All is not well with upcoming spectrum auction
Come September and all eyes will be on the spectrum auctions in India. This time nearly 2300 megahertz (MHz) of airwaves is available to be sold, which is expected to garner Rs.5.6 trillion in revenue—nearly five times more than the last spectrum auction that accumulated an astounding Rs.1.09 trillion.
However, contrary to expectations, this time the government’s multi-band spectrum auction may fail to attract buyers or realize significant dollar sales from airwaves on account of current market conditions. The truth, sadly, is that telecom circa 2017 is a sector in distress and to expect oversubscription or competitive bidding in the upcoming auctions will be like chasing rainbows on a bleak September evening.
While policymakers could have taken cues from the past, pricing will be a major dampener in the upcoming auction. Since 2010, India has witnessed five spectrum auctions having a total outlay of ~Rs.2.9 trillion; of these, the combined payout for the 2014 and 2015 auctions was about 59% of the total outlay. For an already over-leveraged sector, costly auctions have worsened the financial state and have been fundamental in escalating debt levels to over Rs.3.8 trillion at the end of 2015.
The 700MHz spectrum is considered to be a high-value band globally and is gaining popularity due to its spectral efficiency. The government’s decision to fix an astounding reserve price of Rs.1,140 crore/MHz for a band where the ecosystem is yet to develop is unrealistic and will only result in selective bidding across few circles where prices are relatively reasonable. Even though the capex investments are relatively low in this band, it still makes little sense for an operator to acquire 5MHz pan-India spectrum for an astounding Rs.57,420 crore when it’s evident that the benefits would accrue only after three to four years.
In fact, the unreasonable prices will only make matters worse for a bleeding sector witnessing growth in single digits. Going by the numbers, the total recommended reserve prices across all bands, which is pegged at Rs.5.36 trillion (over $80 billion), is almost double the cost of all the spectrum investments made till date.
Simply put, we are looking at a figure which is roughly more than 20 times the annual free cash flow of the entire mobile industry in India!
The band witnessed fierce bidding and good uptake in March 2015 primarily to ensure business continuity in key circles and strengthening data holdings. In contrast, this year the government proposes to auction 21MHz in seven circles only, which mostly comprises unsold airwaves and spectrum arising out of licence expiry. Given the small quantum of spectrum in this band, if the ongoing discussions with the defence ministry can bring ~202MHz harmonized spectrum for auction, there may be a lot of additional spectrum which can be efficiently put to use.
Interestingly, the 2500MHz band is priced similar to the 2300MHz band at a pan-India reserve price of Rs.8.17 billion/MHz. Having said that, pricing both bands equally may not be rationally correct as the ecosystem for the 2500MHz band is not well developed in India. Going by global standards, the band plan followed in India is different from what has been adopted in Latin America and Europe. As a result, demand may be scarce. On the flip side, the 2300MHz is a well-developed ecosystem and a more interesting band for auction. It may witness participation by telcos looking at expanding their LTE portfolios.
While the government has recommended lowering the minimum spectrum that the operator can bid for in the 900MHz band to 0.2MHz from 0.6MHz in the previous auction, the fact that merely 9.8MHz is proposed to be put on sale is too little to offer incremental benefits to operators. On the other hand, the 800MHz is gaining prominence as a premium LTE band primarily due to its extensive use to deliver wireless broadband services in Europe. Although 4G is gaining pace in India, the quantum of spectrum is too little to witness good uptake.
The government proposes 345MHz spectrum for auction at a pan-India reserve price of Rs.37.4 billion/MHz. Seeing that large chunks of spectrum are proposed to be put up for sale, operators may participate to strengthen their 3G footprint, but will have to shell out more seeing that the band was previously sold at a premium.
In conclusion, a lacklustre auction may not be in line with the government’s Digital India ambitions. The government’s keenness to auction all available spectrum is a positive, but setting a stage for an expensive spectrum auction may not be in tandem with the goals of creating a Digital India. The auction may fail to witness participation, diluting its fundamental purpose in addressing the sector’s spectrum crunch.
In fact, any participation will be at the cost of escalating debt further. It is expected that the industry’s debt will rise to over Rs.4.6 trillion following the auction—that’s nearly 1.8 times the current sector revenues. So while on the one hand, the government envisions creation of a Digital India by 2020, in contrast, an expensive auction will be pushing the sector into a potential debt trap.
September, it may be, but the summer of auctions is well and truly over, and winter chills will be setting in early this year for telecom in India.
Prashant Singhal is EY’s global telecommunications leader.