Spectrum availability and access forms the basis for delivery of telecom services. Acquiring spectrum has in many contributed to the financial distress and strained balance sheets of Indian operators over the past few years. To put things in perspective, between 2010- 2015, the telecoms industry has already spent ~ US$ 44b on spectrum acquisition. With that, the debt levels have escalated at a CAGR of 24% during this period to reach US$ 57.2b while sector revenues have not increased in line and grew at only 8.2% during the period. Capex investment to roll out networks form a considerable portion of investments. In these past 5 years, telecom operators have invested a cumulative capex of US$ 42b addition to the spectrum investments. Telecoms is a highly capital intensive sector and with secular decline in average revenues per user, the margins have declined. Going by the numbers, Indian telecoms is clearly a sector in distress and inching towards a potential debt trap.
High reserve prices are a strain on sector’s financial viability
The latest round of India telecoms spectrum auction concluded on a rather disappointing note – closing in on INR 65.7 bn with nearly 60% of the airwaves not attracting any bids. This is the third instance of muted auction resulting from a pricing mismatch in terms of the government’s expectations and the operators’ interest. These auctions clearly highlighted the basic principles of economics where low market demand will push the supply price to come down, and equilibrium will be achieved. Similarly, as long as the government fixes reserve prices near the previously discovered market prices, the auction outcome will be unfavourable.
The muted response in the 2016 spectrum auctions was in line with expectations. No bidding was witnessed in the high spectral efficiency bands of 700 MHz and 900 MHz. While the 700 Mhz band was over-priced to witness any participation, no bidding in the legacy 2G band was primarily due to the low quantum ~9.4 MHz in the offing. Since the telcos were successful in safeguarding their holdings from license expiry via the 2015 spectrum auction which enabled access to clean and litigation free spectrum for the next 20 years. Having aid that, the current auction offered no real business case for investment in this band.
Other popular 4G bands vis-à-vis 1800 MHz and 2300 MHz witnessed positive traction with over 95% circles witnessing activity on the 1800 MHz band and all circles witnessed bidding in 2300 MHz band, though at very low premiums over the reserve prices. Clearly, the operators intended to augment their existing 4G portfolio at a more reasonable price in comparison to the premium 700 MHz band.
The high capex 2500 MHz band was better priced than the low capex 700 MHz band. Interestingly, it witnessed bidding in over 90% of the total circles at offer, though at nearly no premium over reserve price. Given it’s under developed ecosystem, activity in this 4G band is indicative of the operators’ intent to commit investments in the data play, only if they perceive investing at the current base price may justify the return on investments.
Investments in the 2100 MHz 3G band was in line with expectations 3G continues to drive major chunk of India’s growth story. According to industry reports, 3G contributed 64% of the total data traffic in 2015. With the auction, operators’ managed to supplement their 3G holdings to cater to the rising data demand. All circles witnessed traction and the mark up over reserve prices were limited to the range of 0 – 57%.
700 MHz was over-priced; telcos opt for other 4G bands to address the current data needs
With superior spectral efficiency and propagation characteristics, the digital dividend spectrum provides an opportunity for the operators to differentiate service offering as well as cost effectively improve coverage and quality of service. It’s is for this reason, the niche 700 MHz band is extremely valuable and cost effective in terms of capex spends.
Going by the current LTE adoption in India is in its nascent stages, which range between 5-10% (on the higher side in urban areas); and the LTE device ecosystem still needs to mature. Thus, from an investment viability perspective, the operator’s reluctance to commit heavily in this band is in line with what was witnessed. The return on investments were not justified with the overpriced reserve prices at INR 114.85b per MHz, which exceeds the globally discovered auction prices at ~ 1.8x of Argentina, 4.8x of Brazil, 19.8x of Chile (clearing price per MHz per populated adjusted to ARPU).
Further, with the current 4G holdings, operators have sufficient capacity and dense networks in urban and semi urban regions to cater to the data demands using other 4G bands such as 1800/2300/2500 Mhz. LTE services have already been rolled out in these bands and their ecosystem is well developed in comparison to 700 Mhz, Interestingly, these bands witnessed good traction in select circles though bidding was restricted to low premiums over reserve prices. This clearly indicates that the operator were only looking to plug in additional spectrum to augment their regional footprint.
Going forward, pricing will be critical as the data will play a pivotal role in government’s Digital India vision
The data tsunami is set to hit the country in the foreseeable future. The ecosystem is expected to take at least 2-3 years to evolve, however, once 4G gains mass adoption, the play of 700 Mhz is bound to increase and the correct pricing of this band will be critical in driving uptake. Looking ahead, it is essential to recognize that the amount and price of spectrum put to auction should not only reflect the benefits it brings to operators, but also consider the future socio-economic gains realized through improved tele-density and digital inclusion. An expensive auction not only results in higher cash outflows and strained balance sheets, but a slow down in network rollouts.
Having said that, the government’s effort in adopting the APT 700 band is in line with the global digital dividend initiatives. Globally its ecosystem is shaping up at a relatively faster pace in markets such as US, Germany and France. For India, its introduction is a step in the right direction and will greatly support in addressing the data boom in India over the long run.
All in all, the auction was an encouraging initiative by the government, where for the first time, the harmonised spectrum in the 1800 Mhz band was made available in addition to releasing LTE spectrum in new bands new bands such as 700 Mhz and 2500 Mhz. In a highly competitive telecoms industry where fragmented spectrum holdings have acted as a challenge to efficient utilization, the auctions have opened doors for unleashing the data play. India has steered ahead in the quest for connecting the unconnected and hence bringing the much needed digital kranti in the lifestyles of its ‘aam aadmi’. Going forward, the vision of bringing the power of affordable connectivity to a billion Indians is possible only when adequate spectrum is made available at a business viable price.