Telecom industry may no longer be the goose that lays the golden egg

For the government, the telecom industry is best viewed as the fabled goose that lays golden eggs. And telecom companies have rarely disappointed. They have outbid each other to buy spectrum at ridiculous prices at regular intervals. Some analysts even joke that large telecom companies have perfected the art of buying the unaffordable.

But on a handful of occasions, telcos have refused to cooperate and some spectrum auctions have been failures. If the government accepts the regulator’s recommendations for the next spectrum auction, another failure seems to be on the cards.

“We expect the spectrum auctions to be a non-event,” analysts at Edelweiss Securities Ltd wrote in a note to clients on 1 August.

Of course, with telecom firms, you can never say never. If even just one company jumps in with bids to procure 5G spectrum, one or two of the others may follow suit, so that they aren’t left behind in the arms race for speed and efficiency. In such a scenario, the government will go laughing all the way to the bank.

But this looks like a highly unlikely scenario. If all the spectrum were to be sold at the recommended reserve price, the auctions would be worth over ₹ 5 trillion, or as much as $78 billion. About 45% of this is for spectrum in the 700 MHz band, the price of which has been cut by about 40% from the previous auction. But even after the cut, the cost involved in acquiring pan-India spectrum in this band is huge and telcos are likely to stay away. Even Reliance Jio Infocomm Ltd, which seems to have no dearth of funds, is expected to prefer waiting for further cuts in spectrum pricing before participating.

Almost 30% of the total spectrum on offer in value terms is the 5G spectrum in the bands above 3GHz. Even here, the price recommended by the Telecom Regulatory Authority of India (Trai) is very high.

The recommended price for the 5G spectrum on offer is over seven times of what was discovered in a recently held auction in South Korea for 3,500 MHz spectrum. Parag Kar, an industry executive, wrote on his personal blog, “Note that the validity of 3.5 GHz spectrum auctioned in Korea is 10 years versus 20 years in India. But, it gets balanced by the total industry revenue of Korea, which is higher than that of India.”

As such, it would be foolhardy for telcos with already stretched balance sheets to bid for expensive spectrum.

All of this begs the question as to why Trai still wants to squeeze the life out of the operators at a time when they are already on their knees. The government, which typically accepts Trai’s recommendations, needs to introspect, too.

Some analysts say that a sharp drop in spectrum prices may lead to allegations of a fraud by government officials, leading to a cautious approach by the regulator. But there are ways around this problem.

Sticking with extremely high spectrum prices unfortunately shows that the regulator and the government don’t care much about the financial health of surviving telcos.