Wth a target to achieve 250 million subscribers by 2007, the Indian telecom sector is trying to step up its pace of growth. However, a stumbling block in its path could be the total inability of the industry, policy-makers and the regulator to resolve the contentious spectrum issue.
With mobile subscriber additions increasing at the rate of roughly 4 million a month, the need for additional spectrum has become even more acute. There is an urgent need to sort out spectrum allocation and pricing issues ?? not only to maintain service quality but also to launch new services such as 3G.
As it is, service providers in India get very limited amounts of spectrum. Compared to international average allocations, which are of the order of 2×20 MHz for GSM and 2×14 MHz for CDMA, Indian telecom operators receive 2×4.4 MHz to 2×10 MHz for GSM services and 2×2.5 MHz to 2×5 MHz for CDMA services.
It is not that the regulator or the policymakers are not working towards it; however, at every stage they are meeting serious hurdles. The presence of both technologies, GSM and CDMA, each with their specific spectrum needs and equally strong lobbies, has led to strong differences on how spectrum ought to be allocated.
Also India, unlike many other countries, has always followed a discretionary 2:1 ratio for allocating spectrum to GSM and CDMA players. Recently, the Department of Telecommunications (DoT) linked the allocation of additional spectrum to the subscriber base in a given circle. For example, GSM operators will get 10 MHz of spectrum when their subscriber base reaches 100,000 in the metros; CDMA operators on the other hand are eligible for 5 MHz.
Not surprisingly, CDMA operators and the CDMA International Association are protesting. According to Dr Charles Rush, CTO, Telecommunications Management Group, India is the only country that allocates spectrum on the basis of subscriber numbers. Barring a few isolated cases, it is also the only country in the world that practises discretionary allocation.
Recently, the defence ministry agreed to free up spectrum in the 45 MHz band. With the possibility of fresh spectrum availability, the question again arises, how best to allocate this scarce resource? What are the international best practices for spectrum allocation
“Not the current allocation position for sure,” say both, the Cellular Operators Association of India (COAI) and the Association of Unified Service Providers of India (AUSPI). Comments Mukund Govind Rajan, AUSPI president: “The 2:1 criterion is biased against CDMA technology, which is a 3G technology.” T.V. Ramachandran, director-general of COAI says: “The subscriber-per-MHz procedure is not considered appropriate for judging spectrum efficiency. It could lead to greatly misleading inferences.”
However, R.N. Aggarwal, former wireless adviser to the Government of India, differs. According to him, the assignment of frequencies has to be need based. “Most parts of the country do not face spectrum availability issues. Additional spectrum is needed mostly in the metros and big cities where the subscriber base is large and traffic density is high,” explains Aggarwal. “Giving equal spectrum to all players using different technologies doesn’t make much sense as each technology has its own technological characteristics and requirements.
Internationally, there seems to be no hard and fast rule on assigning spectrum. Countries have experimented with various methods of spectrum allocation, such as spectrum “beauty contests”, or trading and auctioning of spectrum with varying degrees of success.
According to analysts, most countries predominantly offer one or the other technology. For instance, most of Europe operates largely on GSM networks while the Americas operate on CDMA. Though some countries with CDMA also have a GSM presence and vice versa. China, for instance, not only has one of the world’s largest GSM networks but also offers CDMA-based services. Mindel de la Torre, president, Telecommunications Managament Group, says that, “Customers have access to both technologies almost all over the Americas, from Canada to the US and right down to countries such as Chile, Argentina and Brazil.” Australia and New Zealand mainly have GSM-based networks but also have CDMA operations, especially in the remote areas. In Asia, countries such as Japan, Hong Kong, China, Korea, Malaysia and now Pakistan offer both technologies.
Drawing from the experience of these countries, it can be seen that spectrum can either be equally distributed to those who need it or allocated through a competitive mechanism. It can also be provided on a first come, first served basis.
Allocating equal amounts of spectrum to each applicant is, in principle, fair, but doesn’t take into account the relative efficiencies of utilisation. Players would have no incentive to use the spectrum efficiently. Also, it may result in lesser allocation to operators who need it the most, hence impeding telecom growth. This strategy would be appropriate only if all the players grow at an equal pace and have the same need for the resource.
According to analysts, however, most countries set minimum conditions for participating in spectrum tenders, which can include proof of financial stability, business plan and adherence to spectrum caps. Usually, countries divide the existing spectrum into usable blocks and then award it through competitive mechanisms such as beauty contests or auctions.
