Important to get spectrum strategy right
When SoftBank CEO Masayoshi Son met prime minister Narendra Modi last October, he made it a point to tell him that unless India addressed the problem of acute shortage of spectrum—Indian telcos have an average of 12-13 MHz of spectrum against a global average of 50 MHz—there was very little chance of Digital India succeeding. After all, if the bulk of Indians accessing the internet is through mobile phones, spectrum is critical—even building up a national optic fibre network won’t really help here. Which is why, telecom minister Ravi Shankar Prasad has to be congratulated for finally resolving the issue of the ‘defence band’, stuck for several years now, which was critical if the defence forces were to release more spectrum. Given this, however, it comes as a surprise when, after the defence ministry agreed to swap 15 MHz of spectrum in the commercially useful 2100 MHz band, the Cabinet decided on Monday to auction only 5 MHz (85 MHz, since it is across 17 circles) of this spectrum in the February auction.
It is true that 4.7 MHz (103.75 MHz across 22 circles) of 800 MHz frequency, 10.5 MHz in 900 MHz frequency and 6.6 MHz in the 1800 MHz frequency will also be auctioned, but the real fight will be over the 900 and 2100 MHz frequencies—there isn’t much of an ecosystem for devices in the 800 MHz frequency and, like the 1800 MHz one, there isn’t enough contiguous spectrum in most circles, which is what is required for providing data. Since the amount of 900 MHz spectrum that is being auctioned is really the spectrum released from the licences that are expiring after their 20-year life, this means those holding such spectrum simply have to retain it or replace it with 2100 MHz spectrum if they are to continue with their operations in India—so, it requires just one bidder to completely upset the bidding and to make bid prices skyrocket. This is precisely what happened in 2010 when, due to constrained spectrum availability, telcos paid 4.8 times the base price in the auction. In the auctions held earlier this year, however, with enough 1800 MHz spectrum as a back-up in case firms didn’t win back their 900 MHz spectrum, they paid 1.2 times the base price for the 900 MHz spectrum and 1.28 times for the 1800 MHz spectrum frequency band. This is also why the telecom regulator had recommended that, were not enough spectrum to be available for auction, it would be better not to have an auction—the government’s revenues, Trai said, could be protected by simply extending on a pro-rata basis, the existing 900 MHz licences and charging telcos for this based on the Trai’s base price for the auctions in the 900 MHz frequency band.
While the bigger telcos with strong balance sheets will obviously be able to withstand the higher bids, a few other consequences will follow. One, if telcos are going to be shelling $10-12 billion each year by way of auction fees, apart from the large annual payouts they make, their returns on capital will fall —Bharti Airtel’s return on capital employed has fallen from 20.6% in FY10 to a mere 6.65% in FY14—and this will put a limit to how much money they will actually invest in their networks; this is why call/internet quality is so poor in India. Two, as competition dies off, telcos will start raising prices to recoup their large investments. Either way, Digital India suffers.