In some frontier and emerging markets, the regulators’ decision to release spectrum is primarily guided by spectrum availability at that point in time irrespective of the demand among operators. A disconnect between the time of availability, and release, of spectrum and the time of its demand results in an “early release” situation.
A recent research paper released by consulting firm CAPITEL suggests that the early release of spectrum by regulators in frontier and emerging markets is driving mobile operators to adopt data pricing and investment models that may stagnate mobile data adoption and limit long-term returns.
Reasons for early release
Governments across the world have taken time to fully appreciate the value of spectrum. The realisation dawned after mobile penetration increased dramatically, and operators started reporting earnings before interest, taxes, depreciation and amortisation of over 40 per cent. The regulators did not have a long-term demand-aligned spectrum roadmap in place as the real demand, or the true value of spectrum, was not known. As such, spectrum was auctioned, allocated, or assigned as and when it became available. For instance, 2300 MHz spectrum, used for long term evolution (LTE) capacity in dense urban areas, has been released in markets with no smartphones and 3G services.
As the governments realised the value of spectrum, they started requesting for spectrum auctions to help achieve their fiscal budget targets. Making spectrum available can be an arduous exercise involving various constraints such as interference concerns, harmonisation requirements and multiple other prerequisites. Moreover, getting the right band available may not be possible every year. Therefore, countries tend to auction the available bands.
Further, lobbying by interest groups of equipment manufacturers, mobile operators and other stakeholders can have an impact on the release decision.
Impact on operator plans
An operator has two options if spectrum is released early. It can either buy spectrum ahead of time to prevent competitors from gaining a marketing and business advantage, or wait for the next round of spectrum availability. The second option is typically not available to market leaders, and they end up purchasing spectrum ahead of time and sometimes at a high price. This kick-starts a cycle of poor consumer experience that reduces engagement, limits data adoption, hurts operator returns and further weakens their ability to buy additional spectrum in the next round of release.
Increasing investments in spectrum and network requires at least a proportionate increase in earnings before interest and taxes, and in profit after tax. If investments are made ahead of time, the focus will be on maximising returns from existing assets to increase the yield, and optimising any additional investments to minimise the increase in capital employed.
To maximise the yield or realisation per MB, operators are adopting a strategy of increasing their marketing focus on LTE but focusing their on-the-ground network investments on 2.5G and 3G to delay new investments till the market matures. Moreover, operators are pricing pure LTE and 3G packs beyond the capacity of mass market users, while blended data packs are becoming more prevalent. To ensure that the actual investment required in 3G and 4G is low, 2G is being built into the pricing of 3G and 4G. Users who buy 3G and 4G end up using 2.5G for 20-30 per cent of the time because of coverage gaps or capacity constraints. As a result, the on-ground experience of users is 2.5G or 3G, with 4G being an aspirational product with no mass market access. This also leads to patchy 3G and 4G data coverage and complex tariff plans that are difficult for common users to decipher.
In addition, operators are looking to optimise new investments in networks. The focus of many operators in these markets is on strengthening their GSM networks to support data fallback from 3G/4G plans and manage 2.5G data traffic. Typically, 3G and 4G investments are optimised through the following investment parameters:
- Decision on the level of indoor coverage: Given that the low frequency spectrum band is generally expensive, and competing wireline yields for home broadband are a fraction of the mobile data yield, the use of mobiles for indoor coverage is a key investment decision.
- Decision on realised user experience: Operators charge a premium of 40-60 per cent for delivering an equal quantum of monthly MB data on 4G versus 3G. There is a price (and a cost) for a better user experience, and operators need to decide on the level of experience they plan to offer.
- Decision on geographical areas to be covered: Low frequency spectrum is preferable for rural coverage and is priced higher than high frequency bands. As operators have different views on the growth potential and challenges of rural markets, geographical coverage becomes an important decision factor.
The alignment of spectrum release timelines with market readiness will allow regulators to realise a market value closer to the intrinsic value of the spectrum, and prevent losses to the exchequer.
Impact on data market growth
Unlike the voice business, the value of user experience in mobile data consumption increases, especially as the market matures. Operators differentiate on the basis of speed, throughput and network experience, rather than coverage. This experience has a significant cost because providing a network with 2 Mbps throughput as against 0.5 Mbps throughput requires a substantial increase in investments.
If the market does not grow, operators have to deploy additional spectrum to serve the same limited set of customers. The user experience improves but the ARPU does not improve at the same pace. In such a scenario, the purchase and deployment of additional spectrum will result in declining returns, and reduce the overall returns of the business. If the burden of purchasing spectrum in every cycle begins to weigh down on operator financials, it gets reflected in their approach to maximise yield and minimise investments. This ultimately results in a situation where a 2G or a 3G data user is subsidising the user experience for a 4G user, making data unaffordable for the majority of mass market users. As operators keep accumulating spectrum, while market adoption and usage slows down, the ability of operators to further invest in buying spectrum becomes constrained.
Thus, the annual release of spectrum bands that cannot be deployed immediately puts in motion a cycle of declining marginal returns. Typically, operators focused on quarterly or periodic returns tend to follow the approach discussed earlier. However, this may not hold true for operators that have committed significant capital into the market with a view to achieve long-term returns.
Eventually, all operators decide on their investment appetite for the market and align their returns model accordingly. For an operator that is part of a multinational group, the investment decision is led by the relative attractiveness of the market opportunity vis-à-vis alternative investment opportunities available in other markets. For stand-alone operators with local market operations, the decision will be driven by the availability of funds based on the strength of their balance sheets and the returns from other business verticals of telecom operations.
Except for those operators that are well funded and have long-term plans for the market, all others will have to compromise between indoor coverage, user experience and geographic reach to generate the desired returns. This has a longer-term impact on service availability and quality, and may further delay the adoption of services among consumers.
Going forward
It is essential that regulators devise a spectrum release framework to help operators better plan their investments and let the data market grow. The alignment of spectrum release timelines with market readiness will allow regulators to realise a market value closer to the intrinsic value of the spectrum, and prevent losses to the exchequer. This is visible in secondary market deals or follow-up auctions for the same spectrum bands at a later date, where typically the realised price points are higher even after discounting for the accrued interest cost.
A policy framework that evaluates the market readiness on demand and competitive parameters with the spectrum availability situation is required to enable faster growth of the data market, an improved consumer experience and better realisation of spectrum value.
Based on the paper “Economics of Mobile Data in Frontier and Emerging Markets”, by CAPITEL
