Spectrum sale: Crucial renewals likely than fresh purchases

Telecom veterans speak of radio spectrum or airwaves as being the equivalent of cement and iron for the industry, a fundamental ingredient and key essential for a connected society. So the decision by the government to finally hold the sixth round of spectrum auctions from March 1 has been welcomed by all.

This round of auctions will help incumbent telecom companies, Reliance Jio Infocomm (RJio), Bharti Airtel, and Vodafone Idea (Vi) in renewing spectrum in those circles where their respective holdings are expiring over the next few months. It will also enable telcos to purchase additional spectrum in key frequencies to improve the quality of service.

No, this round of spectrum auction will not lead to the start of fifth generation or 5G services in India anytime soon, since the spectrum band considered ideal for 5G services (3300-3600 MHz band) is not on offer.

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The telecom industry in India has been heavily leveraged historically and recent regulatory actions such as the demand from the government for substantial past dues from incumbent telcos, along with heightened competition and market consolidation, have only worsened the industry’s financials.

In this situation, at least two of the three private telcos have been reluctant to launch 5G services – the spectrum needed for 5G services will mean an additional huge investment in buying the airwaves plus further capex, something these telecom companies are unable to do as of now.

Analysts had earlier said that pan-India 5G spectrum would need capex in excess of ₹60,000 crore. So the impending auctions will be primarily used by incumbent telcos to boost their 4G services by renewing spectrum in 800 and 900 MHz bands in certain states.

Like in the previous rounds of spectrum auction, the Department of Telecom (DoT) will again offer a deferred payment option to telecom operators, so that only 50% of the cost has to be paid upfront in 1800, 2100, 2300 and 2500 MHz bands. For the more expensive bands of 700, 800 and 900 MHz, only 25% of the final bid amount is required to be paid upfront. The operators will then get a two-year moratorium and subsequently can pay the balance amounts in 16 equal annual instalments at an interest rate of 7.3%. This is a better deal than previous auctions where the interest rate was 9.3%.

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India’s telecom market is divided into 22 telecom circles and analysts have pointed out that 57 MHz spectrum in the 1800 MHz band is coming up for renewal for Bharti while Vi needs 46.2 MHz in the same band; the two telecom operators also have 6.2 MHz spectrum each coming up for renewal in the Tamil Nadu circle in the 900 MHz band. Given the cost dynamics, the two may not opt to renew all of these spectrums. For Bharti, the biggest chunk of renewal spectrum is in the lucrative Mumbai circle at 9.2 MHz while for Vi, renewing 8 MHz in Delhi could be crucial.

The most enthusiastic participant in this round of auctions is likely to be RJio since the spectrum held by it in the 800 MHz band is expiring in nearly a dozen circles in a few months.

Here are the salient features of the upcoming auction:

1. Auctions would be held simultaneously across all bands and the validity of this spectrum awarded would be for 20 years. The cap on how spectrum an operator can hold in each circle continue to be as before: 50% for 700, 800 and 900 MHz) and 35% of total spectrum available in each circle.
2. Bidding for the sixth round of spectrum auction in frequency bands of 700, 800, 900, 2100, 2300, and 2500 MHz is scheduled to start on March 1, according to a notice issued by the government on Wednesday. On offer is 2,251.25 MHz of spectrum worth ₹3.92 lakh crore, as per the base prices already announced.
3. The base price for one of the most efficient spectrum bands, the 800 MHz band, has already been lowered by about a sixth compared to the reserve price seen in the auctions in October 2016, say analysts. But the base price for the 1800 MHz band is 14.5% higher and for 2300 MHz price it is 17.5% higher. And even though the reserve price for the 700 MHz band has been cut by a whopping 43%, it still remains a very expensive band and may not find any bidders.
4. The Cellular Operators Association of India (COAI) has already warned against high reserve prices, saying keeping prices high in previous rounds of spectrum auctions resulted in large amounts of spectrum remaining unsold. The COAI has also sought additional measures to boost the financials of this highly leveraged industry.
5. Analysts are already saying that the final auction prices across spectrum bands could be equal to the reserve price in each band. This auction has promised an abundant supply of spectrum supply. Also, due to M&A, Bharti has already acquired a significant amount of spectrum and may not, therefore, come forward for 900 MHz and 1800 MHz spectrum bands in a bog way. Vi is financially strained and may decide not to spend huge sums in getting fresh spectrum.
6. The absence of any 5G spectrum in this round of auctions means the key issue being faced by RJio – high network congestion – remains. Analysts at brokerage Spark Research pointed out that they expect market share stagnation for RJio as it is grappling with congested networks. This despite RJio’s scorching pace of subscriber acquisition (its active subscriber share has increased by 3-5% in 16 circles) and jump in market share in most metro/category A circles by 7-9%. Since the upcoming auctions do not include 3500 MHz band, which is key to RJio resolving its network issues, it may buy more of 2300 MHz to address the congestion issues in its key circles, besides renewing the 800 MHz spectrum in most of the circles.

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