than the previous auction at Rs 582.9 billion per MHz, is expected to have equal demand as the ecosystem has evolved and the demand for data-based services has increased. TRAI has made this spectrum available in 19 circles, which can encourage operators who are looking for pan-Indian spectrum.

As far as the 700 MHz band is concerned, pricing it at four times the reserve price of the 1800 MHz band is very ambitious, especially when the ecosystem is not fully developed. Its potential benefits might need significant investments and lead times before they can be realised.

Considering its key role in the Digital India initiative, telecom should be considered a strategic industry and, therefore, reserve prices should either be moderated significantly, or an alternative valuation model like revenue share-based bidding (pay as you earn) should be explored.

Inderpreet Kaur

There are many instances of governments and regulators failing to garner operator interest in the 700 MHz band due to pricing issues. In Australia, for example, 700 MHz spectrum went unsold due to its high reserve price. In a multiband auction, even though 700 MHz means lower capex, operators will compare the price attached to the 700 MHz band with that of the 2100 MHz and 2500 MHz bands.

Dr Mahesh Uppal

I believe that spectrum in the 1800 MHz and 2100 MHz bands is readily usable but its available quantity is very small. There is a particular shortage of contiguous spectrum in the 1800 MHz band and the need for harmonisation is urgent. However, one would expect companies to bid for 700 MHz even though they might not be able to deploy it right away. Most players recognise that the tenure for the use of auctioned spectrum is 20 years and it would be worth having access to it when they are ready to deploy services in this band. They cannot risk all of it going to rivals.

Are telecom operators equipped to bid across seven different bands given their capex commitments towards building 3G and 4G infrastructure?

Pankaj Agrawal

Every operator will have a specific technology and spectrum roadmap depending on its target markets and segments and the mix of coverage and capacity spectrum it requires to serve them. Of the overall cost per MB, spectrum accounts for a high proportion as compared to the network build-out capex, especially as operators prefer loading to standalone tenancies wherever possible.

Hemant Joshi

The spectrum bands that are being used for 3G and 4G services (2100 MHz, 2300 MHz and 800 MHz) are expected to be in high demand because the future lies in data. There is great potential in the market due to the Smart Cities project, Digital India and the high penetration of smartphones and smart devices. However, the ability of operators to pay for spectrum will be constrained as the realised rates for voice and data are not growing. They have been declining for the past few quarters and balance sheets are already overstretched with the inadequate appetite for equity in the market.

Dr Mahesh Uppal

Most, if not all, will arguably want the auction delayed purely for financial reasons. After the auction, one can expect the debt burden to be significantly higher. However, this problem will be short-lived.

 
 
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