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Spectrum Hope: Industry awaits upcoming auction for business expansion

September 01, 2016

The government has finally set September 29, 2016 as the date to kick off the biggest ever spectrum auction in the country. The spectrum sale will witness telecom bigwigs fighting it out to acquire spectrum worth around a base price of Rs 5.6 trillion, spread across multiple bands. Spectrum acquisition in some of the highly efficient bands will enable operators to provide good quality of service (QoS) to their customers. Further, increased spectrum availability will give a major fillip to the data ecosystem in the country. As the industry gears up for the upcoming spectrum auction, tele.net seeks analysts’ views on the expected outcome and potential operator strategies…

Sathish-Gopalaiah-KPMGAditya-Khaitan-KPMGHemant-M-Joshi-Partner-Deloitte-Haskins--SellsInderpreet-Kaur-Ovum

What are your expectations from the upcoming spectrum auction? What will be the key dampeners and/or success factors?

Sathish Gopalaiah and Aditya Khaitan

(The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in India.)

With the government’s clearance, the stage is set for one of the biggest spectrum auctions in India with approximately 2,300 MHz of spectrum across seven bands, valued at around Rs 5.66 trillion, up for grabs. However, we believe that the balance sheets of telecom service providers are already leveraged and bidding in this auction might not be as aggressive as it was in 2015.

The key dampeners envisaged are as follows:

• Pricing of spectrum: Given the high reserve price for spectrum in the 700 MHz band, the amount that service providers need to spend to acquire a 5 MHz block on a pan-Indian basis might be a deterrent. The value of spectrum in the 700 MHz band is a significant portion of the total spectrum value on sale.

• Ecosystem for the newly introduced bands: Lack of a developed device ecosystem for the 700 MHz and 2500 MHz bands could hamper bidding.

• Stringent payment conditions: The payment conditions have been made more stringent for the above 1 GHz bands – 1800 MHz, 2100 MHz, 2300 MHz and 2500 MHz – with upfront payment being increased to 50 per cent from the previous 33 per cent. These factors are likely to put further pressure on the already cash-strapped telecommunication companies.

Factors that will drive spectrum sale include:

• Opportunity to expand the 3G footprint and roll out 4G networks: Meeting customer demands created by exponential data growth and improving customer experience could be the key drivers for purchase of spectrum in the 1800 MHz, 2100 MHz and 2300 MHz bands.

• Availability of harmonised spectrum: Spectrum bands are now technology neutral. Moreover, the availability of harmonised spectrum in the 800 MHz and 1800 MHz bands could further increase interest in these bands.

• Availability of spectrum in 30 days: The spectrum won in the auction will be made available in 30 days from the date of making the payment, facilitating ease of doing business.

• Reduced lock-in period: The lock-in period after the fulfilment of the roll-out obligation has been reduced to one year from the earlier two years, which will provide flexibility to operators for trading/sharing of unused spectrum.

Hemant Joshi

The upcoming spectrum auction with an estimated value of Rs 6 trillion is expected to be the biggest in the history of the Indian telecom sector. Reports indicate that this auction will not be a “do-or-die situation” for operators. The new spectrum could provide new business opportunities and geographical expansion. Spectrum in several bands will be made available for the first time in India and is likely to attract many bidders. The demand will be different for different spectrum bands.

Inderpreet Kaur

Of the total spectrum that the Telecom Regulatory Authority of India (TRAI) has proposed to put on sale in various bands, only the 2100 MHz, 2300 MHz and 700 MHz bands offer large blocks of contiguous spectrum that operators will find useful for providing data-led services. The rest of the bands have fragmented spectrum, offering small-quantum blocks. The recent clearing of spectrum sharing and trading rules means that operators might choose to opt for the less pricey spectrum in the 800 MHz, 900 MHz and 1800 MHz bands, in order to fill the gaps, if any, in their data spectrum holdings.

The high price attached to the 700 MHz band might further limit operators’ interest, keeping in view the huge debts that they are carrying their balance sheets. TRAI has decided to opt for the Asia-Pacific Telecommunity (APT) 700 frequency division duplex (FDD) for deploying long term evolution (LTE) services as this plan has been widely adopted globally. However, the limited availability of LTE user devices may also dampen operator interest in the band.

Which band(s) do you believe will be the most sought after by the players and why? What is the near-term scope of service roll-out and adoption in the 700 MHz band in India?

Sathish Gopalaiah and Aditya Khaitan

The 1800 MHz, 2100 MHz and 2300 MHz bands could generate a fair amount of interest in the auction.

• With technology neutrality, the 1800 MHz band will be utilised for FDD-LTE deployment. Key drivers for the uptake of this band include utilising it for LTE coverage requirements and supporting the existing subscriber base (2G and 3G). Availability of harmonised 1800 MHz spectrum would increase service providers’ interest in the band.

• The 2100 MHz band is among the most important bands for 3G in India. Despite the introduction of 4G, operators are still in the process of enhancing the coverage and capacity of their 3G networks. This is likely to drive the uptake of this band.

The 2300 MHz band, which supports TD-LTE and has a well-developed device ecosystem may witness high participation by service providers looking to expand their LTE networks. For the 700 MHz band, the high reserve price of the spectrum is expected to be a major deterrent. Even if the band is selectively picked by operators in specific circles, the existing ecosystem could impact the near-term scope and service roll-out, and spectrum might remain underutilised.

