The spectrum puzzle

A look at what’s at stake in the largest auction of telecom radio waves for the world’s fastest growing mobile phone market


The Indian government expects to raise at least <span class='WebRupee'>Rs.</span>5.63 trillion ($84 billion) in the country’s largest auction of telecom radio waves, set to start on 29 September. Photo: iStock photo
The Indian government expects to raise at least Rs.5.63 trillion ($84 billion) in the country’s largest auction of telecom radio waves, set to start on 29 September. Photo: iStock photo

Mumbai: Indian telecom companies are no strangers to taking on the government. In the past, they have sparred with the government of the day and the telecom regulator, and sometimes even gone to court, over opaque policies, lack of adequate spectrum, net neutrality rules, call drops and competition from over-the-top (OTT) service providers such as WhatsApp.

The gloves are off again as India prepares for its largest auction of telecom radio waves—one from which the government hopes to raise Rs.5.63 trillion at the base price. The fight this time is over service roll-out obligations across spectrum bands, interconnection charges between operators and the coming entry of Reliance Jio Infocomm Ltd (R-Jio).

Incumbent telecom companies are alleging that the test phase of R-Jio’s 4G services, involving 1.5 million users, is of the magnitude of a full-blown commercial operation. They claim that as a result, telcos on whose networks calls made from R-Jio’s network terminate do not receive the so-called interconnection usage charge. They say the Telecom Regulatory Authority of India (Trai) is turning a Nelson’s eye to the conduct of R-Jio in “commercially” selling its phones in the guise of testing its network.

R-Jio, in which billionaire Mukesh Ambani’s Reliance Industries Ltd has invested Rs.1.5 trillion, has retorted that the Cellular Operators Association of India (COAI) is trying to sabotage its launch. COAI is primarily a lobby of large incumbent telcos, although R-Jio is also a part of it.

A lack of clarity over these issues has even prompted telecom operators to request the government to defer the spectrum auction, which is set to start on 29 September, by a few days to give them more time between the mock auction (on 26-27 September) and the actual start of the sale.

If the pre-auction drama creates the impression that the incumbent telecom operators will be sweating it out to bid for spectrum at the coming auction, it is clearly misleading.

Big telecom operators such as Bharti Airtel Ltd, Vodafone India Ltd and Idea Cellular Ltd, which account for almost 75% of the Indian telecom sector’s revenue, are clearly not hungry for spectrum.

They purchased adequate spectrum to build capacity in the auctions held during the last five years, and may only look to expand their coverage in the coming auction. Many telecom operators have put in place spectrum sharing or trading agreements with each other. Telco mergers have also reduced the need for additional spectrum.

A buyer’s market

Such factors may favour the telecom operators, but they do pose a problem for the government, which is putting on the block at one go, over 2.3GHz of spectrum across seven frequency bands—700MHz, 800MHz, 900MHz, 1800MHz, 2100MHz, 2300MHz and 2500MHz.

Besides the proceeds of the auction, the government hopes to collect a tidy sum of money from the various levies and services in the telecom sector in the year to next March to boost its finances. Additionally, spectrum sold in these bands will attract an annual spectrum usage charge (SUC) at the rate of 3% of the adjusted gross revenue, excluding the revenue from wireline services.

To be sure, the Rs.5.63 trillion the government expects to raise from the sale at the base price will not accrue to the national exchequer at one go but over the years. Buyers have the option of paying for spectrum in instalments.

Yet, the government is confronted with the fact that unlike the auctions over the last five years, it is clearly a buyer’s market for telecom operators this time around, experts say.

Analysts at rating company Crisil Ltd, in a July note, said they expect realizations from the auction to “be moderately lower than the Rs.560 billion (Rs.56,000 crore) estimated in the Union budget for this fiscal”.

India’s largest telecom operators could cumulatively invest about Rs.1.2 trillion (Rs.120,000 crore) over the next two years to protect their turf as R-Jio debuts, according to the note.

A different auction

Over 50% of this will be spent on network augmentation and the rest to buy more spectrum and pay instalments for previous purchases, the note said. The top three operators—Bharti Airtel, Vodafone and Idea Cellular—are expected to account for about 55-60% of the total spending at the auctions, it added.

