Spectrum Pricing Provokes Jitters in India

Spectrum auctions in India are usually embroiled in controversy and the latest appears to be no different. The recently announced base prices (minimum rates set by the government) for the spectrum that will go up for sale are provoking a strong reaction from the industry. (See India Targets $10.3B From Spectrum Auctions.)

"There has to be balance between investment in spectrum and networks," says P Balaji, director of Regulatory and External Affairs at Vodafone India . He was speaking during a panel discussion at Digital India Summit 2015.

In the 2100MHz band, India's Telecom Commission has recommended a base price of 37 billion Indian rupees (US$600 million) per megahertz, 36% more than the price suggested by the Telecom Regulatory Authority of India (TRAI) last month.

Rates are also high in other bands. Per-megahertz base prices in the 800MHz, 900MHz and 1800MHz bands have been set at INR36.7 billion ($590 million), INR39.8 billion ($640 million) and INR21.9 billion ($355 million) respectively.

Experts believe that high reserve prices will not only delay the expansion of networks into new areas but also force the operators to increase tariffs, adversely affecting end customers.

"This reserve price of spectrum is unviable," says Mahesh Uppal, director, ComFirst, and a well-known telecom consultant. "It will definitely impact the competition. They [service providers] will have very little to spend on anything except spectrum. It will impact expansion in new areas and new subscribers."

The industry claims the government is thinking only of short-term gains at the risk of affecting the take-up of data services in the country.

"Conducting auctions makes little sense if the government is starting with high reserve prices," says Uppal. "They [service providers] are left with no choice but to spend a huge amount on spectrum. It is a good option for generating a lot of revenue in the short term but can be extremely damaging for the industry. It is like killing the golden goose."

It is debatable whether operators would actually be able to pass on the high spectrum prices to their customers. The dynamics of the Indian market would make it extremely difficult for service providers to increase tariffs beyond a point.

"With strong competition from OTT [over-the-top] players like WhatsApp, Viber and others in both voice and data, the service providers would find it difficult to increase the tariff. In fact, I don't think there is going to be a major impact of the high base price. It is a bitter pill which the telcos have to swallow," says Deepak Kumar, founder analyst, BusinessandMarket.net.

There could, however, be an impact on network quality. India's networks are largely geared to handle voice and not data. Yet rising data usage demands major network upgrades. If operators have to spend heavily to procure spectrum they may lack the funds needed to upgrade their networks.

"The investment in networks might be muted but they do have to keep investing," says Kumar. "The entry of players like Reliance Jio [India's only pan-India 4G operator, which is planning to launch operations later this year] might force them to invest in networks."

The total spectrum payout is expected to be in the range of INR900-960 billion ($14.5-15.5 billion), INR140-180 billion ($2.2-2.9 billion) of which is likely to come from spending on 2100MHz spectrum, according to a recently released report from the ICRA, an Indian credit rating agency. "The sizeable spectrum payouts would further elevate the debt levels for the industry and adversely impact the debt coverage metrics," according to the ICRA report.

The forthcoming spectrum auction is critical for incumbent service providers Bharti Airtel Ltd. (Mumbai: BHARTIARTL), Reliance Communications Ltd. , Vodafone India and Idea Cellular Ltd. .

Spectrum licenses held by Bharti Airtel, the largest service provider in the country, are due to expire in six circles (service areas) later this year. Idea Cellular's licenses are coming to an end in nine circles and Vodafone India and Reliance Communications each stand to lose licenses in seven.

All of these service providers are keen to retain 900MHz spectrum they already use, since any change in the spectrum band would force them to invest heavily in network reconfiguration. That means bidding in this band is likely to be very aggressive.

Yet operators are also desperate to acquire more 2100MHz spectrum, which is essential for the expansion of 3G networks in India. With the growth of mobile broadband, consumers are increasingly demanding ubiquitous coverage. The government, however, has decided to put only a limited amount of 2100MHz spectrum up for auction, and that means prices will probably rise sharply in this band, too.

"The proposal by the government to only put 2x5MHz of spectrum in the 2100MHz band up for auction, versus GSMA and TRAI recommendations to auction at least 2x20MHz of the band, risks further distorting the outcome of the auction to the disadvantage of India's citizens," says a recent press release from the GSMA.

Of course, in a market where connectivity is increasingly dependent on wireless technology, spectrum is hardly likely to come cheap.

— Gagandeep Kaur, contributing editor, special to Light Reading

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