Spectrum bid 2016: A cautionary note

Political economy of spectrum auction that induced the govt to fix high reserve prices has spoilt the game.

The largest ever radio spectrum auction for commercial mobile services in India ended last week with a large amount of spectrum unsold. It was the first time that the Indian government put on auction spectrum in various bands including 700, 800, 900, 1800, 2100, 2300 and 2500 MHz.

A total of about 2,300 MHz of spectrum across all telecom circles was put on table for mobile operators to pick up. However, only about one-fourth of it was sold. The total winning price was just about one-tenth of the reserve prices fixed for all bands.

A detailed analysis reveals that the bands where much of the spectrum was sold – 1800, 2300 and 2500 MHz – all had lower reservation price per MHz compared to those that went unsold. The 700 MHz that had the highest reserve price did not sell at all in any of the circles.

The 900 MHz, which also had a high reservation price, did not sell in the four circles that it was put on block, too. The average winning price for 800 MHz was much lower than the reservation price. This is due to very low percentage of just about 20% of the spectrum blocks sold in this band, and that too in circles where the reserve prices were lower.

Higher amounts of spectrum sold of the 2300 MHz (88%) and 2500 MHz (52%) put for auction is mainly due to lower reserve prices. It should be noted that the 2500 MHz was assigned to the state-owned BSNL/MTNL way back in 2009 and was returned to the government due partially to non-availability of the technical ecosystem for the same.

Even the 2300 MHz spectrum, which was won by the Broadband Wireless Access licensees way back in 2010, is just now being put to deployment, again due to the lack of a suitable ecosystem and an associated network equipment operating in this band.

The lower frequency bands such as 700, 800 and 900 MHz are good to have for the operators as they have superior propagation characteristics. These bands also provide good in-building coverage compared to the higher frequency bands.

However, because of the high reserve prices, the operators could unfortunately not lay their hands on them.

The reserve price for the 700 MHz is about four euros/ MHz/ population in the three metro circles and its order of magnitude is higher than the sale price in most of the developed countries. It is almost four times per MHz compared to 1800 MHz band.

Of course, having lower freq-uency bands would have redu-ced the capital and operational expenditures for the operators since they have to use fewer nu-mber of cell towers to provide the required coverage. One can argue that these savings should have been paid towards corresponding spectrum charges. But, the operators would have made all these calculations in their bidding strategy and deci-ded not to bid for the lower freq-uency bands due mainly to multiple factor pricing as compared to higher frequency bands.

While the spectrum picked up by the operators increase their holding and provide much-needed capacity in dense urban areas, they are not helpful in their rural rollouts where coverage and not capacity is the concern.

Coupled with the high reserve prices, there is consolidation in progress in the Indian mobile sector. With Airtel+ Qualcomm+Augure+Videocon acquiring Aircel’s 2300 MHz through trading arrangement; RCOM+MTS+Aircel acquisition; Vodafone+Tikona coupled with acquisition of Telewings; the number of players in each circle has been drastically reduced, leading to spectrum consolidation.

The average number of spectrum holders has fallen from 10 pre acquisitions to 7 post acquisitions; the average spectrum holding across bands per operator per Licensed Spectrum Access (LSA) has increased by about 30%. The operators who have been crying foul over scarcity in spectrum suddenly found themselves having a large amount of spectrum due to the development of the secondary spectrum market.

It has been well proven by economists and game theorists alike that the Simultaneous Multiple Round Ascending (SMRA) auction mechanism that was employed will derive the true value of the spectrum from potential buyers and is one of the methods advocated for allocating scarce resources such as spectrum.

Further, the ranking rules, eligibility points assignment, activity levels as designed in the auction platform were carefully drafted, thus minimising the possibilities of winners curse, collusive bidding and other such imperfect market behaviour. This theoretically strong mechanism works best when left to the market forces to play the game; instead of the government fixing it. The political economy of spectrum auction that induced the government to fix the high reserve prices has spoilt the game.

Are there lessons to be learnt? Will there be a re-auction of 800 MHz at lower reserve prices much like what happened in March 2013 due to non-selling of the same in November 2012 when it was put on block with 1800 MHz? If so, what is the methodology that the Trai and the DoT will use for 700 MHz which has no history unlike the benchmark prices available for the other bands?

(The writer is a professor at IIIT-Bangalore)