Crisil researchers expect bidding in 700MHz to be extremely selective, with players preferring the less pricey 1800MHz. About half of the spectrum put on the block in 1800MHz and 2100MHz, and most of it in 800MHz and 900MHz, would be lapped up, while bidding interest in 2300MHz and 2500MHz is expected to be limited.

The most expensive spectrum band is 700MHz, at Rs.11,485 crore for 1MHz. This makes the industry liable to pay Rs.57,425 crore for 5MHz on a pan-India basis.

“The upcoming auction will be different in many ways,” concurs a 16 July report by ICICI Securities Ltd. It lists four reasons why it is so.

First, the spectrum supply will be huge. Second, there is no renewal burden for the top three telecom operators. Third, these three companies are “fairly covered in the mobile broadband spectrum in leadership circles,” hence, the spectrum demand is “largely in non-leadership circles”.

The fourth reason, according to the report, is “Reliance Jio’s spectrum needs are minimal”.

Based on the spectrum demand model prepared by ICICI Securities, Bharti’s spectrum investment in the coming auction would be Rs.5,500 crore, which includes a coverage spectrum investment of Rs.3,600 crore and a capacity spectrum investment of Rs.1,800 crore. Idea’s spectrum investment in the coming auction would be Rs.7,600 crore, which would entirely be for expanding coverage, according to ICICI Securities analyst Sanjesh Jain, who wrote the report.

No dearth of spectrum

“There is enough spectrum in the market. India is not a spectrum-deficient country any more, especially for data services,” insists Rohan Dhamija, head-India and South Asia at Analysys Mason, a telecoms, media and technology (TMT) advisory firm.

He pointed out that telecom operators have enough spectrum in all bands from previous auctions as well as through the trading and sharing route.

Second, “they could acquire further spectrum from either of those routes going forward”.

India’s largest telco, Bharti Airtel, already believes it is in “a very solid position”.

“We need spectrum to fill a few gaps here and there. Broadly, we don’t see a great need of spectrum at this point in time,” Gopal Vittal, managing director and chief executive officer (India and South Asia), said in an earnings call on 28 July.

In the March 2015 spectrum auction, Idea Cellular secured 900MHz spectrum in all nine service areas due for the telecom licences expiring in December 2015/April 2016, “ensuring continuity of existing business for its 118 million subscribers (about 67% of its customer base)”, according to its April-June quarter earnings report.

Bharti, on its part, is improving its spectrum holding in the 2300MHz band for 4G services. It already has a spectrum trading pact with Videocon Ltd, which will help it shore up its 1800MHz spectrum holding for 4G services.

This makes Bharti a pan-India 4G operator. Similarly, Reliance Communications Ltd (R-Com), which is a part of Reliance Group headed by Mukesh Ambani’s younger brother Anil Ambani, is strengthening its 800MHz spectrum holding for 4G services even as it has a spectrum sharing and trading agreement with R-Jio, which could help both firms to plug the gaps in 800MHz spectrum holding, according to an April note by ICRA Ltd.

R-Com’s merger with Aircel Ltd, meanwhile, should help it achieve synergies across services, subscriber base and spectrum holding in all frequencies.

Moreover, according to Dhamija, the “evolution of technology standards as well as the development of the ecosystem to support optimal re-farming of bands for use in efficient data technologies such as 4G has further helped the spectrum supply situation”.

For example, he says, “the 3G band can be used for 4G services both globally and in India, especially with the fact that 2100MHz band now probably supports the second largest number of devices for use on 4G”.

Selective buying

Particularly, there might hardly be any takers for the expensive 700MHz despite it being the most efficient spectrum, simply because technology allows telecom operators to even use the 3G band effectively for 4G services.

The one area where regulatory intervention could help is around the pricing of 700MHz, according to Dhamija. “Given how expensive the reserve prices for this band are in most circles in terms of $/MHz/pop (population), we expect operators to bid for this (700MHz) spectrum only in selective circles,” he said.

Alok Shende, founder-director and principal analyst, Ascentius Consulting, concurred that telecom operators will selectively buy spectrum either to fill a strategic gap or strengthen their presence in specific geographical markets. He, too, believes that while the 700MHz band has very favourable propagation properties, it is unlikely to draw competitive interest because “there is no business case at the current reserve prices”.

