Oct 24, 2011

The Telecom Spectrum Saga Continues

Over the years, various alternatives have been suggested for allocating spectrum-from simple licenses (through administrative routes), lottery, first come first serve to auctions. Most of the successful telecom markets have seen a move from an administrative process to the occasional lottery.

The experience across various countries, over the last 15-20 years, shows that auctioning works best. Now it works well for raising revenues, an auction assigns licenses to the firms best able to use them.

Certain arguments seem to be arising out of the recent round of 2G spectrum auctions in the country:

  • That the auction diminishes government’s capability to effectively manage a scarce national resource, (unilateral approach, inconsistent policies, arbitrary allocations, etc, probably trying to say the government has unfairly priced the spectrum high)
  • It can lead to future problems of reallocating and maybe recovering spectrum
  • The argument that high auction prices will increase the tariff
  • The argument that high auction prices may question the viability of business models

Why 3G auction prices are not valid for 2G?

In auctions, the rules of the game are set in advance which do not allow the government to change the criterion. However it does not stop the government from designing the auction to propagate investors, innovators, or specialist who can in turn favor the overall revenue generation as well as larger public good.

Some of the recent outcry over the high prices of spectrum undermines the fundamentals of looking at fixed and variable costs separately while creating business case for an investment.

Typically, marginal costs are looked at when defining the pricing strategies for providing one additional unit of service and the whole spectrum is considered as a fixed price and is paid even before a service is offered to a customer.

The marginal price is therefore an outcome of the current competitive scenario whether the market sees the value in paying for the service at that marginal price or not.

The argument that high auction prices may increase the tariff might also not work well as the borrowing for auction and the debt burden could result in companies investing less and increasing the marginal costs of providing the service, might actually be flawed.

  • Operators are not paying the fees at one go but in installments, resulting in the outgo more from profits than from debt at one go
  • Operators will not increase or decrease the prices based on the spectrum/license costs but on the competitive intensity and breadth of acceptance of services
  • If that would have been the case, how will new entrants be able to match the market prices at all times?
  • Secondly if they get spectrum, will operators be satisfied at 30% margins and pass on the discounts to customers?
  • In actual practice, because of the way the politics of spectrum allocation works it does not raise but lower the prices. Auctions in general also increase competition by bringing down the barriers to entry
  • The beneficiaries of the entire process are large corporations and if they pay high prices for scarce national resources instead of earning higher profits the profits will go into the public coffers. Yes, these corporations have been at the edge of innovative business models and will be able to generate enough resources to effectively compete in the market place
  • Spectrum use will not be restricted to one technology alone and can be used to provide any service.
  • According to Trai Commercial LTE services using 1,800 MHz have been launched in Europe, Middle East, and APAC which includes Poland, Lithuania, Singapore, Germany, Latvia, Finland, Saudi Arabia, Australia, Denmark, Finland, and Hong Kong.
  • Worldwide over 350 operators have been allocated 1,800 MHz spectrum. In many markets, 1,800 MHz represents the largest spectrum allocation. Providing widespread coverage with LTE in the 1,800 MHz band is substantially cheaper than covering the same area with LTE using higher frequency bands.

It looks a little artificial to not participate in the auction process when the quality of service suffers, and for long the industry has been talking about how need for spectrum is a must to improve the quality of services.

When the government increases the price of petrol by 5-7 rupees, does consumption go down? No, not really, because it is a necessity. Telecom has now become a necessity and that is agreed to by the entire ecosystem, customers, and government. Hence a limited exposure to increase in tariff, even if that is absolutely necessary, might not result into a crisis for the industry but would have gone in building a structured and robust industry for the future.

The 3G services adoption in India is still in the nascent stage and its mass adoption would still take some time. Operators who have BWA spectrum for 4G services are yet to commercially roll out the 4G services beyond few circles. Nowhere in the World has 4G reached a level of affordability with a scalable and sustainable business plan.

Today’s extensive reach for 2G services makes it the most likely service in the telecom market. However hyper-competition, declining ARPUs, higher opex, higher interest rates to raise funds, increased marketing cost havea impact on the ability to support spectrum acquisition costs and yet have a sustainable business model. Any reserve price setting should reflect the above parameters. However under the current circumstances of amending the past policies, as well creating transparent system and judicial requirements, the government had limited choice.

s4The reality is that in this year’s Union Budget the government planned to raise `40,000 crore (the target was later lowered to `30,000 crore) from spectrum auction. The following were not expected as part of this plan:

  • Only 1/3rd payment upfront by bidders
  • Might not get any money from the PSUs as one-time fee to the government for excess spectrum
  • Adjustment for revenues against companies that lost spectrum means no money from those companies

The numbers have dramatically changed as a result of the above-mentioned conditions.

If the operators decide to go for a staggered mode this can become another headache for the government. However if they decide to raise foreign capital at much lower rates, it can take the staggered payment mode out of the equation, which can help the government walk away with the required numbers.

Whatever the government decides to follow, one thing that it should keep in mind is that there is no better way to allocate natural resources than auctions. However depending on the sector’s maturity and conditions these rules can be designed to do larger public good.

Having said that, regulations need to be simplified and made transparent in order to enable this industry to create a second revolution-the data revolution. We missed the fixed internet bus sometime back, hope this time we don’t miss the data revolution!

The next few steps are clear for the government-what to do with the partial spectrum blocks in many circles that have not been sold? More importantly, what to do with the 3 key circles where no one has bid? Can it reduce the base price without the move being challenged in a court of law? The path is still not a straight one.

The author is co-founder, Monk Consulting

Source:Voice&data (http://www.voicendata.com/voice-data/news/170949/the-telecom-spectrum-saga-continues)

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