Between 2015 and 2016, 29 unified access service licences (UASL), in circles across India, will expire. As required by the new rules, the Department of Telecommunications (DoT) plans to auction the accompanying 900 MHz and 1800 MHz spectrum. It has asked the Telecom Regulatory Authority of India (Trai) to recommend a reserve price. However, the auction poses much bigger challenges for the DoT, especially as the government sees broadband as a priority.
The challenges relate to the type, quantity and quality of spectrum up for auction. For any wireless service, for example broadband, the features of interest include frequency?900 MHz, 1800 MHz, 2100 MHz, etc?the amount on offer and whether it is contiguous or in fragments. For example, the number of operators that can deploy 3G and LTE services will depend on the total number of chunks of at least 5 MHz.
Trai?s consultation paper of August 7, 2014, raises these issues but doesn?t go far enough. It notes that, as things stand, the 900 MHz spectrum available is strictly that is currently associated with expiring licences. Contiguous blocks are few; several circles have only blocks of contiguous spectrum and West Bengal has none. The 900 MHz spectrum being auctioned cannot accommodate even two players in all circles. An incumbent player would have to outbid all its current and new competitors or stop operations.
The 1800 MHz spectrum, too, is in short supply. It could theoretically backup for the scarce 900 MHz spectrum since both support current 2G services. The 1800 MHz spectrum is extremely fragmented in most parts of India. Of the 22 circles, 18 lack a single 5 MHz block of contiguous spectrum. Tamil Nadu and Odisha have three blocks and Rajasthan and Kolkata have one each. In several cases, it is unavailable uniformly across the service area. The lack of contiguous 5 MHz chunks will also make it virtually impossible to use 1800 MHz for higher speed LTE services.
Thanks to this shortage, 12 circles stand to lose an existing service provider. Reliance faces exit from Assam, Bihar,
Himachal Pradesh, Madhya Pradesh, North-East, Odisha and West Bengal. Vodafone risks losing Maharashtra, Gujarat and Tamil Nadu, and Idea could lose Uttar Pradesh (West) and Gujarat.
However, the risk of involuntary exits hides an even more serious flaw in the auction design. It is a bad idea not only to auction overly small amounts of spectrum but also exclude related spectrum that would affect bidders? longer-term plans, not to speak of India?s broadband aspirations. The 2100 MHz, although being widely used worldwide for 3G, is not being auctioned, despite repeated requests from the industry. It would have gone a long way to augment the tiny amounts of 900 MHz and 1800 MHz spectrum and its many unwelcome implications listed above.
In auctions, demand outstripping supply is the norm and not an exception. It cannot be anybody?s case that the government floods the market with additional spectrum and risks its revenues. However, shortages in this auction are unprecedented. In the auction in February 2014, around 90% spectrum was new, i.e., not in commercial use till then. This time it is barely 26%.
Companies that do finally win and retain spectrum in this arguably hyper-competitive auction will face an unenviable choice. They will have to choose between protecting their considerable revenues from existing 2G voice businesses and the revenues from data services, the source of future growth.
The current plans for the auction of 900 MHz and 1800 MHz encourage its use for less efficient 2G services. The high potential of 900 MHz was reflected in its high price in the February 2014 auction for the metros. It would be unfortunate if it was used simply to continue existing 2G operations. The DoT and Trai have advocated refarming of 900 MHz?from its current use for 2G to more efficient 3G services. The current auction design would incentivise the opposite.
India cannot afford to starve broadband services of spectrum. Unless operators can pool and use all relevant spectrum flexibly to meet current and future demand, inefficient use will continue. That is why 900 MHz, 1800 MHz and 2100 MHz spectrum are inextricably linked and must be auctioned together. The cost to broadband growth would be much lower and the environment more predictable if bidders for 900 MHz spectrum had access to 2100 MHz spectrum.
This is an important reason to expedite release of 2100 MHz reportedly sitting idle with defence. Several news reports have spoken of replacing it with the currently idle 1900 MHz. This is besides the R50,000 crore that experts believe its auction can provide. A decisive government could, if necessary, even use a small part of this to facilitate relocation of existing users, including several government and private players, who can potentially free up spectrum for telecom use.
This is all the more relevant, given the ?holes? in the current 3G deployment. No private operator in India has nationwide 3G spectrum and the government-owned BSNL and MTNL combine, which have the spectrum to cover the country, have done little to deploy services, as their subscriber numbers and revenues indicate.
Abandoning auctions is not a choice. Also, regulation and policy cannot be expected to protect individual players from market competition. Whatever the current risks, it would be counterproductive to abandon auctions and revert to opaque administrative methods of allocation of spectrum. They have caused manifest controversy and harm.
However, artificial scarcity of spectrum also hurts the sector and its users, even if it boosts government revenues in the short term. High upfront costs for spectrum encourage companies to prioritise more lucrative users and areas that provide better returns. They discourage much-needed market-development, for example in rural areas.
Spectrum is the lifeblood of wireless services and is currently the only choice for over 95% Indians for telephony, broadband and even e-governance. A government that swears by digital inclusion and broadband cannot afford a short-sighted approach to spectrum that ends up exploiting its scarcity instead of facilitating its efficient use.
A poorly-designed and incomplete auction will not just hurt key private investors, but also hurt India?s larger development goals. Releasing more broadband spectrum for commercial use must be the government?s first priority.
The author is a telecom consultant