Echoes of 3G spectrum bubble in India’s over-priced mega-auction
Government approves proposals to auction airwaves in seven bands in September, but MNOs may have to pay $850m for 5 MHz in the key band
The stage is set for the biggest ever spectrum auction in India, a country where operators need new capacity more than anywhere in the world. But the largest MNOs have seen growth in data usage slowing recently, so they will need to use the new 4G spectrum to tempt consumers and businesses with strong new services, or risk yet another price war.
The Indian government has approved the proposal, from regulator TRAI, for a huge auction, which would be held in September. It will cover seven frequency bands, including the much-coveted 700 MHz spectrum for LTE, plus the 800 MHz, 900 MHz, 1.8 GHz, 2.1 GHz, 2.3 GHz and 2.5 GHz bands.
It could raise a record INR5.6 trillion ($85bn) if analyst forecasts prove correct. That would eclipse last year’s auction proceeds, also a record, of INR1.1 trillion.
These dizzying sums have worrying echoes of Europe’s 3G spectrum bubble at the start of the century, which delivered windfalls for governments like the UK’s, but created huge problems that greatly delayed and diluted the impact of 3G. Excessive spectrum fees limit the operators’ ability to invest in networks and customer service, and in Europe’s case, there was a procession of write-downs and of disappointing revenue figures from the new networks.
The same will be true in India if the government sticks to reserve prices like the one set for 700 MHz (the most expensive band) – no less than INR11.5bn per MHz, which would mean INR57.5bn for a block of just 5 MHz – more than half the entire proceeds of the 2015 auction.
India is an incredibly tough one for cellcos because of its super-low ARPUs, and the race to the bottom in terms of tariffs has continued in the data era. But one reason is the way that spectrum has been allocated. Operators have typically had to pay very high prices, relative to their revenue potential, for slivers of spectrum, fragmented between different geographical ‘circles’. No MNO, for instance, got national spectrum for 3G, yet there have been strict limitations on the ability to share airwaves or even to roam and so achieve nationwide coverage with its essential benefits – economies of scale, brand awareness and quality of service for travelling customers.
And the 5 MHz slices are outmoded when operators need to launch services that require more bandwidth than that. The large number of players – eight MNOs won airwaves in 2015 – and high reserve prices make it hard for companies to win multiple blocks of spectrum in key areas. But the bandwidth issue is a critical one for operators, whose tariffs have been kept low partly because they have never had sufficient capacity to deliver acceptable QoS in many areas.
Also, larger chunks of spectrum would enable them to be more creative with service offerings for high value users. One of the reasons for the recent slowdown in data growth – according to Gopal Vittal, MD of the largest Indian MNO, Bharti Airtel – is that “80% to 90% of the use of data in this country is still around basic applications, whether it’s Facebook, WhatsApp and maybe video”. Application providers like Facebook have worked hard to make their services work effectively with low end handsets and connectivity, so Indian users are very efficient in their use of 4G. But while that solves some capex challenges for MNOs, it limits the potential to increase data fees or to push out premium apps, especially to business users.
This vicious circle of Indian mobile data – small, expensive spectrum allocations forcing operators to focus on low end services – needs to be broken in LTE. Many Indian consumers have low disposable income of course, but there is also a quickly growing middle class and a large population of mobile-oriented young people and mobile-first businesses. Operators need to have better tools to deliver high value services to these groups.
One likely result is that Indian MNOs will be at the cutting edge of techniques like WiFi offload, small cell HetNet and carrier aggregation – at least where the regulator allows – in order to make the most of their fractured spectrum holdings.
Some operators had argued for the 700 MHz sale to be postponed for a couple of years until the 4G ecosystem – particularly a wide range of devices but also backhaul and roaming – had developed more, and they had had the chance to refill their depleted coffers. However, it is almost certain to go ahead now, along with the other sales, with the pre-auction starting on July 6.