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A Damp Squib: Spectrum auction fails to enthuse operators

October 27, 2016
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While most observers were disappointed with the outcome of the 2016 spectrum auction, telecom minister Manoj Sinha said, “I think it was a successful auction and a big achievement. For some spectrum bands, telcos did not have the ecosystem.”

Prashant Singhal, global telecom leader, EY, provided a balanced perspective in an extended analysis of the auction. “The 2016 telecom spectrum auction is the third instance of a tepid response by the industry, largely owing to high reserve prices. The muted response is indicative of operators’ reluctance to invest heavily at current market prices. Data play is on the rise. Operators are filling network coverage gaps for a wider footprint and augmenting capacities.”

He continued, “The current valuations do not justify the expected rate of returns due to which bidding was restricted to very low premiums over the base price. Having said that, we must praise the government for harmonising spectrum in the 1800 MHz band, which will enable efficient spectrum utilisation. The government’s support in making large chunks of spectrum available is in line with the sector’s needs and the government’s Digital India objectives.”

The auction lasted just five days as compared to the previous auction, which lasted over a month. There was limited industry participation and lower prices were discovered. Only seven out of 11 telecom operators participated. Just about 40 per cent of the bandwidth on offer was sold, that is, 965 MHz of the 2355 MHz offered. The bids yielded Rs 657.9 billion, which was less than 12 per cent of the total base price of Rs 5.6 trillion.

There were no bids for two of the seven wavelengths on offer. There was an apparent mispricing of the 700 MHz and 900 MHz frequencies, because those two bands evinced no interest. According to analysts, the 900 MHz spectrum on offer was too fragmented to interest operators.

As per basic physics principles, the lower the frequency, the better the penetration, and the less expensive it is to spread a signal. For example, call drops within buildings are less with low frequencies. Moreover, it is about 65-70 per cent cheaper to run a network off the 700 MHz band as opposed to 2100 MHz.

The base price for the 700 MHz band was set at Rs 115 billion per MHz and it would have cost a minimum of Rs 570 billion for a national network. The 700 MHz band alone would have raised over Rs 4 trillion if the entire spectrum on offer had been awarded. However, only one operator, Reliance Jio Infocomm Limited (RJIL), submitted enough earnest money to even consider bidding for 700 MHz. There were no bids at all and the 900 MHz band also found no takers.

There is a good global ecosystem in the 2300 MHz and 2500 MHz bands and affordable 4G-enabled handsets are also available in the market. The entire spectrum in the 2300 MHz band was sold, and 99 per cent, 72 per cent and 64 per cent of the spectrum offered in the 1800 MHz, 2500 MHz and 2100 MHz bands respectively was sold.

The bidding was very selective. Idea and Vodafone India are currently looking to expand their 4G footprint. Vodafone did not bid as aggressively as expected, given that it received a substantial infusion of Rs 477 billion from its parent just prior to the auction. Tata Teleservices Limited (TTSL) wanted to ensure continuity of service where licences were due to run out in Maharashtra, Mumbai and Andhra Pradesh. Airtel and RJIL were looking to plug gaps in their national networks.

According to Dr Mahesh Uppal, director of consultancy firm ComFirst, “The auction enabled most players to fill gaps in their networks. The additional spectrum will help improve the quality of services.”

Vodafone India acquired spectrum in the 1800 MHz, 2100 MHz and 2500 MHz bands for a 20-year term across all its key telecom circles for a total cost of Rs 202.8 billion, of which it will be paying Rs 101.4 billion upfront. Meanwhile, Airtel acquired spectrum in the 1800 MHz, 2100 MHz and 2300 MHz bands for a total consideration of Rs 142.4 billion.

RJIL acquired spectrum across all 22 circles for a total of Rs 136.7 billion. It spent Rs 36 billion on spectrum in the 800 MHz band, Rs 21.5 billion for spectrum in the 1800 MHz band and Rs 78.9 billion in the 2300 MHz band. RJIL was the only bidder in the 800 MHz segment and it picked up 800 MHz blocks in four circles.

