Column: Hobsons choice for telcos

Written by Hemant Joshi | Updated: Mar 28 2014, 08:27am hrs
Before the latest round of spectrum auctions, the government had set a total revenue target of R40,874.5 crore from spectrum for FY14. Trai, in its recommendations, suggested a pan-India reserve price of R1,496 crore per MHz in the 1800 MHz band, which was down by 37% from the base price set in the previous auction. Similarly, in the 900 MHz band, Trai recommended a reserve price of R288 crore per MHz for Delhi, R262 crore for Mumbai and R100 crore for Kolkata. These rates were about 60% lower than the reserve price set in the previous auction. The existing players were harmed due to the governments refusal to renew the spectrumthey had to take the auction routeand were forced to pay a high price for the spectrum bands for renewal.

Completion of the auctions is a welcome relief for industry, the government and all the stake holders in the industry. This spectrum auction proved to be successful where the government collected about R61,162 crore from the 2G auction which, to some extent, helped in controlling its fiscal situation. However, it has hurt the finances of the telecom players.

Telecom companies will pay 25% and 33% of the bid amount upfront in the 900 MHz band and 1800 MHz band, respectively. Thus, the government is estimated to obtain R18,296 crore by March 31 this yearthe companies are allowed to initially pay an upfront amount and the remainder in 10 annual instalments after a two-year period. It will be reducing the burden of telcos to a certain extent.

The incumbent operators, whose licenses are expiring at the end of this year, had no choice but to bid and win spectrum to continue providing services. The prices paid by the operators in winning back spectrum they were holding is substantially higher than the amounts they originally paid and also the reserve price set by the government.

Impact of the auctions

Consolidation: The recent auction is going to decrease the number of telecom operators per service area from 12 to 6 or 7 as the bottom 6 telcos are likely to exit as they lack sufficient spectrum and financial muscle to remain viable. With high debt and inability to reduce (or pass on) the costs, the profitability of these players is likely to fall in the coming years. Ongoing consolidation in the industry is likely to take more time to materialise, as the companies have not enough funds remaining to pursue acquisitions.

Spectrum sharing: India has agreed to allow the telecom sector to share and trade in airwaves before the next round of auctions, which is going to be held around March 2015. The sharing rule considered by the government for 2G spectrum is that the combined holding of two companies sharing spectrum should not be more than 50% of the total airwaves allotted in that region.

Mergers & acquisitions (M&A): As per the guideline on M&A, the resultant entity will need to pay at the time of merger a differential between the market-determined price of spectrum and the entry fee paid. The government has eased the M&A rules by allowing mergers between telcos with up to 50% combined market share.

Tariffs: The collective market capitalisation of telcos took an immense hit after shares of top telcos dropped down. The overall outcome of the higher input cost should have been increase in tariff. However, due to intense competition, all the increase in cost is unlikely to get passed on to the consumer. The already highly leveraged balance sheets of the telcos would get more leveraged and operators are also likely to face bottom-line pressure. Raising the tariffs wont be an easy choice as the market is still very competitive and all the operators do not have the same high cost of spectrum.

Future auctions: According to the interim budget, the government is anticipating raising R38,954 crore for communication services in the next financial year, including proceeds from spectrum auction and related charges. While the 900 MHz band was sold out in metros, around 78 MHz spectrum in the 1800 MHz band is still unsold which will be up for auction in future. While each of these operators have tried to protect their non-metro markets by capturing additional airwaves in the 1800 MHz, still they have to incur huge expenses to reinforce their holdings in the 900 MHz band. The incumbents will face the 900 MHz auction in non-metro markets within the next 12-18 months as their mobile licenses are going to expire in these circles. The government will also try to auction spectrum in the 800 MHz band, which is being used for providing CDMA services. The government will have to be cautious on the auction of 700 MHz in the next financial year, based on the availability of the ecosystem for it. The future of the sector is heavily dependent on the next round of auctions.

Next generation technologies: Under unified licenses, telcos will be able to offer any technology on any spectrum band. Deploying 4G services on 1800 MHz band will require 30% lesser towers as compared to the 2300 MHz band. As large operators have recently bid in the 900 MHz and 1800 MHz auctions, even though the said spectrum could be utilised for launching of next generation services, their appetite for the upcoming auction may be limited as the industry has paid huge amounts and the balance sheets are highly leveraged. Telcos are likely to first focus on deployment of services in the spectrum they have recently won.

Telcos have no choice but to take part in the auctionsit is a choiceless choice.

The author is a partner with Deloitte Haskins & Sells. Views are personal