To expedite the rollout of 3G services in the country, the Telecom Commission, which is the apex body of the Department of Telecommunications (DoT), has cleared the draft policy on 3G mobile services. The draft was released by DoT in mid-March, and was based broadly on the Telecom Regulatory Authority of India’s (TRAI) recommendations for 3G services.
DoT agreed, in principle, to most of TRAI’s recommendations including that for auctioning 3G spectrum. The successful bidder will get a unified access service licence for 3G services after paying the required entry fee, and would then be allocated spectrum (radio frequency) in the 2.1 GHz band through a process of auction. The operator would not be eligible for 2G spectrum on the 3G licence.
DoT has, however, deviated from TRAI’s recommendations on the crucial spectrum allocation issue. While TRAI had suggested that each GSM operator be allowed to bid only for 5 MHz of 3G spectrum, DoT has allowed all players to bid for up to 10 MHz of 3G spectrum (two blocks). However, operators that need only 5 MHz of 3G spectrum to migrate to 3G services can bid only for one block.
DoT’s move has cleared the way for foreign players as well as new domestic companies to participate in the 3G arena. For new operators who need a minimum of 10 MHz to launch 3G services, this is a welcome move as they also require additional start-up spectrum. However, the existing telecom operators, both CDMA and GSM, are upset about the entry of new players in 3G and they have written to DoT threatening legal action if new operators are allowed to participate in the auction.
The existing operators feel that they should get some priority in the evolution to 3G as these services are an extension of 2G services. DoT officials, however, contend that while it may be true that 3G is an improved version of 2G, it does not automatically give 2G players a pre-emptive right over 3G spectrum.
Rationalising the auction-based pricing of 3G spectrum ?? as against the fixed, below-market fee for 2G spectrum ?? DoT officials say that the move is aimed at making 2G services more affordable. So, 3G is meant for value-added services, for which it is better suited, while 2G is to remain an affordable voice service. This makes 3G a distinct service from 2G, and the business models for these would have to be different. “Given that, it is only logical that the auction be thrown open to everyone,” notes a senior DoT official.
The draft policy has also suggested big changes to the base price for 3G spectrum bids. Whereas TRAI had recommended that the base price for 3G spectrum be set at Rs 800 million for Delhi, Mumbai and Category A circles; Rs 400 million for Chennai, Kolkata and Category B circles; and Rs 150 million for Category C circles, DoT set the highest base price for Chennai at Rs 2.33 billion followed by Karnataka, Mumbai and Delhi at Rs 2.06 billion, Rs 2.03 billion and Rs 1.70 billion respectively.
Operators are expected to place bids over and above these figures. At these prices, an operator seeking 3G spectrum in all 23 circles, along with spectrum for broadband wireless access, would have to fork out Rs 14 billion just by way of reserve price.
DoT has taken steps to safeguard the interests of state-owned operators Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL). The policy allows both the companies to bid for 3G spectrum, and one block of spectrum will be reserved for them. According to the policy: “If they (BSNL or MTNL) win one of the spectrum blocks, they would get spectrum based on their bidding price. Otherwise, one block of spectrum would be given to them at a price equal to the highest bid.”
In an effort to fine-tune the auctioning process, DoT plans to introduce a clause stipulating that all successful bidders must pay the same spectrum fee as the highest bidder. The auction for 3G spectrum will be held by circle and three to five operators will be given 3G spectrum in each circle, depending on the availability of radio frequencies. One of these slots will be reserved for BSNL or MTNL. The Telecom Commission is of the opinion that if the incumbents are made to match the price quoted by the highest bidder, the other successful bidders too, must be made to follow suit.
The spectrum will be awarded through a controlled ascending e-auction rather than a direct auction (see Box 1). If all the successful bidders are asked to match the price quoted by the highest bidder, it will significantly increase the government’s revenues from the auction.
The reason why DoT is not in favour of a direct auction for 3G spectrum is that it may result in a situation similar to that in the mid-1990s, when many companies could not pay the astronomically high amounts they had bid for cellular licences. Moreover, DoT’s experience with straight telecom and broadcasting licence auctions ?? in India as well as in Europe ?? has not been completely satisfactory.
Even though DoT has still to finalise the details regarding the auction process, it has indicated that spectrum would be initially allocated to the first five successful bidders. The others would be waitlisted till subsequent tranches of spectrum are available.
Meanwhile, the government has proposed stiff network rollout obligations for 3G mobile service providers. If the operators fail to meet the obligations, they would have to pay a hefty penalty for hoarding spectrum or the radio frequency. The following is an excerpt from DoT’s guidelines on obligatory rollout: “If operators do not achieve their rollout obligations, they would be given one year within which to fulfil their rollout obligations. Within this one year, the operators would be fined a spectrum cess of 2.5 per cent of their winning auction per quarter. If operators do not complete their rollout obligations even within the one-year grace period, their spectrum assignment would be cancelled and the spectrum would be allocated via an auction to a new operator.” Moreover, no company related to a defaulting operator would be permitted to participate in subsequent auctions.
DoT has also been fairly strict on the merger and acquisition rules, according to which no merger will be allowed if the number of operators in a service area falls below four. This has been done to ensure that there is adequate competition.
According to market analysts, DoT has been fair in its draft policy on 3G services. Reserving a slot for the PSU players is a more equitable way of allotting spectrum than giving it free. The stiff rollout obligations would also discourage spectrum hoarding. What now remains to be seen is how quickly DoT freezes the policy and gets 3G services rolling through a welldesigned auction.
Stressing the need to roll out services quickly, Sunil Mittal, chairman and managing director, Bharti Airtel says, “Indian consumers are completely ready for 3G services. The services are there, the price point is there; I hope India puts 3G spectrum on auction soon, as we are already two years late, and we cannot afford to delay it more.” However, even with the Telecom Commission finalising the guidelines, clearance from the political leadership is a must before the service takes off.
Box 1: Controlled ascending e-auction
The controlled ascending e-auction process, conducted online, can be explained by the following example.
Say, only two operators are to be chosen for Delhi. First, all players would place their bids. If more than two players place bids above the base price, the auction will continue after eliminating the lowest bidder. The second lowest bid would then be the base price for the next round. The amount of the second lowest bid and the highest bid would also be made public. In the next round, the bidders would be permitted to increase their bids or keep them at the previous level. This process would continue till two operators emerge as the winners. The final spectrum charge for all operators would be the same as that paid by the highest bidder.
The controlled ascending auction was first used by the US Federal Communications Commission (FCC) for spectrum auctions in 1994, and has since been used for all spectrum auctions by the FCC.
Box 2: Highlights of DoT’s 3G draft recommendations