Idea Cellular procured spectrum worth Rs 128 billion in the 1800 MHz, 2100 MHz, 2300 MHz and 2500 MHz bands. TTSL spent Rs 45 billion on acquiring spectrum in the 1800 MHz band in Mumbai, Maharashtra, and Andhra Pradesh.

About half of the bid amount will accrue to the exchequer this fiscal. This translates into a 45 per cent shortfall in budget estimates. The 2016-17 budget expected Rs 560 billion from these auctions - non-tax telecom revenues were calculated at Rs 0.99 trillion, of which Rs 430 billion would be from prior commitments.

The previous auction lasted 31 days and raised Rs 1.1 trillion. Since 2010, cumulative spectrum bids have yielded Rs 3.5 trillion to the exchequer. Given the gross annual revenues of Rs 2 trillion and earnings before interest, taxes, depreciation and amortisation of Rs 500 billion, this is a huge commitment from the industry.

Telecom operators had nearly Rs 4 trillion of outstanding debt on collective balance sheets prior to the 2016 auction. In terms of revenue streams, the industry must bet on fast growth in data volumes. Subscriber growth has flattened at close to 950 million connections. Voice ARPUs are also flat.

Data is the only visible growth area and if data doesn’t grow at expected rates, corporates with stressed balance sheets will struggle to stay afloat. Rajan S. Mathews, director-general, Cellular Operators’ Association of India, says, “The appetite for data is increasing. Thus, operators need more spectrum. The latest additions will help operators provide quality broadband services with better speed.” According to Mathews, data consumption is growing at 20-30 per cent year on year.

The data space is also highly competitive and RJIL has just triggered a price war. Under these circumstances, every serious telecom player must develop a national 4G footprint. There is definite interest in the sub-1000 MHz 4G bands. But the base prices of these bands - such as 700 MHz and 900 MHz - must be reduced for the market to clear. In the case of the 900 MHz band, the offered spectrum must also be harmonised with less fragmented chunks on offer.

The auction results have created a conundrum for policymakers. The government is hyper-sensitive with regard to accusations of a scam - a fallout from January 2008, when the then-telecom minister, A. Raja, renewed the incumbents’ licences for nominal amounts in a hurried, opaque process that was later overturned by the Supreme Court. The so-called 2G scam has made the government cautious about being accused of corruption, if spectrum is auctioned cheap. But if the base prices are set too high, spectrum will not be bought at all, which means the government realises nothing.

Apart from spectrum pricing, the industry is ripe for consolidation. A policy roadmap with predictability is necessary to resolve contentious issues such as the interconnect regime and to allow mergers to take place without undue interference or monopolist tendencies. The spectrum usage charges also need to be normalised, to avoid arbitraging in a spectrum sharing and trading regime. Costs for the industry are liable to rise anyhow. Service tax rates have increased and would rise again with the Goods and Services Tax.

There are lessons to be learnt before the unsold spectrum is re-priced and offered again.  Rishi Tejpal, principal analyst, telecom business strategy at Gartner, says, “In terms of connectivity, the additional spectrum will allow operators to enhance their mobile broadband footprint, thus offering better and wider availability of these services.”

But the sheer volume of traffic means that the improvements in quality may be marginal despite the new spectrum. The strategy in this auction was to acquire enough spectrum to bolster 4G services in a market where RJIL is a new player. Poor connectivity will impact ambitious public service schemes such as Digital India and Smart Cities as well as direct benefit transfer.

While telecom operators battle for market share and revenues, the government needs to free itself from the fears of under-pricing. It must ensure that spectrum does not remain unutilised. The auction process was transparent and that is a guarantee against accusations of corruption. If the base pricing had been more realistic, every class of stakeholder would have benefited.

By Devangshu Datta

 
 
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