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BW Businessworld

Coming Soon: War Of The Waves

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It's like sitting for a board exam every year. For the third year in a row, leading Indian telecom operators are poring over the bulky Notice Inviting Applications (NIA) released by the Department of Telecommunications (DoT). The NIA spells out the way forward for spectrum auctions. This year, too, telecom operators are girding up for the exercise, scheduled for 25 February.
The coming auction is crucial for some of the country’s biggest telecom service providers — Bharti Airtel, Vodafone, Idea Cellular and Reliance Communications — as they need to bid for licences that are expiring at the end of 2015 and early 2016. Idea Cellular will be looking to bid in nine circles, Vodafone and Reliance Communications in seven circles each, and Bharti Airtel in six.
As a result, this could well turn out to be the biggest auction after the 2010 round for 3G spectrum in the 2100 MHz band and broadband wireless access spectrum in the 2300 MHz band. That’s because DoT is putting up spectrum in the 800 MHz, 900 MHz, 1800 MHz and 2100 MHz bands simultaneously for bidding. 
The 2010 auction was followed by spectrum auctions in November 2012, March 2013 and February 2014. In the process, the government raked in over Rs 1,65,000 crore. The 2012 and 2013 auctions were tepid, but there was a robust bidding in 2014. This year, the government expects to raise at least Rs 65,000 crore ($10 billion).
The incumbent operators need to bid for spectrum in the 900 and 1800 MHz bands to continue their services. DoT has put 177.8 MHz of 900 MHz band spectrum in 17 circles and 99.2 MHz of 1800 MHz band spectrum in 15 circles up for bidding. In addition, it has also put 103.75 MHz of spectrum in the 800 MHz band in 20 circles on auction. Another 5 MHz of 2100MHz band spectrum is being offered in 17 circles. This is important for operators looking for a pan-India 3G presence. Currently, Bharti, Aircel and Reliance Communications have 2100 MHz spectrum in 13 out of the 22 circles.
But, like all good things that come to an end, this will be by far the last big auction for quite some time to come. Starting next fiscal, the finance minister will need to look at other options to bridge the country’s fiscal deficit. That’s because once this auction is over, most large operators would have renewed licences in key circles for another 20 years. The next big auction after this will only be in 2021, when 13 circles of Reliance Communications, seven of Bharti Airtel and three each of Vodafone and Idea Cellular come up for renewal. The only way for the government to raise revenues afresh from spectrum will be to put the 700 MHz band and the balance in the 2100 MHz band on auction.
Battle Royale
So what can one expect from this year’s auction? Bidding is likely to be aggressive in the 900 and 1800 MHz bands. However, interest in the 800 MHz band is going to be muted, since there is only one operator — Sistema Shyam TeleServices (SSTL) — that is a full-fledged Code Division Multiple Access (CDMA)-based service provider. And, SSTL is disappointed with the recommended reserve price of 800 MHz spectrum as it feels that it is not in sync with the business and ecosystem realities. SSTL officials point out that the proposed pricing of  Rs 3,646 crore per MHz is way out of line and does not make a strong business case for buying spectrum. More importantly, such a price would go against the spirit of Prime Minister Narendra Modi’s vision of Digital India and broadband for all, they say.
The issue of high base prices has been raised by other operators too. That’s because DoT has specified a base price of Rs 3,399 crore for 1 MHz of 900 MHz and Rs 1,425 crore for 1 MHz of 1800 MHz spectrum. The base price for 900 MHz is much higher than the Rs 3,004 crore that the Telecom Regulatory Authority of India (Trai) had recommended. 
Says D.S. Rawat, secretary general, Associated Chambers of Commerce and Industry of India (Assocham): “The government pressing the regulator to raise the reserve price despite the bitter experience of the previous auction is bound to disturb the globally recognised success of the Indian telecom industry that was able to offer the cheapest service to people.”
While that may be so, the current round of bidding could be tough. Says Rajan S. Mathews, director general, Cellular Operators Association of India (COAI): “We expect aggressive bidding in both the 900 and 1800 MHz bands.” However, the problem area for COAI relates to the lack of clarity on the 2100 MHz auction. While DoT has come up with the NIA, there is hardly any reference to the amount of spectrum that will be offered in this band and the potential price that bidders will need to pay.
The other problem, according to COAI, is the lack of any incremental spectrum in this auction. In the 2014 auction, there was enough 1800 MHz spectrum on offer since spectrum was vacated after the government cancelled telecom licences. Mathews feels the availability of 2100 MHz will improve the situation. But, as things stand, the government is offering 5 MHz and not the 15 MHz of 2100 MHz band spectrum that the defence sector is freeing.
Make Or Break
The big issue is that incumbent operators need to bid in the circles where their licences are expiring at the end of the year. Most operators had already factored this in while bidding in the last auctions. Bharti Airtel, which has to bid in six circles (Andhra Pradesh, Karnataka, Punjab, Rajasthan, Himachal Pradesh and the North-east), has already acquired spectrum in all circles in the 1800 MHz band during the last auctions. Bharti has acquired over 8 MHz of spectrum in the 1800 MHz band in five of the six circles. In the North-east, it picked up 7 MHz.
The same is the situation with Vodafone and Idea Cellular. While Idea has acquired spectrum in seven of the nine circles, it needs to acquire spectrum in Gujarat and Uttar Pradesh (West), where it did not acquire any in the last round. While it picked up 5 MHz in Karnataka, it acquired over 6 MHz in six other circles. Similarly, it is imperative that Vodafone acquires spectrum in three of the seven circles — Maharashtra, Tamil Nadu and Uttar Pradesh (West) — where its licences are expiring.
The only operator that seems to be in a tricky situation is Reliance Communications, whose 900 MHz spectrum in Madhya Pradesh, West Bengal, Himachal Pradesh, Bihar, Orissa, Assam and North-east circles expires this year-end. Further, the company did not acquire any spectrum in these circles in the 2014 auctions. As a result, it definitely needs to acquire spectrum in all the circles where its licences are expiring. One way out is to leverage the 2100 MHz spectrum that it has in these circles to continue services. 
What is not clear at the moment is the stance that the Mukesh Ambani-owned Reliance Jio Infocomm will take in the auction. In the 2014 round, it acquired 78.8 MHz of 1800 MHz band spectrum in 14 circles. It could expand its presence in the band to other circles this time around.
Tough battles for spectrum are expected in Tamil Nadu (no 900 MHz band on offer), Karnataka (14 MHz of 900 MHz band and 1.8 MHz of 1800 MHz band) and Andhra Pradesh (14 MHz of 900 MHz and 3.8 MHz of 1800 MHz band).
Wasted Opportunity?
The one issue that is become a hot topic for telecom operators is the fact that the government is not putting up the 15 MHz of spectrum that the defence sector is vacating. That means, the price of spectrum will rise. For the government, it means that it can offer the spectrum later, at a higher price. Says a telecom consultant: “By not providing new spectrum, DoT is creating problems for the government’s Digital India drive.” The lack of spectrum will push back the broadband initiative of the government.
In fact, the government seems to have wasted this opportunity to ensure that telecom service providers in India have adequate spectrum. That objective seems to have been given up to inject another dose of revenue into its coffers through yet another auction. But what the mandarins in the bhavans that dot Lutyens Delhi do not seem to realise is that it will defeat the purpose of providing low-cost broadband connectivity to the masses.  
(This story was published in BW | Businessworld Issue Dated 09-02-2015)