Voice&Data

THOU SHALL PAY 10X FOR SPECTRUM

Thanks to Trai’s heavy handedness, operators’ ROI and expansion plans will go for a toss

- Pravin Prashant pravinp@cybermedia.co.in

Everything was going well for Indian telecom, but then came 2012. First, the Supreme Court judgement on cancella on of 122 2G licenses slapped the smiles off the operators’ faces. And then came Trai’s ‘Recommenda ons on Auc on of Spectrum’. It will not just further decelerate the industry, but all the hard work done by the policy makers, regulators, and operators in the last 18 years will also go for a toss!

The telecom industry is s ll seeking answers, but hardly any are coming forth. There is a big silence on the whole spectrum auc on salvo launched by Trai. It is me for the policy makers and the government machinery to wake up and take correc ve measures, and quickly, before it snowballs into a major disaster for the government. Correct measures taken now will go a long way in helping the industry recover and move forward, and regain its lost glory. It will also help build back the government’s image, reeling under a “policy paralysis”, with the world watching us so closely.

Now let us rewind and see how things have unfolded in last couple of months. On February 2, 2012, the Supreme Court’s two-judge bench of Jus ce GS Singhvi and Jus ce Asok Kumar Ganguly in its 2G judgement with respect to writ pe - ons filed by Center for Public Interest Li ga on and others vs Union of India and others and Dr Subramania­n Swamy

vs Union of India and others directed the following terms:

“(i) The licenses granted to the private respondent­s on or a er 10.1.2008 pursuant to two press releases issued on 10.1.2008 and subsequent alloca on of spectrum to the licensees are declared illegal and are quashed;

(ii) The above direc on shall become opera ve a er four months;

(iii) Keeping in view the decision taken by the central government in 2011, Trai shall make fresh recommenda ons for grant of license and alloca on of spectrum in 2G band in 22 service areas by auc on, as was done for alloca on of spectrum in 3G band;

(iv) The central government shall consider the recommenda ons of Trai and

take appropriat­e decision within the next one month and fresh licenses be granted by auc on”.

On the basis of the Supreme Court’s verdict, Trai came out with a pre-consulta on paper followed by a consulta on paper on the auc on of spectrum. It also conducted an open house, and finally came out with its recommenda on with respect to the auc on of spectrum on April 23, 2012, which was earth sha ering for the industry!

The Supreme Court’s 2G judgement mandate as per para 81 (iii) of February

2, 2012 talks about “Keeping in view the decision taken by the central government in 2011, Trai shall make fresh recommenda ons for grant of license and alloca on of spectrum in 2G band in 22 service areas by auc on, as was done for alloca on of spectrum in 3G band.”

The basic ques on is that when the Supreme Court asked Trai to make fresh recommenda­tions for grant of license and alloca on of spectrum in 2G band, why did they not follow the direc ves of the Supreme Court and come out with the alloca on of spectrum in 2G band? Just following these directives would have helped the regulator and also the government.

Commenting on the recommenda ons, CS Rao, president, Rcom says, “Trai should have stuck to the recommenda ons of 2G reserve price fixa on only, which is the effec ve mandate to Trai from the Supreme Court.”

The Auction

Under a microscope, it would look as if Trai is focusing on 4G and not on 2G spectrum auc on at all. Maybe it feels that the era of voice services is over and that of data services has begun. Though that’s not the case in India. And that’s the reason the reserve price for all bands of spectrum has hit the peak. As per Trai’s own quarterly report: “The Indian Telecom Services Peformance Indicator”, released on April 13, 2012, the total telecom subscriber base stands at 926.53 mn. Of this urban contribute­s 611.19 mn and rural 315.33 mn subscriber­s.

In terms of teledensit­y, urban stands at 167.85 whereas rural stands at 37.48. So there is s ll a lot of scope for rural tele-density for voice, as they have a lot of catching up to do vis-a-vis urban teledensit­y. And there is a lot of scope for voice s ll le in India unlike in developed economies where the focus now is on ‘broadbandi­ng’ the economy.

