Is 700MHz Too Costly for India's Telcos?

Like most spectrum auctions in India, the forthcoming sale of airwaves across a number of different bands has been mired in controversy. But perhaps the most contentious aspect of the whole affair is the valuation of spectrum in the 700MHz range, which Indian authorities are to auction for the first time ever. (See India Preps for Mega Spectrum Auction in September and India Operators Lash Out at 700MHz Plans.)

The process will see India sell a pan-India 700MHz license as well as spectrum in the 800MHz, 900MHz, 1800MHz, 2.1GHz, 2.3GHz and 2.5GHz bands. The auction has the potential to rake in as much as $82.4 billion for the Indian government -- more than five times the revenues of $16 billion generated by the country's last spectrum auction.

The 700MHz spectrum has been priced at 114.9 billion Indian rupees ($1.7 billion) per MHz on a pan-India basis. Predictably enough, these rates have prompted a strong reaction from the industry, with operators arguing that airwaves are grossly overpriced and even threatening to boycott the auction. Some service providers have also asked authorities to postpone the sale of 700MHz airwaves.

There is no doubt that considerable value is attached to the 700MHz spectrum. For one thing, the airwaves up for sale are contiguous -- which means they can be used to provide more bandwidth-hungry services -- and the same quantity of 5MHz is available throughout India. But market watchers still believe that base pricing may be wide of the mark.

“The cost of the 700MHz frequency band is very high and will not suit more than three or four top telcos," says Amresh Nandan, a research director at Gartner. "Even for these telcos, it requires careful long-term planning for this band. The regulator's approach of using the European model of the 800MHz and 1800MHz bands as the ratio to decide the cost of the 700MHz band doesn't seem justified. This ratio in the case of India is much higher and the reality of this market is very different."

The 700MHz pricing clearly makes bidding unviable for the smaller telcos, some of which seem likely to be acquired by bigger players in the coming months. The Indian subsidiary of Norway's Telenor Group (Nasdaq: TELN) has already opted out of the race. Market leader Bharti Airtel Ltd. (Mumbai: BHARTIARTL), meanwhile, has taken steps towards consolidation with its recent acquisition of spectrum from Videocon Telecommunications Ltd. and Aircel Ltd. (See Telenor Skips India Auction, May Quit Market and Airtel Acquires Videocon's 1800MHz Spectrum.)

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In all likelihood, the operators that end up bidding for 700MHz airwaves will include the big three players of Bharti Airtel, Vodafone India and Idea Cellular Ltd. , as well as wealthy 4G new entrant Reliance Jio , owned by Indian billionaire Mukesh Ambani. "Irrespective of high cost, the top two or three telcos may explore buying the 700MHz band," says Nandan. "The reason lies in the contiguous [nature] and pan-India availability of this band. With careful and long-term planning, using this band in certain circles can provide better returns than other bands."

Even so, the operators that do eventually acquire 700MHz licenses will face huge challenges given the immaturity of a 700MHz ecosystem. Currently, devices available in the Indian market do not even function in the 700MHz band.

— Gagandeep Kaur, contributing editor, special to Light Reading

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