Hemant Joshi

Spectrum in the 1800 MHz, 2100 MHz and 2300 MHz bands will be the most sought after, because of the advantage of an already developed ecosystem for them. Further, these bands provide possibilities for business and geographical expansion to major operators.

Spectrum in the 700 MHz band is priced 40 per cent higher than that in the 1800 MHz band because of its greater efficiency. Although there is great potential for the 700 MHz band, in terms of global opportunities, it could attract fewer bidders because its ecosystem is still underdeveloped.

Inderpreet Kaur

For LTE, the 700 MHz band offers better coverage and more in-building penetration than any other band. Importantly, deploying LTE in the 700 MHz band lowers capex requirements compared to the 2100 MHz and 2300 MHz bands. However, with the current market conditions and high pricing linked to the 700 MHz band, operators might show less interest in it. The regulator has become more stringent about network quality and call drops, and operators are expected to adopt a balanced approach while planning investments in spectrum acquisition and ongoing network expansion.

Although the APT 700 FDD band plan has been adopted in over 40 countries, only a handful of devices are capable of supporting LTE in this band. Also, 4G is still at a nascent stage in India and it will not account for a substantial share of the country’s total mobile subscribers before 2017-18. All this means a long wait for the 700 MHz band to become mainstream.

What should be the key considerations/ strategies for operators for participating in this auction?

Sathish Gopalaiah and Aditya Khaitan

The key considerations for players participating in the auction should be:

• Existing network state, growth projections and spectrum needs

• Bridging network gaps in the 3G network to enable pan-Indian roll-out

• 4G roll-out and expansion

• Availability of harmonised spectrum in the 800 MHz and 1800 MHz bands

• Pricing of the spectrum on auction

• Business case for spectrum with potential return on investment

• Device ecosystem for the new bands.

The primary focus of operators should be on bridging the gaps in existing 3G networks, and coverage and capacity enhancements to enable a pan-Indian 3G network, delivering the desired customer experience to voice and data users. To keep up with the exponential data growth and tap into this key revenue driver, operators should also focus on simultaneously rolling out their 4G network in urban areas to lewrage the revenue opportunity.

Operators might be very selective in bidding for the 700 MHz and 2500 MHz bands, considering the underdeveloped device ecosystem and pricing for the 700 MHz band.

Hemant Joshi

Operators need to be careful while bidding as there are a variety of spectrum bands available for auction. Although the 700 MHz ecosystem is underdeveloped, operators could gain the first-mover advantage in this highly efficient band. Geographical expansion will be a key consideration and operators may consider the chances of future consolidation while bidding for spectrum. Debt burden will be a deciding factor and the ongoing call drop issue will encourage operators to bid for more spectrum. Also, the possibilities offered by new and innovative technologies like internet of things, machine-to-machine and cloud-based services will be contributing factors in operators’ bidding decisions.

Inderpreet Kaur

An operator’s decision to participate in the upcoming auction would be influenced by the following factors:

• Industry consolidation: The industry has moved ahead on the path to consolidation and Ovum expects India to emerge as a market with five to six players over the next few years. Operators would consider their future and role in a highly consolidated market before charting their spectrum requirements.

• Long-term industry outlook: India is moving away from being a voice market and the future growth in telecom revenues will be driven by data services. Looking at the long-term strategy, operators cannot afford to fall short on data spectrum, be it for 3G or 4G services. Having said that, the current auction will see selective bidding, with operators trying to fill the in gaps in their existing 3G/4G spectrum portfolios.

• Incumbent operators’ position against Reliance Jio (RJIL): Incumbents have been working on widening their broadband spectrum assets in order to match the capacity of RJIL. For instance, Bharti is already looking at acquiring additional 2300 MHz and 1800 MHz spectrum from Aircel and Videocon is planning to extend its 4G coverage to all the 22 circles.

Based on your expectations, how do you see the overall industry dynamics change after the conclusion of the auction? What can be the potential impact on various stakeholders, including the end-user?

Sathish Gopalaiah and Aditya Khaitan

The consolidation that commenced with the spectrum trading/sharing policy being formalised is likely to continue. Stressed balance sheets and high debt are expected to drive the consolidation. This could enhance market shares, which in turn will drive growth and profitability through volumes.

Considering the spectrum on auction, operators will have sufficient bandwidth to ensure QoS in their networks. The spectrum acquired could drive 4G roll-out and expansion, and help in enhancing 3G network coverage and quality. In line with the trends in data revenue and usage, customers might witness improved data plans and higher data speeds. The additional spectrum obtained by operators could also help resolve issues pertaining to network quality, the lack of which leads to call drops and degraded voice quality.

Hemant Joshi

Among the issues plaguing the Indian telecom sector, poor QoS, call drops, etc. reflect the lack of contiguous spectrum. Operators are trying to utilise the available spectrum to serve the second largest telecom market in the world. The spectrum auction is likely to change industry dynamics and give a chance to operators to improve their QoS. The additional bandwidth will enable them to improve the presence of data-based services like 3G and 4G and ultimately allow them to provide innovative services to end-users. For end-users, there could be significant improvement in network availability, and call continuity services in more regions.

On the other side, the debt of operators will certainly go up and could bring the sector closer to consolidation. In addition, it will accelerate the entry of mobile virtual network operators in the ecosystem that has been pending for a while

 
 

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