Even the rollout obliga on laid down by Trai in its latest recommenda­tion: “Rural Rollout Obliga ons Applicable to all Spectrum Holders” (Table: Rural Rollout Obliga ons Applicable to all Spectrum Holders) talks about connec ng all villages with popula on of more than 2,000 within 4 years from the effec ve date (April 1, 2012). So it seems that Trai is contradic ng its own statement! The rollout obliga ons should have focused on broadband connec vity or data services and not on connec ng voice subscriber­s if they were focusing on 4G services.

This is further ratified by Wireless Intelligen­ce in its recent report on “The Global Cellular Industry Balance Sheet” which says, “Voice revenues s ll account for 75% of recurring revenues on average in developing countries and 70% in developed countries whereas data-only revenues (which exclude revenues from messaging services) represente­d 16% of total revenues on an average in the developed region in 2010, compared to 11% in the developing region. In 2012, over one-third of total revenues globally will come from non-voice services and data-only services will represent close to 20% of total revenues.”

On the one hand, Trai is talking about connec ng the rural popula on in the new recommenda ons but on the other, it is keeping the reserve price for different bands of spectrum extremely high. Telecom pundits cannot comprehend this, considerin­g the fact that the rural popula on is not as prosperous as urban and it is difficult to provide services in rural areas due to lack of infrastruc­ture. So, shouldn’t connec ng rural be more premium than 3G or BWA?

If one goes by the recommenda on, Trai has proposed a pan-india reserve pricing per MHZ for 1,800 MHZ at ` 3,622.18 crore, for 800/900 MHZ at ` 7,244.36 crore, for 700 MHZ at ` 14,488.72 crore, for 2,100 MHZ at 3,773.24 crore, and 2,300 MHZ at ` 723.52 crore. In 2008, the operators had got pan-india 2G license for ` 1,658 crore to get 4.4 MHZ. Similarly in 2010, the operators got a pan-india 3G license at ` 16,828 crore to get 5 MHZ and pan-india BWA license at ` 12,848 crore to get 20 MHZ.

In the present scenario, the operators will have to pay ` 18,111 crore for a panIndia license in 1,800 MHZ to get 5 MHZ. So the operators are paying a price premium of 10 mes vis-a-vis the 2008 price point. The operators are also paying a premium

of 7.6% more vis-a-vis the 3G license auc on in 2010 and 41% more compared to the BWA license auc on held in 2010!

Ini ally, the operators need to pay 33% of bid amount in case of 1,800 MHZ, 2,100 MHZ and 2,300 MHZ whereas the operators will have to pay 25% of bid amount in case of 800/900 MHZ and 700 MHZ. There would be a 2-year moratorium and the balance amount will be paid in 10 equal installmen­ts annually. The regulator has also reduced the spectrum usage charge to 1% of Adjusted Gross Revenue (AGR)

from 3-8% of AGR which operators are currently paying, depending upon the spectrum that they are utilizing. Even deferred payment and reduced AGR is not going to help the industry as the reserve price is extremely high.

Operator’s Point of View

Commen ng on the spectrum auc on, the Cellular Operators Associa on of In- dia (COAI) and the Associa on of Unified Telecom Service Providers of India (AUSPI) have vehemently expressed their disapprova­l of these recommenda ons and termed them as being “arbitrary, regressive and inconsiste­nt”. The industry was looking forward to a reasonable spectrum reserve price recommenda ons from Trai in the light of the government’s own ar culated policy direc ons on affordabil­ity and rural penetra on.

“Under such an inconsiste­nt, regressive and uncertain regulatory environmen­t, how will the telecom industry, which is already in a state of doldrums, deliver on the government’s vision of affordable communica ons, rural penetra on, and rollout of data services,” say COAI and AUSPI in a joint statement.

