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Corporate Aug 16, 2013

Spectrum wars resume again as Trai looks at pricing

By Sindhu Bhattacharya

New Delhi: The telecom industry is divided right down the middle on almost every issue. And this is apparent once again from the response of telcos to the consultation paper floated by the Telecom Regulatory Authority of India (trai) on valuation and pricing of spectrum. The response of the telcos ranges from the incredulous to the unexpected.

Telecom service providers were asked for their opinions on a range of issues related to spectrum, its quantum, pricing and the contentious issue of refarming the 900 Mhz spectrum.

Let's look at the critical issue of 2G, or 1800 Mhz spectrum pricing, where every telco has been shouting about the urgent need for a reduction in spectrum prices. What does Reliance Jio Infocomm, which has no presence in the 2G space till now, say? It says there is absolutely no need to cut prices - neither in the four circles of Delhi, Mumbai, Karnataka and Rajasthan, where no bids were received in earlier auctions; nor in any of the remaining circles.

Reliance Jio and RCom do not want 1,800 Mhz spectrum prices lowered, but the rest of the industry is yelling blue murder

Reliance Jio and RCom do not want 1,800 Mhz spectrum prices lowered, but the rest of the industry is yelling blue murder. Reuters

Its logic? Reliance Jio makes multiple references to a CAG report which alleged cartelisation by telcos, and speaks of Trai''s own data which shows improved industry parameters and says any cut in prices of 2G spectrum would violate the principle of level playing field. It cites the lessening of competitive intensity, tariff increases by 40-50 percent by incumbents and a substantial increase in their average revenues per user (ARPUs) and new operators turning positive on EBITDA (earnings before interest, depreciation, tax and amortisation) in some circles to support the case for no further price reductions in any telecom circle.

"As per Trai's own calculations, spectrum pricing contributes to 4 paise per minute only. Any downward revision in reserve price at this stage will create a non-level playing field for the licensees who have bought spectrum in November 2012, as the government is not going to refund any money to them," Reliance Jio said in its submission to Trai," Reliance Jio said.

The older Ambani is supported in his view only by his younger sibling. Reliance Communications (RCom) is the only other telco which has said there is no need for a price reduction though it has not participated in either round of auctions held so far and there is no clarity if it will participate in forthcoming auctions. But even RCom has not agreed with Reliance Jio in entirety, coming up with another unexpected suggestion: that pricing for 2G spectrum in Delhi and Karnataka circles should be deduced from the price of CDMA spectrum! And for Mumbai, from prices discovered for Delhi; for Rajasthan, from prices discovered in Madhya Pradesh! Then, RCom has gone ahead and demanded a substantial reduction in the price of the 800 Mhz band used for CDMA services. So GSM services should run on expensive spectrum but not CDMA seems to be its logic.

Also, why do only the Ambanis feel the price is right when everyone else, including industry associations and individuals, are crying foul against pricing done by taking 2010 3G auctions as benchmark? The government had set a pan-India reserve price for 3G spectrum at Rs 3,500 crore in 2010. At last year's auction, the reserve price was Rs 14,000 crore for 5 Mhz of spectrum. In the two rounds of auctions since November last, price has been discovered in 18 circles, but no bids were received in the four most expensive circles of Delhi, Karnataka, Mumbai and Rajasthan.

The second issue is the implied threat by telcos that if spectrum prices are not cut, they may raise tariffs. In fact, taking off from what the telcos have threatened in response to the consultation paper, some have already begun speaking of tariff hikes to the media. A large incumbent telco told Firstpost this morning there is a case for a reduction in freebies - free minutes - by as much as 30-35 percent. Freebies are being offered by almost every telco today. Since the beginning of 2013, there have already been three rounds of tariff hikes - in January, March and May - where instead of increasing base tariffs, telcos slashed discounts being offered through special tariff vouchers and first recharge vouchers. Such special vouchers allow subscribers to make calls at discounted rates which are normally much below the headline tariffs. So the fresh threat of tariff increases in case spectrum prices are not brought down begs an explanation since these hikes are coming even in circles where no spectrum was bid for.

The third issue, refarming of spectrum in the 900 Mhz band, has split the industry once again right down the middle. Bharti Airtel, Vodafone, Idea and the public sector BSNL and MTNL hold nearly 85 percent of the spectrum in the 900 Mhz band, which is considered twice as efficient as the 1,800 Mhz band. Licences of operators in this band will be expiring progressively from 2014 onwards, prompting the newer operators to seek a chance for buying spectrum. The incumbents are dead against the idea of surrendering all 900 Mhz spectrum held by them for refarming - which means they either pay the new, higher rates or else bid for the cheaper but also half as efficient 1,800 Mhz band.

GSM lobby arm Cellular Operators Association of India (COAI) is obviously opposed to refarming. "The proposal to refarm spectrum is not in consonance with the policy and licence provisions, which clearly provide for extension of existing licences, which are bundled with allocated spectrum and unambiguously establish a technology-neutral licence regime in India," COAI Director General Rajan Mathews said. COAI also claimed that operators will have to make huge investments if they have to vacate the 900 Mhz spectrum and move on to 1,800 Mhz, which is not very cost efficient. "It would cost the GSM operators approximately Rs 1.25 lakh crore in incremental capex and Rs 25,000 crore in equipment writeoff. This is just the cost of network migration from 900 Mhz to 1,800 Mhz, while the cost of buying spectrum at auction would be over and above this cost."

But other telcos, who are perhaps eyeing a chance to bag 900 Mhz airwaves, are all for refarming. Reliance Jio said the government has already decided on refarming and the same has also been incorporated in the National Telecom Policy - 2012. "Therefore, there is no need to revisit this issue at this stage. Also, DoT has not sought any fresh recommendations of Trai on the issue of refarming in its present reference to Trai," it said.

Then, the issue of E-GSM band, which basically means taking away some spectrum from the CDMA band to extend GSM operations, has also seen a deep divide between CDMA and GSM telcos come out in the open.

Sistema Shyam, Reliance Communications and Tata Tele have all mocked Trai's observation that interest in CDMA services is diminishing. Sistema has pointed out that but for high price of spectrum, it would have bought much more in the March round of auctions (where it was the sole participant, no other CDMA or GSM telco came forward to place bids).

RCom has said "E-GSM band proposal should not be considered as it would not only disrupt and significantly impact CDMA network operations but will also cost the operators huge investment in terms of electronics , filters etc.

It may be noted CDMA operators have existing right under UAS License to use CDMA spectrum till 2021 and, therefore, option to use it as EGSM/liberalised spectrum only rests with the existing 800 Mhz spectrum users."

by Sindhu Bhattacharya

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