The Price Is Not Right: India’s Spectrum Costs

Amidst a wave of pushback from the nation’s biggest mobile carriers, the Telecom Regulatory Authority of India (TRAI) is standing pat on its initial spectrum pricing recommendations to the Department of Telecommunications (DoT).

Back in August 2018, the regulator had suggested that ₹492 crore (US$68.2 million) should be the base price per MHz of 3.3 to 3.6 GHz band. The government, however, has flagged that this price-point might be too steep and would further disincentivize participation in an auction that would already have a low turnout (recent consolidation has effectively reduced the market to three remaining private operators: Reliance Jio, Bharti Airtel, and Vodafone Idea).

Despite this, the TRAI is remaining firm on its recommendations. The concerns of lowered demand for spectrum and possible non-participation in the auction are not deterring the TRAI’s spectrum pricing; “… [the auction] is an open process and there is always a possibility of additional players participating in the process.”

It is a widely accepted notion that there is a positive correlation between the capabilities of the mobile telecommunication sector and its corresponding nation’s Gross Domestic Product (GDP) growth. This is point is especially apropos in regard to India’s forecasted GDP growth through 5G. According to The Economic Times, it is estimated that the telecom industry’s contribution to the GDP would grow from approximately 6.5% in 2019 to 8.2% in 2020.

Overall, the broader mobile telecommunication ecosystem is reported to indirectly and directly support 32 million jobs globally and has made sizable taxation contributions of about US$500 billion (a figure that does not include regulatory and spectrum fees).

Exorbitantly high spectrum fees would serve as a barrier to the economic and social value that mobile industries create for their respective markets. High spectrum auction fees would constitute a large portion of the already escalating capital expenditures of a mobile operator planning to evolve its networks to 5G. From an operator’s perspective, the amount they are willing to shell out for spectrum is a function of a variety of factors that include forecasted demand of products/services, equipment costs and availability, etc. Given this, spectrum fees have an acute impact on the revenue-generation capabilities and pricing strategies of an operator over a given time frame.

The net social and economic benefits that are being created through cellular connectivity would be undermined as operators would be forced to employ more aggressive commercial strategies that involve higher data tariffs to cover for their spectrum expenditure.

These considerations are not lost on the cellular operators’ association of India or COAI (a consortium that is comprised of Vodafone Idea, Reliance Jio, and Bharti Airtel). These operators’ bottom lines have already been affected by hypercompetitive price wars (initiated by Reliance Jio’s aggressive pricing strategies). In addition to this, the COAI also had to weather a recent unprecedented ruling by India’s supreme court to pay a total of Rs 926.4 billion (US$12.6 billion) in underpaid license fees and spectrum-use charges.

The overpriced spectrum would add on to the India’s major operators’ current financial distress. It is of no surprise that they have unanimously rejected the proposed base price of TRAI and have counterproposals that seek lower base prices for the critical 3.3 GHz to 3.6 GHz 5G bands.

The International Telecommunication Union (ITU) emphasizes that regulators should have a principled, holistic approach toward their spectrum pricing decisions. Aside from solely focusing on revenue generation for the public sector, regulators must also pay heed to the social and economic objectives that the use of spectrum (through mobile operators) can bring forward, with higher quality connectivity and expanded coverage being the catalyst for said objectives. As referenced earlier, the consequences of higher spectrum fees would ultimately be transferred to the consumers, as they would have to pay more for their mobile data plans.

Despite this, there are advantages to India’s market-based approach in allocating spectrum through auctions; with the general notion being that spectrum auctions can be an effective mechanism for the regulator to:

• Ensure Maximal Revenue Generation: Revenues from spectrum auctions can provide additional fiscal revenue that governments can use to the benefit of their citizens.

• Ensure Highest Consumer Value: Spectrum auctions are engineered to reward spectrum to operators that are most qualified to provide connectivity to the nation. The high reserve prices, bidding activity, and rollout obligations are measures to narrow the field to operators that have adequate financial and execution capabilities for rolling out fully functional, higher quality networks for consumer use.

The high base price (per MHz) in the 3.3 to 3.6 GHz bands at US$68.2 million far exceeds the prices of other countries; Italy is charging US$26 million for the same frequency bands while South Korea is charging US$18 million. The expensive base price supersedes the intended economic efficiencies of a spectrum auction, as it is preventing operators from even participating in the first place. One might argue that TRAI’s high $/MHz price tag on spectrum can be justified when we account for India’s larger market (population of 1.3 billion), a $/MHz/population calculation would definitely reflect a drastically lower spectrum price. A large market, however, does not automatically imply larger working capitals for operators—Indian Average Revenue per User (ARPU) is one of the lowest in the world and a high price on spectrum would have sizable impact on their capital and operational expense budgets.

The current unyielding positions of both the DoT (still intending to go ahead with its auctions in April) and the operators (seeking lower prices and the delay of the auction by several years) are the primary reasons for the delay of 5G rollouts in India. If the TRAI does prioritize the economic and social benefits of the nation and if the sentiments of non-participation are legitimate and spread across all members of the COAI, it is safe to say that the negotiating leverage belongs to the operators and the onus of 5G therefore lies in TRAI’s receptiveness to compromise.