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Business News/ Opinion / Lessons from the spectrum auction

Lessons from the spectrum auction

More spectrum could be made available for commercial use by re-farming existing spectrum

Among other things, the spectrum auction design created space for opportunistic play by participating bidders. Photo: Priyanka Parashar/MintPremium
Among other things, the spectrum auction design created space for opportunistic play by participating bidders. Photo: Priyanka Parashar/Mint

The spectrum auction in March that raised 1.1 trillion in winning bids was seen as helping bridge a part of the fiscal deficit. The auction was in some of the most sought-after bands—800 megahertz (MHz), 900MHz, 1,800MHz and 2,100MHz, which support advanced services such as 3G and LTE (Long-Term Evolution, a wireless technology).

A closer scrutiny of outcomes shows that despite the highly competitive scenario and the criticality of winning spectrum for all participating operators, some spectrum remained unsold. This has led to further fragmentation of the already fragmented spectrum and will reduce its future value. Unsold spectrum also signifies revenue forgone from the loss of one-time entry fee, annual licence fee, annual spectrum usage charges and backhaul spectrum charges. Conservative estimates put these losses at about 8,000 crore/MHz.

The above does not take into account the operational efficiencies for businesses and individuals that result from higher bandwidth and better quality of service. Besides the loss of revenue to the government, any unsold spectrum creates inefficiencies for operators as they have to invest larger amounts in tower infrastructure to compensate for smaller chunks.

The auction design also created space for opportunistic play by participating bidders. Due to the wider policy focus on natural resource allocation through auctions (for example, coal and gas) the outcomes of this auction raise issues regarding the design of auctions and strategic management of spectrum.

Design of auctions

The simultaneous multiple-round auction gave bidders the flexibility to move across geographical areas and spectrum bands in the various bidding rounds so as to take into account their own strategies regarding choice of service areas and bands. This flexibility allowed bidders to win bids in contiguous service areas, if they wished to, as well as to make choices of spectrum bands simultaneously.

The auction also provided bids for variable-size units of spectrum depending on whether they were new entrants or existing operators, including those whose licences were going to expire in 2015-16. The latter were to be treated as new entrants. New entrants required at least the minimum start-up spectrum while existing operators sought smaller units of spectrum to augment their ongoing services. The bid amounts, therefore, reflected the premium bidders were willing to pay for this flexibility.

Despite a complex design that took into account several dimensions that bidders value, it had the following two unintended consequences:

l Unsold and fragmented spectrum: Spectrum remained unsold in the 800MHz (15.1MHz), 900MHz (9.8MHz) and 1,800MHz (3.4MHz) bands. For the (900/1,800)/800 MHz band, bidders could bid for a minimum of 0.6/1.25 MHz and then in units of 0.2 MHz if they were existing licence holders in the respective bands, or 5MHz if they were new entrants. While variable units of bidding in the auction gave flexibility to existing operators to bid only for the incremental amount of spectrum they wished to add, such operators could bid high as their minimum chunk was smaller, and cause the new operators to have to pay proportionately higher. This happened, for example, in Bihar (900MHz), Andhra Pradesh (800MHz) and Delhi (800MHz). If the new entrants did not proceed by bidding for a larger chunk, then spectrum got fragmented.

l Opportunistic bidding: In some service areas, there was scope for bidders to opportunistically bid for a chunk large enough to not allow any other two bidders to have a minimum amount of spectrum. If it was important for two operators to get the minimum amount to continue with their existing operations, then they would bid higher in the subsequent round to be the provisional winning bidders. Thus the opportunistic bidder could increase the price and be reasonably certain that it would be pre-empted and would not have to pay its bid price while also being able to increase the price in subsequent rounds for the two operators.

Had there been more demand for the smaller chunks from existing operators, then possibly the amount of unsold spectrum would have been lower and the propensity to raise prices by existing operators would have been constrained. Adequate bandwidth in the designated bands could have reduced the extent of fragmentation and opportunistic play.

Strategic perspective

Increasingly, governments have recognized the value of wireless technologies in driving economic growth and hence have specific plans to make more spectrum available for commercial use. This could be done by re-farming existing spectrum, especially that in the sub-1GHz band (which is mostly with the government) for commercial use.

Since spectrum is a renewable resource, its usage in a specific time does not preclude its usage at another point, unlike most natural resources, such as minerals. As per the Telecom Regulatory Authority of India (Trai), more spectrum in each of the auctioned bands could have been made available if the department of telecommunications (DoT) had worked out a plan for longer-term spectrum availability.

While this could bring down the prices the government could get as auction revenue, on the other hand, unutilized spectrum is a loss to the government as explained above. Even though the government may get lower revenues by making more spectrum available in auctions as the gap between supply and demand narrows, the economy as a whole would gain through improved telecom services. Lower cost and higher quality of services could give economic benefits.

Further, the Indian government does not have a time-bound and specific plan for spectrum re-farming. There are well-established instruments for the same, including incentive auctions that have been effectively used in various countries. In this method, existing users are paid some part of the amount generated through auction of the band as compensation for shifting/vacating to a different band. Creating a spectrum fund, facilitating spectrum trading and supporting the development of low-cost indigenous smartphones to enable mobile Internet to take off have been recommended, with little progress.

The coordination problems in re-farming indicate the need to have clarity in the role of Trai vis-à-vis DoT. In most countries, spectrum management is within the preview of the regulatory agencies. However, given the current situation of spectrum being held by different agencies, especially defence agencies, we should consider setting up a unit under the Prime Minister’s office for a period that helps to streamline the spectrum re-farming.

Subsequently, spectrum management should be with an independent body. Currently, since Bharat Sanchar Nigam Ltd and Mahanagar Telephone Nigam Ltd are operators and under DoT, spectrum management is not with an independent body.

There is a need for inter-ministry coordination and political ownership for better institutions and instruments, and for greater government accountability for fair and efficient use of the spectrum.

Rekha Jain is the executive chair of the Telecom Centre of Excellence and professor, Indian Institute of Management, Ahmedabad. She focuses on policy and regulation in the telecom sector and information technology. In telecom, her interest areas are Internet governance, spectrum auctions and Net neutrality.

This article presents the author’s personal views and should not be construed to represent the institute’s position on the subject.

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Published: 11 May 2015, 12:31 AM IST
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