India’s wireless services industry has acquired quite a reputation for unrestrained bidding in spectrum auctions. Even though spectrum in the 700 (megahertz) MHz band was ridiculously priced, there were fears that someone might take the government’s bait. And when Vodafone Group Plc flexed its financial muscle with a record fund infusion into its Indian subsidiary just ahead of the auction, these fears gained some more substance.

The fact that 700MHz spectrum was left untouched has understandably led to a sigh of relief. But it’s naive to conclude that Indian telcos were restrained while bidding. On the contrary, the results show that these companies continue to spend vast resources in acquiring spectrum, especially at a time when there are already questions on whether previous investments will fetch adequate returns.

The industry collectively spent nearly $10 billion, or Rs65,790 crore to be precise, in acquiring spectrum in the latest auction. “Cumulative bids in auctions since 2010 now total Rs3.5 trillion. For an industry with annual revenues in the vicinity of Rs1.8 trillion and Ebitda of around Rs50,000 crore, these are not small numbers, in our view... The industry has placed its bets largely on one variable—data volumes and a disappointment on that front could mean a long phase of subpar industry economics," analysts at Kotak Institutional Equities wrote in a note to clients. Note that growth in data volumes has slowed considerably in the past year (see chart). Ebitda is short for earnings before interest, taxes, depreciation, and amortization.

One may argue that the amount raised by the government is about 40% lower than what was raised in the 2015 auction; but in that auction, telcos were effectively bidding for survival, as they couldn’t continue services unless they purchased the spectrum that was on offer. This time around, there wasn’t any renewal spectrum on offer, leading some brokers such as Morgan Stanley to estimate total bids at around $6 billion.

But telcos bid for large amounts of spectrum for their 4G services. Using the government’s reserve price for each band, the entire spectrum in the 2300MHz band was sold, and 99%, 72%, and 64% of the spectrum in the 1800, 2500, 2100 MHz bands, respectively were sold, according to Bank of America Merrill Lynch’s calculations.

If you thought that after spending 3.5 trillion acquiring just spectrum since 2010, telcos are likely to take a breather, think again. “We note that top three telcos still lack a sub 1000 MHz 4G band, which Jio has, leading to likely purchase of 700 MHz in the future as capacity utilization improves led by data growth. With 60% of the spectrum unsold, we expect government to reduce prices of 700 MHz in future auctions to entice demand." The all-important question here is how much the government needs to reduce prices before large telcos start getting interested in this sub- 1000MHz 4G band.

Telcos may be driven to make larger spectrum purchases because of the relationship between spectrum share and revenue market share. Analysts at CLSA Research point out that Bharti Airtel Ltd’s much larger investment in spectrum has driven revenue share gains. “In the metro and A-circles, its share grew 180bps (basis points) to 33%, versus Vodafone’s 10bps loss to 25%. Having added to its already 8-12ppt higher spectrum share versus peers (in this auction), Bharti’s market share gains are likely to continue," they wrote in a note to clients.

The fairly high bids in the auction also show that incumbents are willing to take whatever steps are necessary to retain high Arpu (average revenue per user) customers. This could mean that the battle in the marketplace could be severe as Reliance Jio Infocomm Ltd aims to gain share. Rising investments at a time when yields are falling are a clear recipe for disaster.