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Spectrum Sale: Is the sector ready?

September 21, 2017
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Setting the ball rolling for the next round of spectrum auctions in the country, the Telecom Regulatory Authority of India (TRAI) has issued a consultation paper on the sale of spectrum in nine bands. Telecom operators, however, are not in favour of another round of auctions in the near term given their high debt levels and deteriorating financial position amidst growing competition. Operators, moreover, feel that the additional spectrum needs of the industry should be assessed only after the finalisation of key merger and acquisition deals. Industry experts share their views on operators’ readiness for the next round of spectrum auctions, the pricing and quantum of airwaves to be put on sale, and the feasibility of auctioning 5G spectrum... (From left to right - Hemant Joshi, TMT India Leader, Deloitte; Inderpreet Kaur, Analyst, Ovum; Rajan S. Mathews, Director General, Cellular Operators Association of India; Dr Mahesh Uppal, Director, ComFirst)

Operator readiness for the next round of spectrum auction

Hemant Joshi

The growth in data subscription and consumption, as well as the popularity of 4G services requires more bandwidth for a seamless network experience. Operators have invested huge capex in the past auctions as a result of which the industry is reeling under a huge debt of around Rs 4.8 trillion. The huge debt, falling margins in data and voice services, and ongoing merger and acquisition (M&A) activity in the sector have put operators on the back foot for the next round of spectrum auctions. Although some of the big players may have funds for future auctions, they are cautious owing to the changing market paradigms and the availability of spectrum with small operators who are not finding operations viable at lower tariffs.

Inderpreet Kaur

Indian telecom operators are already highly leveraged. Looking at the recent financial indicators, the net debt-to-EBITDA (earnings before interest, taxes, depreciation and amortisation) ratio for the top three operators – Bharti Airtel, Vodafone India and Idea Cellular – stands far above the industry benchmark of 1.8X (taking into consideration the top 40 operator groups globally). For Bharti Airtel, the net debt-to-EBITDA ratio was 2.6X, compared to 4.6X and 4.2X for Idea Cellular and Vodafone India respectively. The recent financial deterioration further dampens operator interest in participating in the auction.

The industry is already witnessing some sizeable M&As and, therefore, a delay is expected in operator strategies with regard to new spectrum acquisition. For the next year or so, operators will focus more on integrating their operations in the wake of the ongoing consolidation and upgrading the existing infrastructure.

Rajan S. Mathews

The industry is witnessing an acute financial crisis, which has also triggered mergers/consolidation in the sector. There is considerable uncertainty in the sector at present. Companies will have to wait a little and see how the market dynamics play out. Hence, we feel that the government should not rush into spectrum auctions this year and instead allow the market to settle down. Therefore, the timing of the auction of spectrum in any band should be the latter half of 2018 or early part of 2019, once all the consolidation deals have been announced and locked down. Only then will the companies be in a better position to consider any additional spectrum needs.

Dr Mahesh Uppal

I think there is a broad consensus that operators are not ready for an auction in the short term. They neither feel the pressure to acquire additional spectrum nor do they have the additional funds required to do so. They also do not have the appetite or the capacity to take on more debt.

The pricing and quantum of spectrum to be auctioned

Hemant Joshi

It is too early to predict the spectrum prices and the quantum of spectrum to be auctioned. However, the outcome of the last auction, where the government managed to sell just 40 per cent of the total spectrum, indicates a lower spectrum price in the coming auctions. Spectrum in all seven bands is expected to be auctioned and the government may push the 3300-3400 MHz and 3400-3600 MHz bands considering the developments in 5G technology around the globe.

Inderpreet Kaur

TRAI has proposed new bands for auction – 3300-3400 MHz and 3400-3600 MHz – in addition to the remaining spectrum from the previous auction across the 700 MHz, 800 MHz, 900 MHz, 1800 MHz, 2100 MHz, 2300 MHz and 2500 MHz bands. Around 60 per cent of the total 2352 MHz of spectrum put on sale last year went unsold. The government auctioned 2x35 MHz of 700 MHz spectrum; however, the reserve price of Rs 114.85 billion per MHz was too steep to find bidders. Operators’ interest in acquiring spectrum in the 700 MHz band will be largely driven by a rationalisation in the reserve price. While the regulator needs to take another look at the base price, it should also adopt better ways of determining the base price rather than linking it to the last auction price. The price discovered in the past auctions is normally influenced by a range of local factors specific to the time when the auctions took place; for instance, the quantum of spectrum put on sale, the number of players bidding for that spectrum, auction format, etc.

Rajan S. Mathews

Auctions are useful when there is uncertainty about the value of the good being put on sale. As far as setting the reserve prices is concerned, the following should be the objectives, in order of preference – ensure sale, induce participation, determine optimal value and avoid collusion. Setting reserve prices is typically a conundrum because if they are set too high, it increases the probability of auction failure; if they are set too low, frivolous bidders can enter the auction. Every failed auction results in a missed opportunity for the economy, lower investor interest in the industry, revenue loss to the exchequer and inefficient spectrum allocation. Spectrum is a critical resource for mobile networks and the issue of its “availability” at the “right price” is central to the growth of services in the country.

