Whither Logic In 2G Auction Reserve Price?

The Government of India's move to fix the base price of the spectrum at INR 140 billion (US$2.54 billion) for 5 MHz in the 1800-MHz band and INR 182 billion ($3.3 billion) for CDMA in the 800-MHz band belies all logic.

Service providers say that the call rates will go up significantly if the spectrum price is kept so high. And it is not just the service providers who believe that the tariffs will go up - India's new spectrum pricing will drive consolidation in the telecom sector and lead to higher industry tariffs, says Fitch Ratings in a recent release. Various other agencies like FICCI have also pointed out that a high-spectrum price will lead to higher tariffs.

Government has time and again made its intention clear of promoting telecom services in the rural areas. This move [of having high spectrum prices] then belies any logical thinking. If operators have to pay a high price for the spectrum, it goes without saying that they will focus on high-ARPU customers. The expansion in the hinterland will then not be part of their strategies.

The strategy of having a high reserve price will also lead to consolidation in the industry. I wonder if it is something to vie for? Consolidation will lead to just two or three players who will then control the market and tariffs. High pricing is further likely to lead to a fewer number of bidders in the auction. The newer players will find it difficult to bid with this reserve price.

It will be surprising if the response to these auctions is anywhere as enthusiastic as the last one, in spite of the fact that operators do not have to pay the price at one go. They have to pay only one-third of the auction price upfront, the rest is to be paid over a period of 12 years.

"We believe that India's telecom sector can afford six profit-making operators at the very most. High-spectrum pricing will hasten industry consolidation, and will most likely result in higher tariffs which could be initiated by the largest operators. However, higher tariffs may not be sufficient to offset the negative effects of higher spectrum prices, as the sector will remain competitive with the six operators," says Fitch in a recent press statement. (See The Great Indian Telecom Tamasha.)

"A key implication of the reserve price set by the Union Cabinet is in the possible cash outflows for the future spectrum charges such as spectrum renewal fees and the one-time spectrum charge (if levied) for the existing telecom operators. The prices discovered through the upcoming spectrum auctions will form the base for these charges. Going by the reserve price, telecom operators might have to incur a substantial cash outflow at the time of the renewal of the spectrum (starting earliest by FY 2015 for Bharti Airtel). A one-time spectrum charge would be an additional financial burden for the telecom operators, although there is no certainty on the levy of the same," says the recent ICRA report on spectrum pricing.

New operators like Sistema Shyam TeleServices Ltd. and Uninor had effectively brought down the prices of telecom services. As a result of the cancellation of 122 licenses and the uncertainty surrounding the auction, the future of these companies remains unclear. Uninor has already cut down its operations in four circles and is planning to auction its assets. Postponing the auction is likely to be a death knell for the company. (See IndiaWatch: Auction Battle May Go To Court.)

MTS, like most of the other operators, has complained about the high reserve price. "There is no rationale to support why the 800-MHz CDMA spectrum should be priced 1.3-times more than the GSM 1800-MHz spectrum. It is significant to note that the GSM spectrum being put up for auction is liberalized whereas the 800-MHz CDMA spectrum continues to be non-liberalized," says Vsevolod Rozanov, President and CEO, Sistema Shyam TeleServices Ltd. The company has also filed a curative petition about the cancellation of the order.

Gagandeep Kaur, Editor, Light Reading India