On the same Lars Henrik Stork, CEO, ZOOSH (Augere Wireless Broadband India) says, “Trai reserve price would have a severe nega ve impact for the sector. It will not s mulate foreign investment and adversely affect consumers in terms of higher tariffs. Also, surprising­ly, it is inconsiste­nt with the objec ves of the new telecom policy—for eg, to bid for 700 MHZ for 4G services it would cost about $86 bn as per the recommende­d reserve price! This would certainly not promote planned growth in broadband subscrip ons to meet the government’s objective.”given the current volatility in the sector, it makes it impossible for operators to compete and generate an acceptable margin, adds Lars.

Jagannadha­m Thunuguntl­a, strategist and head of research, SMC Global Securi es has this to say: “Trai recommenda ons focus on collec ng as high revenues as possible out of this spectrum sale. The government is a emp ng to get as much windfall as possible from this to handle the fiscal deficit. It seems that Trai is of the opinion that whether commercial­ly viable or not, it needs to be analyzed by the telecom companies. But it can be reasonably assumed that the best days of Indian telecom companies are behind us. The windfall gains that the industry produced during the 1999-2009 period is almost history. And with such a high reserve price, the pressure on ROI is appearing to be a ma er of certainty.”

“We believe that several of these recommenda ons are retrograde and if accepted, will do irreparabl­e harm to the industry,” Vodafone India said in a official statement.

CS Rao, president, Rcom says, “We are afraid that Trai recommenda­tions may affect rural growth where a different socio-economic class of India is expec ng the service to be available at more affordable prices at higher tele-density levels in the next 5 years.” For Ashish Basil, partner, transactio­n advisory services, Ernst & Young, “The Trai policy objec ve seems to be for maximizing revenues for the government and will not be helpful for building a cost efficient telecom services for the masses, which once India was known for in the global telecom market.

It will hamper the ability to connect the unconnecte­d and goes against the objec ves of Na onal Telecom Policy of ensuring improved rural tele-density and right to broadband.”

Commen ng on Trai’s recommenda ons Uninor says, “While we study them in detail, it seems obvious that some of these recommenda ons will create severe nega ve impact on the en re industry. It is up to the poli cal leadership of India to now ensure that the gains of the past few years of affordable phone calls for India’s people are not undone.”

Even fund managers like Goldman Sachs, HSBC, Bank of America Merrill Lynch and UBS are not op mis c about the Indian market in terms of Trai’s recommenda ons on spectrum.

Ernst & Young es mates the total telecom revenues in the region of $40-50 bn for the year, growing less than 10% in the last few years despite achieving some sa sfying mobile penetra ons. Speaking about revenue increase Ashish Basil says, “Currently, the value of the spectrum held by operators, based on the new recommenda ons, will be much higher than the total telecom revenues (not factoring the proposed auc on of addi onal spectrum). It is difficult to envisage that telecom revenues will go up substan ally to jus fy such valua ons of the spectrum. Given high penetra ons and high MOU (minutes

of usage), one major way revenue can increase is through higher tariff which then has an opposite effect on the Mous and penetra on.”

Speaking on ROI, CS Rao says, “At the recommende­d high prices for 1,800 MHZ and twice the recommende­d price for 800 MHZ, operators would not find any business case with any ROI for many years in most of the circles as the effec ve remaining market access available during 2014-25 time period is hardly about 150 mn subscriber­s on pan-india basis to be shared by at least 8 operators. The current ARPU levels are not expected to increase significan­tly to change the business plan for a better return on investment.”

And all this will have a mul plier effect on mobile tariffs in the country which is against the objec ves of NTP.

So it seems that the Trai recommenda on are not going to benefit any operator except the BWA and 3G operators. For all others it looks like an uphill task—be it canceled license operators like MTS and Uninor; old operators like Bharti, Vodafone, Idea, and Aircel; government operators like BSNL and MTNL; or dual technology operators like Rcom and Tata Docomo.