The band-wise quantum of spectrum that is available for auction is as follows:

• 700 MHz band: 35 MHz in each licence service area totalling 770 MHz pan-India is available for commercial use

• 800 MHz band: 58.75 MHz

• 900 MHz band: 15.6 MHz

• 1800 MHz band: 46.8 MHz

• 2100 MHz band: 275 MHz

• 2300 band: No spectrum is available in this band

• 2500 band: 230 MHz

• 3300-3400 MHz band: The Department of Telecommunications has proposed to include 100 MHz in all the 22 licensed service areas in the 3300-3400 MHz band for the forthcoming auction for access services.

• 3400-3600 MHz band: Of the 200 MHz spectrum available in this band, 25 MHz spectrum (3400-3425 MHz band) is identified for the Indian Space Research Organisation’s use in the Indian Regional Navigation Satellite System. The remaining 175 MHz (3425-3600 MHz band) spectrum is available for access services and can be auctioned.

Dr Mahesh Uppal

As far as the quantum of spectrum is concerned, the government must take into account the inputs provided by telecom companies. As we have seen in the previous auctions, low reserve prices do not necessarily result in low final bids nor do  high reserve prices lead to high receipts from auctions. We have seen how high reserve prices (for example for 700 MHz band) discourage bidding, leaving a large quantum of spectrum unsold. I believe reserve prices can be lowered by an order of magnitude, to almost a tenth of what they are at present. All we need is to ensure that the reserve prices are high enough so as to discourage speculative bidding.

Need for a review of existing roll-out obligations and spectrum cap

Hemant Joshi

The current roll-out obligations in the 700 MHz, 800 MHz, 900 MHz, 1800 MHz, 2100 MHz, 2300 MHz and 2500 MHz bands are difficult for the debt-laden operators to meet. To this end, TRAI has sought feedback and suggestions on the roll-out obligations. Also, it is not possible to specify roll-out obligations for 5G spectrum (3300-3400 MHz and 3400-3600 MHz band) until 5G technology becomes commercial. A spectrum cap can be reconsidered as the market is undergoing consolidation and operators’ spectrum holding can go beyond the prescribed limit because of consolidation. Easing the spectrum cap can help operators strengthen their spectrum holding and provide better quality of service.

Rajan S. Mathews

For any market-driven auction, there is no rationale for insisting on any roll-out obligation. The competitive situation forces operators to roll out services wherever a viable business case for the same exists. Moreover, India is now a mature market in terms of mobile telephony; hence, there is no need to prescribe roll-out obligations. Furthermore, there should be no need to prescribe roll-out obligations for an operator that acquires spectrum in the auction if that operator has already fulfilled the roll-out obligations once, as the present obligations are quite comprehensive.

Dr Mahesh Uppal

Yes, in my opinion, there is a need to review the roll-out obligations and spectrum cap, particularly in the lower frequency bands because they enable  coverage over longer distances. If the roll-out conditions are tough, operators would need  to invest much more in networks, which, in turn, will result in lower bids for spectrum. This is good. The auction design should address public policy objectives like universal broadband access, instead of only augmenting exchequer revenues.

Feasibility of auctioning 5G spectrum

Hemant Joshi

5G spectrum bands (3300-3400 MHz and 3400-3600 MHz band) are expected to be put up for auction by the government. Although there are several developments taking place in 5G and emerging technologies around 5G, India is far from the commercial launch of the technology. However, growing data consumption and hypercompetition in the market may help find bidders for this spectrum band, who would like to gain a first-mover advantage. A lot of activity is expected in these bands from the top three telecom companies to secure bandwidth, provided the pricing is appropriate.

Inderpreet Kaur

Asia-Pacific is leading the 5G race, with Japan and South Korea ready to launch trial 5G networks this year and China joining the race by 2020. These developments mean that the required technical standards and specifications for 5G will be rolled out soon (by 2020). However, rolling out new networks and operating 5G infrastructure will come with additional expenditure and capital outlay. The associated capex and opex requirements would vary depending on operators’ implementation strategies for 5G; for instance, just an upgrade to long term evolution-advanced (LTE-A) technology or 5G as a fixed wireless broadband. Adding to this is the spectrum cost. Considering the financial state of operators at present, we may find limited takers for 5G spectrum.

Rajan S. Mathews

Globally, the regulatory and technical standards for 5G are under deliberation and consultation. 5G spectrum should be auctioned only after the ecosystem is developed, especially for services and applications that can work on all bands but would work much better and faster on 5G spectrum. Thus, 2019 might be an appropriate time to auction 5G spectrum as there will be better use cases and applications for the technology. This will allow for a better understanding of the value of 5G spectrum and the resultant price to be bid. Since no bids were received in the 700 MHz band in the October 2016 auction, TRAI needs to revisit the reserve pricing of the 700 MHz band and price it much lower. A full-fledged bottom-up evaluation process that analyses market conditions, revenue opportunities, and market demand and supply should be undertaken afresh.

Dr Mahesh Uppal

Auctioning of 5G spectrum is not very feasible at this stage. Firstly, more unlicensed spectrum might be more relevant in the case of 5G. Secondly, sale must be driven by demand and not by supply. Therefore, the government would be well advised to not rush in to auction 5G spectrum but to explore more efficient and cost-effective ways of deploying 5G services using the spectrum.

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