The beauty contest is basically an administrative process that involves evaluating each application against a number of prerequisites, which may include operational commitments such as coverage, service quality or tariffs. Often a fixed fee is also included. This is the most common method used around the world.
Such contests have been used to award the majority of GSM licences in Europe, in countries such as Finland, France, Norway, Poland, Spain and Sweden. They have also been used for around half of the third-generation mobile licences. Pakistan, Japan, Hong Kong, South Korea and China have also held beauty contests to allocate spectrum licences.
In Nepal, which has both GSM and CDMA networks, a group headed by the information technology minister and comprising representatives from the aviation and defence services decides who will receive the spectrum. However, unlike India, the spectrum is equally allocated among all the eligible players.
Beauty contests can be quite efficient, provided the comparative selection criteria are objective, transparent and non-discriminatory. According to a study carried out by the European Telecommunications Network Operators Association, this route seems to be more suitable than auctions, provided that the fees imposed on the selected candidates remains proportionate to the spectrum management costs.
Similarly, in another study by the University of Colorado, beauty contests have proven to be more successful than auctions, especially in terms of accelerating deployment and improving service provision. According to the Canadian government, “the comparative process is timeconsuming, but it guarantees the best fit”.
There are, of course, dissenters too. Countries such as the US, Canada, Pakistan and Hong Kong, which started out using beauty contests to allocate licences, later switched to auctioning.
This is because beauty contests have some disadvantages. According to the Telecom Regulatory Authority of India, there are many difficulties in specifying and evaluating criteria. This creates a potential for legal controversy and subsequent delays in the use and deployment of spectrum.
The US, for example, used to hold administrative hearings to allocate cellular licences. However, the hearings were cumbersome and would sometimes drag on for a year. Glen O. Robinson, a former member of the Federal Communications Commission, described them as “the FCC’s equivalent of the medieval trial by ordeal”.
Even Japan, which used a highly successful decentralised method of allocating licences through the administrative process (allowing the industry to decide amongst itself which agent would get the radio broadcast licence in the 1950s), could not extend its application when it came to mobile telecom licences due to constant disagreement among the parties.
Hence, in the 1990s, governments increasingly started auctioning of spectrum. Auctions are a way of assigning spectrum among competitive buyers at the best price that the market can offer. Among others, the US, UK, Australia, Chile, Brazil and Malaysia all auction their spectrum.
According to TRAI, properly designed auctions can provide a transparent and somewhat less subjective approach to allocation than beauty contests. Provided that there is sufficient demand for the resource, a well-designed auction is considered, by some, to be the “most likely method to allocate resources to those who can use them most valuably”.
They are especially useful if the spectrum packages to be offered differ and would be valued differently by the bidders. If nothing else, they generate revenue for the government.
The FCC stated: “Since a bidder’s ability to introduce valuable new services and to deploy them quickly, intensively, and efficiently increases the value of the licence to that bidder, an auction awards licences to those bidders with the highest willingness to pay.” There have been several successful spectrum auctions in the US, Canada, Australia and Brazil, which have not only generated substantial revenues but also allocated spectrum efficiently.
However, despite its many plus points, spectrum auctions have a host of disadvantages too. First, they entail high costs for the bidders. According to analysts, auction costs are often passed on to consumers through higher tariffs. The firms’ high expenditures also leave them with lesser funds to invest in capital expenditure.
The mid-2000 3G auctions in Europe have, for instance, resulted in failure. Due to the overall bullish sentiment over 3G in the telecom industry, players (mostly only GSM) in the UK, Germany and the Netherlands bid huge amounts (close to $100 billion) as auction fees, which contributed not only to a longer payback period, but also led to a sharp slowdown in network rollout for 3G investments. Also, in the past, even FCC auctions, deemed to be among the most successful auctions, have had problems related to collusive behaviour by agents.
The different methods of spectrum allocation in different countries clarify several things. One, that despite having both technologies, the majority of these countries still allocate spectrum in a technologically neutral manner even though CDMA is a more efficient technology than GSM. Second, such countries use a mix of marketand state-based allocation criteria; however, the subscriber base alone is never considered. Third, each allocation procedure has its advantages and disadvantages. It is evident that what has worked for one country may not necessarily work for another.
India, being relatively unique in many respects, would perhaps be best off picking up different aspects of international processes and working out the method most suited to it.