Further, spectrum trading/sharing and business mergers would allow the spectrum holding of the telecom operators to get better aligned to its utilization, thereby leading to greater efficiency, according to an April note by ICRA. Besides, spectrum trading allows smaller telecom operators to monetize their underutilized spectrum holdings, and the larger telecom operators to attain spectrum outside the auctions, the note added.

ICRA researchers expect the trend of consolidation of spectrum holdings of the telecom operators to continue in the medium term.

ICICI Securities’s Jain believes that telecom operators will focus on purchase of 1800MHz to offer 4G services pan-India; purchase of 2100MHz to complete 3G footprints across key circles; and buy additional 4G/3G carriers (2300MHz/2100MHz) in leadership circles to enhance capacity and 900MHz for 3G.

However, the coming auction would be critical for challenger operators such as Tata Teleservices Ltd and R-Com which received licences during 1997 and 1998—as their 20-year licences will soon expire, Jain notes.

These operators, he points out, will need to repurchase their existing 800/1800MHz spectrum holdings.

Jain believes that the coming auction is critical for Idea Cellular and Vodafone as it provides an opportunity to bridge their mobile broadband spectrum gaps with Bharti and R-Jio.

Observers will be keenly watching out for 13 September, the last date for interested telecom operators to submit their applications.

Life after the auction

While telecom operators will continue doing business as usual, what will be the fate of the 700MHz spectrum, which is considered the most efficient for telecom services—around 2.5 times more efficient than 1800MHz, offering greater coverage area and better indoor reception?

The Crisil note points out that “better efficiency, resulting in lower capex, global commonality that supports ecosystem development, and sustaining the quality of service to counter Reliance Jio’s 800MHz are the key reasons that make 700MHz so important for incumbents”.

R-Jio, after its spectrum trading and sharing deal with R-Com in January, has a presence across India in the 800MHz band, which is a very efficient band with superior coverage.

To counter this, incumbents will have few options other than bidding for spectrum in the 700MHz band, especially if contiguous spectrum in the less pricey 1800MHz band is limited and/or insufficient for all interested incumbents, according to the Crisil note.

Over 40 countries have already allocated, committed to or recommended 700MHz deployments (Band 28) with licences given in 13 countries. For India, 700MHz is being auctioned in Band 28, which is also being considered for launch of services in Germany, France, Sweden, the UK, Finland, Singapore, Japan, South Korea, the United Arab Emirates and Thailand.

The other concerns revolve around the incidence of call drops and price wars, which are bound to increase as the commercial launch of R-Jio’s 4G services nears.

Also Read: R-Jio: Still the joker in the telecom pack

Giving an indication of the impending price war, Bharti Airtel, announced two post-paid plans on 5 August—each of them offering unlimited voice calls along with bundled third generation and fourth generation (3G/4G) data that “combines unlimited voice calling with variable data benefits”.

The plans bundled unlimited voice calling—local, long-distance and national roaming—along with SMSes, data and free subscription to the company’s Wynk Music and Wynk Movies.

That very day, Vodafone, India’s second largest telco, announced a free 10-minute talk time “to all customers whose conversation gets interrupted for any reason”, giving an idea of how telecom operators plan to address consumer angst and stave off the wrath of the telecom regulator over call drops.

This initiative on voice followed close on the heels of Vodafone’s “up to 67% data benefit to customers”, announced just a week earlier. There are things which mobile companies still have to figure out, last but not the least of which is the potential impact of the goods and services tax (GST), when it is implemented from 1 April 2017—the government’s target date.

Just like any other service sector, telecom will also have to pay 3-5% higher taxes in the GST regime, reckons Sachin Menon, partner and head, indirect tax, KPMG.

“However, in the positive, all the non-creditable state taxes become creditable under GST regime would moderate the increased tax burden. If any of the services that should find place in the merit rate of 12% GST, the first in that list will be telecom services. It is the only service that is used by a majority of the common men and if the cost of the service goes up, it will have political implications as far as the electorate is concerned,” he said.

P.R. Sanjai contributed to the story.

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