Spectrum Pricing

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Akhil Verma, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

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Telecom Regulatory Authority of India has been increasing the reserve price of spectrum every year without taking into consideration the financial health of the sector. TRAI’s method of last-auction-bid-equals-next-auction-reserve-price is a recipe for disaster since it locks India’s telcos in a death spiral of higher and higher prices. 700 MHz spectrum is being auctioned in India for the first time. For telecom companies the world over, it is the most coveted — ideal for 4G and five times more efficient. TRAI has priced it at twice the base price for 800 MHz spectrum. If the entire spectrum being made available is bought by telecom operators, they will have to pay over ₹5 lakh crore, which is higher than the total industry revenue. Higher spectrum cost will put pressure on telecom operators to either increase tariffs or halt investments in new infrastructure. Neither is good for achieving Prime Minister Narendra Modi’s vision of a Digital India or the 100 Smart Cities project.

In March 2015, the telcos committed the largest-ever investment of USD 17.7bn, mainly due to the necessity to retain their expiring spectrum to avoid network disruption. Some of the reasons why this round of auction, especially for 700 MHz will not meet the government’s expectations are mentioned below. Firstly, propagation properties of both bands (700 MHz & 800 MHz) are not too different. Secondly, while there are several reasonably-priced phones available in the 800 MHz band, there are just a few high-priced devices for the 700 MHz band. Thirdly, telcos possess alternative spectrum (850MHz/1800MHz/2300MHz) to roll out 4G services.

To be fair, the Centre cannot be faulted for following the auction process for allocating spectrum. Compared to other mechanisms used in the past, such as the ‘First Come First Served’ policy or subscriber-linked criteria, auction is the most transparent way to parcel out finite natural resources.

The way forward should thus be clear: One, keep spectrum reserve prices just at last year’s levels, and allow bids beyond that on revenue shares. Two, liberate spectrum pricing and sharing where the government does not look at this as yet another way of making money. Three, liberalise consolidation in the industry by allowing any spectrum acquired in the M&A process to be priced at the old rate till it is time to renew. Four, allow some telecom prices to rise to economic levels without raising Cain over it. Five, no nationalised bank should be pressured to lend to telecom just to make auctions a success. The banking system is already down; there is no point in putting its lights out.

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References:

  1. http://swarajyamag.com/biz/spectrum-pricing-someone-in-trai-surely-didnt-read-the-golden-goose-comic/
  2. http://www.thehindubusinessline.com/opinion/editorial/unreasonable-expectations/article8163605.ece
  3. http://www.myiris.com/opinion/sector/indian-telcos-may-skip-expensive-700mhz-spectrum-fitch/20160129130741199
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