The telecom industry is a serious cash cow for the Indian government. The auctions in past two years have seen the government raise record amounts of money as incumbent telecom operators tried to renew their license in service areas where it was expiring. Telecom operators also bid for extra spectrum in the 1800 MHz and 2100 MHz bands to bolster their 4G and 3G offerings.
It’s widely believed that yet another spectrum auction is looming around the corner and might come to fruition by this year. This auction is unique because it involves the sale of 700 MHz spectrum which hasn’t been done in the past. In this post, we’ll be analyzing this spectrum that’s believed to be a crucial part of the auction.
1. When’s the auction and what airwaves are being sold?
The auction is expected to be held sometime this year. This auction is expected to have the maximum variety of spectrum. The expected spectrum types are 700 MHz, 850 MHz, 900 MHz, 1800 MHz, 2100 MHz, 2300 MHz and 2500 MHz. Never before have so many types of spectrum been put up for auction. The total potential revenue of Rs 5.36 lakh crore from the spectrum auction is more than double of gross revenues of telecom services industry in 2014-15. Telecom service providers had gross revenue of Rs 2.54 lakh crore in that financial year.
Of all the spectrum being put up for auction, the 700 MHz spectrum commands around 70-75% of the total value being auctioned. The Telecom Regulatory Authority of India has recommended a record base price of Rs 11,485 crore per MHz for 700 MHz spectrum on a pan-India basis. Needless to say, a lot of excitement regarding the upcoming spectrum auction is centered around the 700 MHz spectrum, but can it sell at such steep prices?
2. Analyzing the valuation
Many analysts and firms have felt that the price on 700 MHz band given by TRAI is very high. TRAI has gone by the formula of pricing 700 MHz band four times the price of 1800 MHz band of a particular Licensed Service Area (LSA). There are several reasons why this methodology might be flawed. I’ll list down some of them.
Not all 1800 MHz spectrum are equal in terms of quality and quantity
The image below shows how widely the quantity and quality of 1800 MHz spectrum put up for auction in 2015 differed
1800 MHz spectrum is notorious for its fragmentation. The reason for this fragmentation is a screwed spectrum exchange process between the DoT and the Defence in the 1800 MHz band. This fragmentation is not constant all throughout the country. Some circles have much more fragmented 1800 MHz spectrum than others.
This fragmentation played a key role in determining how much telecom operators bid for the 1800 MHz spectrum in a particular circle. For example, a circle where there’s contiguous or non-fragmented 5 MHz block of 1800 MHz spectrum available would most likely get a higher bid than a circle where the same spectrum is highly fragmented as the contiguous/non-fragmented spectrum is much more suited for 4G. However in the case of 700 MHz spectrum, there’s contiguous spectrum available all throughout the country.
The amount of spectrum that was put up for auction in the 1800 MHz band varied from LSA to LSA. While some like Tamil Nadu had huge quantities available, others didn’t. The quantity of spectrum also played a crucial role in determining the final price of the 1800 MHz spectrum in that LSA. However, in the case of the 700 MHz band, there’s a fixed amount that would be available nationwide or in other words, the quantity of spectrum would be fixed in every LSA.
So in case of 700 MHz spectrum, both the quality and quantity would remain the same in all the LSAs. Thereby taking 1800 MHz spectrum as the benchmark was a wrong decision and its side effects are already seen as in certain LSAs like Bihar, the price of 700 MHz spectrum is actually lower than that of 900 MHz spectrum.
It’s really difficult to see how TRAI chose to ignore the quality and quantity differences of 1800 MHz spectrum available in every LSA which largely affected the final auction/market price and rather continued with this auction/market price of 1800 MHz band for 700 MHz band whose quality and quantity are the same in each and every LSA.
Even ignoring the quality and quantity difference in each and every LSA, how was the multiple of 4 arrived?
The image below shows the ratio of price between 800 MHz and 1800 MHz bands in various European countries
To arrive at the multiple of 4, TRAI in its consultation paper said that it studied what the price of 800 MHz spectrum as a multiple of 1800 MHz spectrum was in the European countries and used the same to arrive at the price for 700 MHz spectrum.
However even the average of multiples of all European countries was just 2.78 and when Germany is excluded, it becomes 2.33. TRAI’s benchmark of 4 reveals that this benchmark is 80% higher than the 2.33 benchmark for Europe. Furthermore, this comparison is with constant prices. If we were to compare PPP prices, and take benchmark with Spain whose PPP ratio with India is 3:1, the differences in prices is almost 240%. For a country whose sole aim should be to enhance broadband penetration, a markup of 240% is not only incongruent with other country’s benchmarks but unfair to the poor and middle-class Indians.
Who all are likely to buy the 700MHz spectrum?
We now know that the strategy used to derive the price for 700 MHz spectrum is probably flawed. But even at this price, who are the players that are likely to buy this spectrum? To me, it would seem only four players would be interested in buying this spectrum – Airtel, Vodafone, Idea, Reliance Jio.
Aircel and Tata Docomo would not be able to buy this spectrum as both the telecom operators have negative net worth and would be barred from buying any new spectrum in any service area, these operators would only be allowed to top up their current spectrum portfolio.
