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Modern 5G auctions need more than just a lower reserve price

The Telecom Regulatory Authority of India is reportedly considering lowering the reserve price for 5G spectrum auctions by half. (File Photo: AFP)Premium
The Telecom Regulatory Authority of India is reportedly considering lowering the reserve price for 5G spectrum auctions by half. (File Photo: AFP)

  • The best telecom services in the world are to be found in South Korea and Japan, and neither country auctions spectrum. Spectrum is assigned on the basis of discretion, the focus being on ensuring availability of cutting-edge telecom services and the revenue the super-enabled industry would generate

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The Telecom Regulatory Authority of India (Trai) is reportedly considering lowering the reserve price for 5G spectrum auctions by half. That would be the sensible thing to do. A groundbreaking initiative would be to invite private equity, sovereign wealth funds, and other non-telecom big cats of the business world to take part in the auctions, to buy the spectrum in bulk and lease it out to telecom operators for short periods - as short as a day or an hour, or as long as it takes to initiate and complete a call.

In 2018, Trai had recommended a reserve price of 492 crore per MHz for spectrum, and telecom companies (telcos) have been clamouring for this to be slashed, ever since. In March 2021, the government got a taste of what the telcos’ allergy to high prices means: it had offered a total of 2,308 MHz of spectrum in the 700 MHz and 2,500 MHz bands, and only 37% was sold. Unsold inventory in the government’s hands not only does not fetch any revenue but also works to the competitive disadvantage of Indian industry, even as China goes ahead with its 5G deployment, creating new businesses and enabling regular industry to adopt a paradigm shift to the manufacturing process dubbed Industry 4.0, in which machines communicate with other machines over 5G networks and calibrate their work according to algorithms informed by artificial intelligence.

High reserve prices are obtuse from two points of view. Auction design is now a science that can both rule out collusion and ensure the discovery of fair price of whatever is being auctioned. Why set an artificial floor price, when, even if the bidding starts from 1, the final, winning price would reflect the economic value of the commodity being auctioned? The other consideration is that to raise the upfront cost of spectrum is to increase the capital cost of telecom operators and make it that much more expensive for consumers to use advanced telecom services.

The best telecom services in the world are to be found in South Korea and Japan, and neither country allocates spectrum on the basis of auctions. Spectrum is assigned on the basis of discretion, the focus being on ensuring the availability of cutting-edge telecom services and the revenue the super-enabled industry would generate, rather than on generating revenue from spectrum auctions. Neither the Japanese nor the Koreans are squeamish about eating almost anything that creeps, crawls, swims, flies or runs. But when it comes to geese that lay golden eggs, they apparently lay off.

India’s political economy would not permit assigning spectrum to operators based on what is called a beauty contest, in which the government, the beholder, determines the suitability, or beauty, of an operator to be in the business of offering telecom services. So, some non-arbitrary method of allocating spectrum among alternate claimants has to be found. It would be ideal if a mechanism could be found, that both maximizes the revenue for the government from spectrum auctions and, at the same time, reduces or eliminates upfront payments for a 30-year lease of spectrum. Such a mechanism would be for something in the spectrum equivalent to the aircraft sale and lease-back model in the airliner business. The airlines do not own the planes, they lease them from financial firms that own the aircraft.

The world is full of large chunks of savings on the lookout for profitable deployment in a world of ultra-low rates of interest. Even after several rounds of Fed tightening, the yield on 10-year US government bonds is not expected to rise above 2.5%. Large pension funds need returns three to four times that much to meet their obligations to their subscribers. Why not invite such entities to take part in the spectrum auctions, and lease spectrum for short periods to the telcos at rates that make commercial sense to all those involved?

Such multiple spectrum landlords looking for telcos as short-term tenants would ensure competitive pricing of the spectrum. With pay-as-you-go pricing models, telcos could recover the cost from their consumers’ monthly bills and have no capital cost to service on spectrum. Large pools of savings would have a new income stream to invest in as well.

But is it technologically feasible to share spectrum with multiple operators? Indeed, it is. Cognitive radio permits spectrum hopping of quite some latitude. In fact, this is the only way to ensure maximum utilization of the spectrum. Why should spectrum be assigned to one operator, only to remain unutilized when its subscribers have no demand for it? Similarly, why should an operator be forced to buy up enough spectrum to meet peak demand that will kick in only for a few hours a day, while the bulk of the demand is for a lower amount of spectrum?

If a telco could have spectrum on tap from multiple, competing spectrum landlords willing to lease their spectrum for short periods, no telco capital would be locked up in an underutilized spectrum. Advanced analytics would allow telcos to forecast spectrum demand for short periods in the future and bid to lease the required spectrum from spectrum holders at competitive prices. The better the analytics, the shorter the lease period.

May innovation, inspiration and good commercial sense dawn on India’s telecom policymakers and regulators, all at once!

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