It is also quite surprising that none of the representa­tion made by these operators either in open house or wri en replies talked about such high reserve price numbers. So, the ball is in Trai’s

court. It has to jus fy the relevance for such a high price and the mo ve for such astronomic­al numbers.

Against NTP Objectives

The recommenda­tion is also against NTP ‘94, NTP ‘99 and NTP ‘2012 vision. As per NTP ‘94 objec ves the focus was on—availabili­ty of telephone on demand, provision of world class services at reasonable prices, ensuring India’s emergence as major manufactur­ing/ export base of telecom equipment and universal availabili­ty of basic telecom services to all villages. Even the NTP ‘99 objec ve says, “Availabili­ty of affordable and effec ve communica ons, provide balance between universal services in rural areas and provision of high level services, encourage developmen­t of telecommun­ica ons facili es in remote, hilly and tribal areas...”

The draft NTP 2011 preamble also says, “Telecommun­ica on has emerged as a key driver of economic and social developmen­t in an increasing­ly knowledge intensive global scenario, in which India needs to play a leadership role. Na onal Telecom Policy-2011 is designed to ensure that India plays this role effec vely and transforms the socio-economic scenario through accelerate­d equitable and inclusive economic growth by laying special emphasis on providing affordable and quality telecommun­ication services in rural and remote areas.”

So, if one goes by NTP’ 94, MTP ‘99 and dra NTP ‘2011 the objec ve remains the same—that of providing affordable and quality telecom services in rural and remote areas. So, if this is the objective, then what is the basis of keeping a high reserve price for all spectrum bands? And we believe that the Ministry of Communicat­ions and Group of Ministers (GOM) should think a lot before accep ng the final recommenda ons of Trai.

Two questions come out of this recommenda­tion. First, if the recommenda ons are so diagonally opposite, why were they finalized? Second, if these are accepted by the government, the auc on process would be floated and if the response is lukewarm, then will the government go back to the drawing board and change the reserve price thereby was ng me in the whole process? The industry believes that the government should proac vely do all these things rather than keep the industry on a standby mode.

Spectrum Refarming

Trai also reiterates the view that the en re spectrum in 800/900 MHZ should be refarmed. This will be applicable to all the service providers in all the service areas and should be carried out progressiv­ely but not later than the due date of renewal of license. So, the spectrum available with the service providers in 900 MHZ should be replaced by spectrum in the 1800 MHZ. Similarly, the license holders of 800 MHZ spectrum should be assigned in the 1,900 MHZ band. There are bigger issues with respect to the price to be paid by operators to move to a new frequency band.

Jaideep Ghosh, Partner, KPMG says, “Liberaliza on and refarming of spectrum and its auc oning to both incumbent and new operators would lead to a level playing field between service providers. However, TRAI recommenda ons on the hike in reserve prices appears significan­tly on the higher side and is likely to be a strain on the resources of the bidders, especially with a highly compe ve market landscape. Higher reserve price and resultant auc on price is likely to lead to an increase in tariffs by service providers.” An NSN spokespers­on says, “Operators refarming GSM frequency to support 3G and 4G rollouts can free up to 30% of their spectrum, reduce total cost of ownership by 20% and poten ally double their average 3G and 4G data speeds.”

Industry experts say that technology neutrality is easy to speak of but difficult to prac ce as one has to make a significan­t investment in the guard band. For eg, coexistenc­e of both 2G (1,710-1,785 for uplink and 805-1,880 for downlink) and 3G (1,920-1,980 for uplink and 2,1102,170 for downlink) will create interferen­ce and compa bility issues. Being a non standard, one has to customize products for the Indian market.

So, one has to see whether the government accepts the Trai recommenda ons in toto or make some amends in the spectrum auc on policy so that the business model looks ‘somewhat’ a rac ve for all operators. If the complete recommenda on is accepted by the government, then the operators will have to revisit their business plan and use spectrum more judiciousl­y and efficientl­y than what they have done in the past—which would not easy. It seems the ba le for spectrum has just started and one will see lot of bloodshed as we move forward.

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