Aircel is in talks to merge with Reliance Communications, but even Rcom would not buy any of the 700 MHz spectrum as the operator in the previous auction had let go of valuable 900 MHz spectrum in several circles where it was set to expire. If Rcom didn’t bother about renewing spectrum in the 900 MHz band where it was set to expire and they had no alternate option for 2G, it’s tough to see the operator bidding for 700 MHz which is even more expensive.
BSNL and MTNL might be allocated one block (5 Mhz) of 700 MHz spectrum just like how they were allocated 2100 MHz and 2500 MHz spectrum. But considering that the government is trying hard to revive the state-run telcos and recently accepted to reimburse the cost of 2500 MHz spectrum to BSNL and MTNL, the government might not try to force feed 700 MHz spectrum this time. Telenor has been very vocal about the 700 MHz spectrum, but for an operator whose user base is largely made up of low ARPU voice only customers and which has been having a hard time turning a profit in India, bidding for 700 MHz spectrum doesn’t seem to be in the cards at least at these prices.
4. Do the telcos who can bid really need to bid?
By now I have given a clear overview of why I think the pricing of 700 MHz auction is flawed and even at this pricing, which are the operators that have the financial muscle and business incentive to bid.
The primary question that now remains is even amongst the operators who can bid, is it really necessary for them to buy 700 MHz spectrum at such steep prices? Let’s look at them one by one.
The Mukesh Ambani-backed telecom operator has yet to launch its services, but this hasn’t stopped it from amassing spectrum. For the spectrum auctions held in 2014 and 2015, Reliance Jio was a major player buying troves of 1800 MHz and 850 MHz spectrum all over India to complement its pan-India 2300 MHz spectrum.
The 850 MHz spectrum has propagation characteristics that are very similar to that of 700 MHz spectrum meaning that in terms of distance covered and in-building coverage, the 850 MHz spectrum is almost as good as the 700 MHz spectrum. Reliance Jio has already purchased a hefty amount of that in the 2015 auctions. Its spectrum sharing and trading deal with Rcom which is, in turn, buying MTS should further help strengthen its 850 MHz holdings. If Rcom’s, MTS’ and Rjio’s 850 MHz holdings are viewed on a combined basis, then there is no LSA in India where there’s less than 5 MHz of 850 MHz spectrum available for use in 4G.
As of today, the device ecosystem for 4G devices in the 700 MHz spectrum is actually worse than what’s available for 850 Mhz spectrum in India. For the most part, Reliance Jio already has low band spectrum secured in the form of 850 MHz at a much cheaper rate than what has been proposed for 700 MHz. Both of them lack device ecosystems. Only negative in case of 850 MHz spectrum is that Rcom’s spectrum would expire by 2020 which is just 4-4.5 years, so to future proof in those areas Rjio might buy 700 MHz. Or else they could just ignore the 700 MHz spectrum for now and buy back the 850 MHz at the time of its expiry just like operators did recently with the 900 MHz spectrum which was bought back at the verge of its expiry.
Airtel, Vodafone and Idea
I am generalizing all these operators under one category as they’re largely the same in the sense that they dominate certain circles. They have a combination of 900 MHz, 1800 MHz and 2100 MHz spectrum all over India except for Airtel which also owns 2300 MHz spectrum. Also, all three of these operators seemed to have a very similar bidding pattern in the last two auctions where they mostly concentrated on their leadership circles and avoided bidding each other’s spectrum in circles where they weren’t the market leader except for a few instances.
In the case of Airtel, Vodafone and Idea they have one key advantage and that is 3G. All these operators by the 2015 auction managed to bag 3G airwaves in circles of importance. Since the government is once again expected to auction 3G spectrum, these operators can top their existing 5 MHz of 2100 MHz spectrum and increase it to 10 MHz of 2100 MHz spectrum in which case they would be able to offer DC-HSPA which can theoretically offer speeds up to 42 Mbps for download. A recent Nokia M-Bit study found that a vast number of devices support DC-HSPA in India and that DC-HSPA can act as a replacement for 4G in the short term.
From a coverage perspective, telcos who purchased 900 MHz spectrum in 2014 and 2015 are already using it for 3G. For example, Airtel in Mumbai, Vodafone in Orissa and Idea in Delhi. Like this in several other locations, all these three operators are using 900 MHz spectrum for 3G thereby giving them some form of ubiquitous broadband coverage.
As for 4G, both Idea and Vodafone have already deployed 4G in the 1800 MHz band and Airtel has deployed 4G in the 1800 MHz and 2300 MHz bands. It’s true that these telcos have no low band spectrum for 4G purposes like how Reliance Jio has 850 MHz spectrum. It, therefore, might be possible that Airtel, Vodafone and Idea might bid for 700 MHz spectrum in their leadership circles. For example for Airtel, it would be Delhi, Karnataka, Tamil Nadu, Andhra Pradesh etc. For Vodafone, it might be Delhi, Mumbai, Kolkata, Gujarat etc. For Idea, it might be Maharashtra, Gujarat, Madhya Pradesh, Kerala, Andhra Pradesh etc.
But even if Airtel, Vodafone and Idea were to bid, they would just bid 5 MHz of 700 MHz spectrum and in selective circles of leadership. However, as I said, they have repurposed 900 MHz spectrum for 3G in a lot of their leadership circles.