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BW Businessworld

Spectrum Of Disinterest

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The action in the telecom auction begins just a day before the festival of lights — Diwali. On 12 November, a couple of hours before millions of Indians settle in front of card tables to see how much they can make playing teen patti (a gambling card game also called Flash), officials of the five mobile telecom service providers would have completed the first day of bidding for spectrum in the 1,800 MHz band. Unlike millions of teen patti players who are not sure whether  Goddess Lakshmi will listen to their fervent pleas this year, telecom operators are not a worried lot this time around.

The operators are convinced that this auction is all set to be a dud. Many are confident that the auction will be over in a day. Others say that bidding will not go beyond the first round — the Department of Telecommunications (DoT) has targeted at least five rounds a day.

With no bidders for CDMA spectrum, the auction is a partial failure already. However, even if the auction fails, the government could get somewhere close to Rs 40,000 crore from telecom auctions thanks to the Cabinet’s decision to impose a one-time spectrum fee of Rs 30, 927 crore (provided every telco pays up) on the telecom players. However, operators need to pay only a third of the amount this fiscal.

As for the auctions, it is estimated that the Centre can earn between Rs 15,000 crore and Rs 21,000 crore, depending on how aggressively Idea Cellular bids.

The muted response to the auction has also shaken up DoT. Says a DoT official on condition of anonymity: “We had not factored in a situation where there would be hardly any bidders. This process needs to be looked into, but that will take time.” An official of a leading telecom operator says: “Now it is abundantly clear that the government has shot itself in the foot.”

The auction follows the Supreme Court’s (SC) decision in February to cancel 122 licences issued during A. Raja’s term as communications minister in 2008. This included 24 CDMA licences of 2.5 MHz each and 98 GSM licences of 4.4 MHz each. That works out to 60 MHz of CDMA and 431.2 MHz of GSM spectrum cancelled. However, three operators — Etisalat DB, S Tel and Loop Telecom — who had 42 licences amounting to 184.8 MHz between them — pulled out of the sector soon after the licences were cancelled. Since then demand for spectrum has fallen.

Currently, the government is offering eight to 11 blocks (of 1.25 MHz each) across the country for auction. In all, it has put up 236 blocks (GSM spectrum in the 1,800 MHz band) of 1.25 MHz — amounting to 295 MHz — for auction, which is way lower than the 431.2 MHz that was cancelled. Yet, it is expected that only close to 170 blocks — totalling 212.5 MHz — will be picked up by operators. That leaves over 80 MHz of unsought spectrum. The government has not released the balance spectrum (over 130 MHz) for auction since it believes it will be needed when refarming of the 900 MHz spectrum starts in 2014, when the initial licences start expiring. This decision to hold back spectrum was questioned by the SC barely four days before the auction, which said that according to its February order the entire spectrum amount held by the cancelled licensees should have been put on auction.

Why is this auction in trouble? 

First, no new bidder — domestic or international — has joined the auction this time, making the absentees’ list more noteworthy. Both Reliance Industries (RIL) and Reliance Communications opted to stay out of the auction. Industry sources believe that RIL could pick up the Videocon Telecommunications (VTL) licences quite like it did with Infotel Broadband in the wireless broadband auctions in 2010.

MAXIMUM earnings of Rs 21,332 cr from the 2G auction
could be in the region of Rs 15,000 cr in the GSM auction
Second, the CDMA spectrum auction in the 800 MHz band is a washout with both Tata Teleservices and VTL withdrawing their bids. Meanwhile, Sistema Shyam Teleservices, the joint venture between Russia’s Sistema and the Shyam group, did not put in a bid, since it is awaiting a response to the curative petition it has filed in the SC (see Russian Roulette).

Hemant Joshi, partner, Deloitte Haskins & Sells, says: “At Rs 1,658 crore, there was no business case for CDMA. It is unlikely that anyone will pay Rs 18,000 crore for the same now.” With average revenue per user (arpu) of just Rs 75, it is unlikely that operators would be willing to shell out big money for CDMA spectrum now. There are other problems with CDMA. Operators need to formulate a strategy to monetise data services. Currently, data revenues in India, at 15 per cent (including SMS, which accounts for the bulk of the data revenues), are much lower than the 30 per cent prevailing in Japan and South-east Asian markets.

Third, there are just five firms in the race for GSM spectrum in the 1,800 MHz band. Two incumbents — Bharti Airtel and Vodafone — have been joined by Idea Cellular, VTL and Telewings Communications (Telenor’s new Indian venture), which had their licences cancelled. But for the bids put up by Idea and Telewings, the GSM auction too would not have happened. Says Joshi: “One cannot rule out the possibility of the auction failing.”

That’s a far cry from the 3G auction of 2010 when nine firms bid for three slots of 5 MHz in the 2,100 MHz band. Then the government had raked in over Rs 1 lakh crore from auctioning four 3G slots and three broadband wireless access slots nationwide. The auctions then  lasted well over a month. Earlier too, in 2008, a dozen-odd firms had queued up at Sanchar Bhawan with fat demand drafts for nation-wide licences.

