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How Ravishankar Prasad can resolve the 700 MHz spectrum auction pricing problem

broadbandIndia is getting ready for a digital revolution by auctioning 700 MHz spectrum that has the potential to take high-speed Internet to every village in the country. However, telecom operators — who have to play the role of the enablers — are not popping open the bubbly quite yet.

The reason for their misgivings is the high financial commitment that they have to make to get their hands on 700 MHz spectrum.

A LITTLE BACKGROUND

Cellular spectrum can be divided into two types — high priced, high propagation and low priced, low propagation.

As the name implies, the first type covers a lot of distance, but costs more; while the second type comes cheap, but covers only a smaller area.

Why is this important? If more area can be covered by a single tower, that saves a lot of money for operators who can then sell their service at a lower cost.

For example, if you were to use the current, popular band of 2300 MHz to set up a 4G network, you will need around 6 lakh towers to achieve pan-India coverage. And it’s not just the 6 lakh towers — you also need to connect these towers using a fiber network too.

If, on the other hand, you are using 700 MHz spectrum, you can achieve the same coverage using 1 lakh or fewer towers. In fact, CDMA operators have achieved near ubiquitous coverage on the adjoining 800 MHz spectrum with less than 50,000 towers nationally.

This reduction in the number of towers can save operators a lot of money. An average cell site costs around Rs 30,000 per month, or Rs 3.6 lakhs per year. Over the 20-year lifespan of the auctioned airwaves, the total cost per tower works out to Rs 72 lakhs.

So, if an operator chooses 700 MHz spectrum instead of 2300 MHz, he can save at least Rs 72 lakh multiplied by 5 lakh, which works out to Rs 36,00,00,00,00,000 or Rs 3.6 lakh crore.

In addition, this also saves the operator from having to build lakhs of km of fiber backbone to connect these high-speed towers, which would be another substantial amount. In total, therefore, the switch to 700 MHz would save them Rs 5 lakh cr or more during the validity period of the airwaves.

Now, let’s compare this savings with the price of the spectrum. The TRAI has suggested a base price of Rs 1.15 lakh cr for a decent 10 MHz block, compared to a price of around Rs 8,200 cr for the low-propagation 2300 MHz band.

In other words, to make the switch from 2300 MHz to 700 MHz and save Rs 5 lakh cr in tower and fiber costs, operators have to pay an extra Rs 1.07 lakh cr over the next 13 years in terms of spectrum charges.

The choice, you’d think, is not that difficult to make. After all, if you can save Rs 5 lakh cr over the next 20 years by paying Rs 1 lakh cr in the next 13 years, why wouldn’t you?

TOO LONG A PERIOD?

The problem is that no one really knows what is going to happen to wireless telecom in the next 20 years. In fact, it’s difficult to predict what will happen in the next 8 years.

This makes telecom companies wary of committing such a huge amount of money.

Even Mukesh Ambani’s Reliance Industries, which has invested Rs 1 lakh cr over the past 3 years in its telecom venture Reliance Jio, doesn’t have the stomach to shell out another Rs 1 lakh cr.

Reliance Jio, like Bharti Airtel and Idea Cellular, asked the government to postpone the sale of the 700 MHz spectrum.

The problem is not the price itself as much as the duration of the commitment.

For example, the savings of Rs 5 lakh cr over 20 years translates to a saving of Rs 25,000 cr per year, while the spectrum price of Rs 1.15 lakh cr for 20 years translates to just Rs 5,750 cr per year.

Looked at in this way, it makes total sense for the company to pay Rs 5,750 cr and save Rs 25,000 cr next year.

But the catch is that the government is seeking a commitment for 20 years when no one is able to predict with any certainty what the shape of the business will be in the longer term.

For all you know, new light-based or satellite-based technology could reduce the value of this spectrum to nothing after 10 years. Just like technology can reduce the spectrum value in the future, it could also increase it manifold, and Rs 1 lakh cr could look like peanuts after five years. No one really knows.

As a result, the operators are wary of shelling out the amounts and want the government to give the spectrum cheaper to them by reducing the reserve price. Of course, lower prices would also help increase any windfall gains they stand to make 10  years from now.

More justifiably, the operators justifiably point out that they are not in the business of speculation, but communication. By insisting on selling spectrum for 20 years, the government is forcing telecom companies a speculative play on the value of the spectrum in the future.

If both parties are adamant in their stands, there is a possibility that the operators could boycott the 700 MHz auction.

This would be a set back for India as a country, as there is nothing — except Reliance Jio’s 800 MHz service — that can replace this band in taking broadband to the villages.

THE SOLUTION

The ideal solution is reduce the risk for the operators, while protecting the interests of the public of the country by ensuring a fair valuation. This can be achieved by cutting the tenure of the spectrum award.

In other words, in addition to the price, let operators also bid for tenure. So, instead of putting in a bid for Rs 50,000 cr for 20 years, allow them to bid for Rs 5,000 cr for five years, which they are most likely to.

In fact, given the potential valuation upside to wireless spectrum in the next 8-12 years, it would also be unfair to the taxpayers to ‘sell’ this spectrum for 20 years and let the operators keep any upside to the valuation in the future.

If variable tenure sounds complicated, the government can also just cut the validity period of the airwaves in half — to 10 years.

This will not prevent operators from buying the airwaves or building new networks using this spectrum. Reliance Jio, Reliance Communications and Tata Teleservices are deploying 4G networks on spectrum that is valid only till 2022 — another six years.

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