After several deliberations, the cabinet has finalised the reserve price for spectrum across multiple frequency bands (800 MHz, 900 MHz, 1800 MHz and 2100 MHz) for the forthcoming auctions. The government has also issued the notice inviting application (NIA) outlining the details of the auction process, which is scheduled for March 4, 2015. There will be a total sale of 380.75 MHz of spectrum across three bands ? 900 MHz, 1800 MHz and 800 MHz. From this sale, the government expects to garner about Rs 650 billion, of which Rs 160 billion is expected to be realised in 2014-15. It will also sell 5 MHz of pan-Indian spectrum in the 2100 MHz band, which will result in an additional windfall of Rs 185 billion.
The government has fixed a reserve price of Rs 36.46 billion per MHz for pan-Indian spectrum in the 800 MHz band, Rs 39.8 billion per MHz for pan-Indian spectrum (excluding Delhi, Mumbai, Kolkata, and Jammu & Kashmir) in the 900 MHz band, and Rs 21.91 billion per MHz for pan-Indian spectrum (excluding Maharashtra and West Bengal) in the 1800 MHz band. The cabinet has also approved a reserve price of Rs 37.05 billion for spectrum in the 2100 MHz band.
As per the NIA, the licences to be awarded to the auction winners will have a validity of 20 years. New entrants, as well as those operators whose licences will expire in 2015-16 and who did not acquire spectrum in the November 2012 and February 2014 auctions, will be required to bid for at least 5 MHz of spectrum in this auction. Those whose licences are due to expire in 2015-16 and who acquired spectrum in the two previous auctions will be required to bid for a minimum of only 0.6 MHz of spectrum.
Spectrum winners have the option of using the full upfront payment option or the deferred payment option. Under the former, auction winners can make the payment within 10 days of the declaration of the final price or the prepayment of one or more annual instalments. Under the deferred payment mode, service providers can make an upfront payment of 33 per cent in the case of spectrum in the 1800 MHz band, while 25 per cent of the total amount can be paid upfront in the case of spectrum in the 900 MHz and 800 MHz bands within 10 days of the successful declaration of the auction winners. There will be a moratorium of two years for the remaining amount of the spectrum payout, which can be paid in 10 equal instalments.
Industry response to spectrum prices
Industry players and experts are largely of the opinion that the reserve price of the spectrum to be auctioned in March 2015 has been fixed with the objective of maximising government revenue, which can affect industry dynamics. Despite a relatively large quantum of spectrum being made available, the industry reckons that there will be intense competition for spectrum in the 900 MHz band, which will drive up its price and affect the financial health of operators. This is because the licences of many service providers operating in this band are due to expire in 2015-16 and they have no option but to reacquire it in order to continue offering mobile services in the same band. Among the operators whose licences are due to expire soon are Idea Cellular (licences for seven circles), Bharti Airtel (six circles) and Vodafone India (six circles).
Another reason the bidding is expected to be aggressive in this band is that 900 MHz spectrum can also be used for offering 3G services. Given that none of the operators have pan-Indian 3G spectrum, they are likely to go all out in bidding for this spectrum to increase their 3G footprint and take advantage of the exponential increase in data demand. In addition, service providers that do not currently hold spectrum in the 900 MHz band will consider entering the fray since this type of spectrum can be used for expanding 2G coverage as well as for launching 3G services. Consequently, industry experts are expecting fierce competition in the 900 MHz band, as was witnessed in the March 2014 auctions.
On the other hand, the demand for spectrum in the 1800 MHz band is likely to be relatively modest. The incumbents already increased their spectrum holdings in the 1800 MHz band in the previous two auctions and would therefore be more interested in buying 900 MHz spectrum. Moreover, the total quantum of spectrum available in the 1800 MHz band in many Category A circles is minuscule, which could deter service providers from looking at entering these high-ARPU markets. For instance, the government has offered only 3.8 MHz, 3.4 MHz and 1.8 MHz of spectrum in this band in the Andhra Pradesh, Gujarat and Karnataka circles respectively.
However, new entrants and regional players could bid aggressively as they look to enter new circles over and above the three aforementioned areas. Some service providers will also be considering acquiring more spectrum in the 1800 MHz band for providing 4G services using long term evolution-frequency division duplexing technology, which has a more developed ecosystem and reduces the time-to-market.
The industry also fears that the auction could witness highly competitive bids in the 2100 MHz band, considering that only 5 MHz of spectrum is being put up for sale. The availability of additional 3G spectrum has become critical for operators as they are finding it increasingly difficult to support the growth in data traffic and are therefore demanding additional sales in this regard.
Even though the Department of Telecomunications (DoT) is likely to soon receive an additional 15 MHz of spectrum in the 2100 MHz band as part of the swap deal between the Ministry of Communication and IT and the Ministry of Defence, the government has decided against putting it up in the February auctions. The industry believes that if an additional 20 MHz of spectrum had been made available in the auctions, as recommended by the Telecom Regulatory Authority of India, a more rational bidding process would have been ensured. While the government has indicated that the remaining spectrum would be sold later, operators would prefer not to wait for the next auction, given the risks involved. There have already been several delays in the swapping of spectrum between DoT and the defence ministry, and any further hindrance would severely affect 3G network expansion plans.
Economic costs of high-price spectrum auction
While the high reserve price of spectrum will result in significant revenues for the exchequer, the industry and consumers will have to bear the consequences. With the bidding expected to be aggressive, spectrum winners would be required to pay a significantly higher sum than the reserve price. While some operators have secured equity funding for buying spectrum, they would be using debt to partly fund spectrum payouts. However, for most operators, raising additional debt will be costly and will further weaken their financial health.
This would also leave them with limited funds for investing in network roll-outs and expansion. In fact, given the financial crunch, service providers might initially restrict investments to high-ARPU service areas with the aim of getting a reasonable return on investments and only then expand their network to other areas. This would, however, defeat the government?s objective of ensuring an improvement in telecom connectivity across the country.
Moreover, service providers are likely to continue withdrawing promotional offers and hiking voice and data tariffs to increase revenues. Such moves have already started showing signs of improvement in the financial performance of operators, as is evident from the past few quarterly results. A continuation of this trend, however, could be counterproductive. High tariff hikes might compel subscribers to limit voice usage and shift to over-the-top services, which would affect operator revenues. Therefore, they will have to take a cautious stance in increasing tariffs to ensure growth in revenues while simultaneously restricting subscriber churn.
Conclusion
The government needs to be lauded for offering a considerable quantum of spectrum across bands in the forthcoming auctions, but aggressive bidding, particularly for airwaves in the 900 MHz and 2100 MHz bands, could worsen the financial health of telecom operators. Though they are better placed to fund their spectrum payouts this time around, aggressive bids and high prices would nevertheless jeopardise their investment plans. It will be interesting to see what strategy they follow in their attempt to not overpay for spectrum while simultaneously making sure that they acquire airwaves in those circles in which their licences are due to expire.