Fourth, this time around, it is unlikely that any operator will bid for pan-India spectrum.

What can one expect from this auction?
The DoT has allocated between eight and 11 spectrum blocks (1.25 MHz each) in all circles. Going by the DoT directive, a new player or a player whose licence was cancelled needs to bid for a minimum of four and a maximum of five blocks of 1.25 MHz. As things stand, in most circles, the supply of spectrum is all set to exceed demand. The only two circles where demand could exceed supply are West Bengal and Kolkata. But with a base price of Rs 26.84 crore (West Bengal) and Rs 113.32 crore (Kolkata), they are unlikely to make much difference to the government’s earnings from spectrum sale.

The interesting part is that if there is any bidder at all in Delhi, it will be Idea. However, if Idea too decides not to bid for more spectrum in Delhi, then the price could get invalidated, which is what operators would want. Telewings could well be the only bidder in Mumbai. But even at the base price it would have to pay over Rs 2,700 crore for  acquiring 5 MHz of spectrum, which is  a lot more than the Rs 1,658 crore paid for pan-India spectrum in 2001.

However, the most aggressive bidder in the auction is incumbent Idea that had seven licences cancelled. It is expected to bid for five slots (6.25 MHz in all) in seven circles — Tamil Nadu, Orissa, West Bengal, Kolkata, Assam, the North-east and Jammu and Kashmir. It can acquire all these circles for Rs 2,500 crore. I remains to be seen if it will bid for spectrum in any other circle. That could hit Idea big time.

Going by current calculations, there will be greater supply than demand in four of the five A circles (such as Gujarat, Andhra Pradesh, Tamil Nadu, Karnataka and Maharashtra), Delhi and Mumbai that account for over Rs 11,000 crore of the base price of Rs 14,000 crore. In Andhra Pradesh, supply is expected to match demand.

With the auction likely to fail, there are issues that need to be looked at closely. The main reason for the rather cold response to bidding is because operators realise that the base price is too high. It is a challenge for operators to pay the high rates when subscriber growth is static, profits are falling, cash flows are down, they are still paying for 3G spectrum and no foreign investment is coming into the sector.

The auction will also take the wind out of the Comptroller and Auditor General’s argument that the country faced a notional loss of Rs 1.76 lakh crore by allocating spectrum in 2008 at 2001 prices. With no bids for CDMA, the Centre will have to find a new mechanism to levy a one-time fee on CDMA operators. So, if there are no bidders for GSM in some circles, the same course of action would have to be extended to it too.

With operators unwilling to spend on the 1,800 MHz spectrum, it is still unclear what kind of demand there is for the 900 MHz auction, since it is to be priced at double the base price. Says Joshi: “There is no money in the sector. What the industry needs is time to recoup. The other need is for a well-defined exit policy.” That should clear up the air.

But as the industry reluctantly gears up for a pre-Diwali gamble, it remains to be seen whether this will turn out to be a festive season for operators or not.

The CDMA auction was initially supposed to start two days after the GSM auction ended. Now, there will be no auction for CDMA spectrum in the 800 MHz band. Sistema Shyam Teleservices (SSTL) — a joint venture between Russia’s Sistema JSFC and the Shyam group — which had 21 of the 22 CDMA licences cancelled, decided not to bid. Tata Teleservices (TTSL) and Videocon Telecommunications (VTL), which had initially put in bids, withdrew.

The big deterrent for the bidders this time around was that the base price for CDMA spectrum was fixed at 1.3 times that of GSM spectrum — at Rs 18,200 crore for a pan-India presence.

SSTL did not put in its bid because it is the only operator to have filed a curative petition in the Supreme Court seeking restoration of its licence. So what happens to SSTL? It is unlikely to exit the Indian telecom sector. While commenting on its staying away from the bids, the company stated that it has been unfairly penalised. “SSTL believes it has a strong case and is determined to await the hearing,” says an SSTL press release. A curative petition allows the petitioner to seek a review of the order by a Supreme Court bench.

By applying for, and then withdrawing from, the CDMA race, VTL and TTSL have bolstered SSTL’s case that there was simply no demand for CDMA spectrum. In 2008, SSTL was the only operator seeking CDMA spectrum. So much so, the CDMA subscriber base fell by 8.11 million to 105.11 in fiscal 2012. During the period, MTS is the only operator to have seen its subscriber base rise — from 10 million to 15.8 million. TTSL numbers have slumped to 29 million from 42 million, while Reliance Communications has been static at around 56 million.

So what happens if SSTL wins the curative petition? The government will have to give SSTL spectrum at the 2001 rate of Rs 1,658 crore. That could lead to other operators also going to court. Quite a bit of the reluctance can be attributed to the problems with CDMA. Says Mohammad Chowdhury, partner, Pricewaterhouse-Coopers: “It is  difficult to use CDMA for voice services. Added to that is the problem of a limited number of handsets.” It remains to be seen whether CDMA services are there in the longer term.

But, for now, the Supreme Court has to yet again decide SSTL’s fate.


(This story was published in Businessworld Issue Dated 19-11-2012)