It is entirely possible that the price of spectrum gets substantially reduced for the upcoming third round of auctions.
Telecom regulator Trai oday began the consultation process for determining a reserve price for spectrum in 1800, 900 and 800 mhz bands or for 2G and CDMA services. This process, where comments and counter comments of telecom companies and other stakeholders would be in by August 21, may well result in a significant reduction in the reserve price of spectrum.
In the consultation paper itself, Trai chairman Rahul Khullar has shown his hand when he questions the logic of pricing 2G spectrum based on exorbitant prices seen in the 3G auctions of 2010.
"The 3G spectrum sold in the auction of 2010 was seen as catering to the provision of data services such as video services and other data packet services. This was significantly different from the voice-dominated services provided on 900, 1800 or 800 MHz spectrum. 3G services have a different eco-system, growth profile and even subscriber base as compared to 2G services. From this point of view, even assuming similar market conditions in 2012-13 as compared to 2010, the 900, 1800 or 800 MHz spectrum could not, prima facie, have had a relative value in 2012-13, similar to the 3G band. In 2012-13, therefore, comparing the 3G band and 900, 1800 or 800 MHz was akin to comparing apples and oranges."
Instead of comparing and apples with oranges, the Government needs to take the present market realities into account. Already, it has faced two embarrassing spectrum auctions, where former TRAI Chairman J S Sarma stuck to the pricing formula based on 3G auctions even when industry lodged widespread protests. Prices were abnormally high in the 2010 auctions because 3G service allowed video and data transmission against voice services through 2G till then and also because demand for spectrum was robust.
But the last two failed auctions have hopefully cautioned the Government about changed market realities; it cannot now risk another failed auction. So all indications are that prices may be reduced.
The first round of auctions, after the Supreme Court cancelled 122 licenses allotted by former telecom minister A Raja, was held in November 2012 and the second one in March this year. In the first, the Government managed to gain just about a fourth of the expected revenue while in the second round, only Sistema Shyam came forward for CDMA spectrum and not a single GSM operator placed a bid.
The first round of spectrum auctions in November 2012 did not find any bidder for the 800 MHz band. (This was in spite of the fact that the reserve price of the 800 MHz band (unliberalised) was revised to 1.3 times the reserve price for 1800 MHz spectrum). For 1800 MHz band, spectrum in service areas of Delhi, Karnataka, Mumbai and Rajasthan failed to find any bidder. Other than the LSA of Bihar, spectrum in all service areas was sold at the reserve price.
Thereafter, the Government reduced the reserve price for 1800 MHz in the four circles where no sale of spectrum took place by 30 percent. In all cases the reserve price of 900 MHz was to be twice the price of 1800 MHz, either reworked or discovered through the auction.Then, the reserve price for 800 MHz band in all service areas was reduced by 50 percent in January 2013. In the ensuing auction, spectrum in this band was sold in eight circles at the reserve price.
In June last year, Trai Chairman Rahul Khullar had himself indicated that the pricing which was done by his predecessor was not quite right. "Of course, the auctions failed because of the high reserve price, which was not in sync with market realities. In hindsight, everyone knows it. The years 2011, 2012 and 2013 were not 2006, 2007 and 2008... The former were boom years and the latter years were of downturn," Khullar told Financial Express. He also spoke of pricing spectrum in the context of market realities, not in a absolute sense.
Apart from a strong indication that prices might be dropped, the consultation paper has also thrown up a few surprises.
1) Instead of sticking to the brief provided by the Department of Telecom, which had merely asked Trai to provide pricing details of various spectrum brands, the paper released today not only addresses the issue of refarming of 900 mhz spectrum band but also seeks an opinion on the method of this refarming. The Government has already said all 900 mhz spectrum held by incumbents will have to be returned and these telcos can then bid for the 900 mhz or the less efficient 1800 mhz spectrum at much higher prices to continue 2G services. In the consultation paper, TRAI wants to know what is the correct method of refarming.
2) TRAI has also asked telcos' opinions on eligibility criteria for participants in the next round of auctions
3) Then, it has also sought comments on a plan to expand the 900 mhz spectrum band through 'eGSM' plan which means taking some spectrum from the 800 mhz CDMA band into 900 mhz band. It has pointed out that since CDMA subscriber base is not growing, this could be considered.