According to media reports, Reliance Communications will convert nearly all of its CDMA spectrum into 4G spectrum by paying around Rs 7,000 cr to the government, and then sell it to Reliance Jio for Rs 4,500.
Some are perplexed as to why a company would pay so much to the government to free up its spectrum and then sell it at a lower valuation — in effect suffering a loss. After all, they ask, what is in it for Reliance Communications?
The answer lies in the quantum involved.
While the Rs 7,000 cr covers the cost of converting 5 MHz of 800 MHz CDMA spectrum into 4G waves in nearly all the circles in India, what the company will be subsequently selling to Reliance Jio will only be part of the spectrum so converted.
Reliance Jio already has 4G capable 800 MHz spectrum in 10 out of the 22 circles in India (even though most of these are not-so-lucrative circles.) So, it is unlikely to be buying RCom spectrum in nine of these ten circles.
These nine circles, where Jio already has 5 MHz of this spectrum are Mumbai, MP, Bihar, Haryana, Himachal Pradesh, North East, Assam, J&K and Orissa.
So even after conversion, RCom will most likely keep its spectrum in these nine circles. There’s one more – Uttar Pradesh East – where RJio has 3.75 MHz of spectrum – and needs only another 1.25 MHz.
That leaves 12 out of 22 circles where Jio doesn’t have any 4G spectrum in the 800 MHz band.
It is in these circles that Reliance Communications will sell an undisclosed amount of spectrum to the Mukesh Ambani firm for Rs 4,500.
In return, Jio will share its 4G network with RCom.
Another factor to keep in mind, besides geography, is the quantum of spectrum being sold by RCom.
RCom is not selling all 5 MHz of its converted spectrum either. This is because a rule in the spectrum sharing guidelines requires both parties in a sharing contract to have (converted or auctioned) spectrum in the band of sharing.
What this means is that if RCom sells the entire 5 MHz of its spectrum after conversion, it won’t be able to engage in a sharing deal with Jio, which means that it won’t be able to launch 4G services.
At the same time, according to the contours of the deal leaked so far, both parties will create a shared 4G network across India.
This means that, as far as these 12 circles are concerned, RCom will sell only part of its converted spectrum, possibly 2.5 MHz in each of the 12 circles, and will retain the other half with itself.
The two companies will then pool this 2.5 Mhz plus 2.5 MHz to create an LTE network of 5 MHz each.
The only downside to structuring it like this is that the total spectrum in use is only 5 MHz, while in the first set of 10 circles, the total spectrum in use will be double this because each party is bringing in 5 MHz each. The more spectrum there is, the more bandwidth and users the network will support.
FURTHER COST CUTS
There are two more ways in which RCom should be able to cut its conversion costs.
First is related to the RCom-MTS merger, and the 3.75 MHz of spectrum that the merger will bring to the table.
It just so happens that all eight telecom zones where MTS will bring in this 3.75 MHz spectrum belong to the 12 circles where this 2.5 MHz + 2.5 MHz sharing has to take place.
Since MTS has already paid auction prices (and doesn’t have to pay as steep a conversion price as RCom), converting MTS’ spectrum into 4G spectrum will be much cheaper than doing so with RCom’s administratively assigned spectrum.
However, what is not is not clear is whether this can be implemented right now since the merger has not been completed in all its formalities.
Another challenge is that unlike RCom’s spectrum, which is in a single contiguous block of 5 MHz, MTS’ may not be, especially since it has to be clubbed with 1.25 MHz from RCom to make a 5 MHz block.
However, there is one more reason why costs will be under control, and it is that RCom has recently bought small chunks of 4G spectrum in nine circles. In addition, it has full 5 MHz 4G blocks in two circles.
For example, in a state like Punjab, RCom already has 2.5 MHz of 4G spectrum, and needs to convert only 2.5 MHz more to implement a sharing deal with Jio.
SHARING IS CARING
Though the Anil Ambani firm ends up losing chunks of its precious spectrum in the deal, the benefits of such sharing agreements with Jio far outweigh the risks.
First, it spares RCom from having to raise money from the markets or banks — a very difficult proposition given the current macro environment and the company’s own leverage position.
Secondly, and perhaps more importantly, sharing with Jio means RCom may not have to put in even a single 4G tower in any circle in India to have its own pan-India 4G service.
This is because, under spectrum sharing, the company merely has to agree to let RJio use its frequencies. The rest is done by RJio, which will tune its base stations to use RCom’s frequencies as well.
All this is probably done from the central command station in Navi Mumbai, and in a few days, a whole new 4G network can be in place at almost zero infrastructure cost. In a market where time to market is crucial, this is a value proposition that cannot be ignored.
And the benefits are not limited to RCom either. Jio benefits as it will now have a pan-India 4G network on the 800 MHz band, which will ensure that the signal doesn’t drop when you step inside a toilet or a basement.
IMPACT ON COMPETITION
The deal is likely to force a rethink in certain quarters, especially at Bharti Airtel’s headquarters in Gurgaon, about the need for 700 MHz auctions. The company, along with Idea Cellular, had opposed having the auctions right now in TRAI’s consultation process.
However, with Jio having immediate access to low-frequency (high propagation) spectrum, it is an edge they may not be willing to forego either.
The importance of having low frequency waves has already been demonstrated in the voice segment, where nearly every circle is led by an operator that uses the 900 MHz band, while those who use 1800 MHz band have faced enormous challenges in getting traction and coverage.
Other than getting 800 Mhz band (in which there is no more spectrum left to be allocated), the only way for Bharti Airtel and Idea Cellular to compete on an even footing with the Ambani brothers is to buy 700 MHz spectrum.
However, if TRAI heeds Airtel’s earlier request that the band not be auctioned now, it would delay any 4G launch on this band to at least the year 2018 – giving Ambanis a two-year head start in the rural market.