How to get telcos to pipe down: revenue share auctions

By R Jagannathan

What are India’s mobile biggies really complaining about? And why are they giving out contradictory estimates on what higher spectrum means for consumer tariffs?

Look at the numbers being spewed out.

A few days ago, they said the Telecom Regulatory Authority of India’s (Trai’s) base prices for spectrum would result in mobile tariffs rising by 25-30 percent. (As an aside, let’s point out that just the other day, Vodafone raised Mumbai's post-paid tariffs by 20 percent , so this kind of hike is no big deal).

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Two days ago, the Cellular Operators’ Association of India (COAI), the lobbying arm of companies using the Global System of Mobile (GSM) Communications technology (Bharti, Vodafone and Idea, among others) said if Trai’s proposals were accepted, tariffs would double across India. So 25-30 percent has suddenly escalated to 100 percent.

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Now, contrast this with what Trai itself has said: an increase of just 2-4 paise per minute on local calls. The cellular operators obviously don’t think Trai knows its oats.

But a Citigroup research report backs the Trai numbers. It estimates that tariffs will rise by around 4 paise a minute - more or less the upper end suggested by Trai.

On Thursday, Vodafone CEO Martin Pieters claimed that if Trai’s proposals become the benchmark, Indian mobile companies would be paying 48 times the price paid by other parts of the world. But at the 3G auctions in 2010, the base price was nearly nine times higher than that offered by A Raja in 2008 for 2G spectrum (Rs 3,500 crore versus Rs 380 crore per Mhz) and no one seemed to complain, including Vodafone.

A Morgan Stanley estimate of the net impact of paying higher spectrum charges for Bharti and Idea is around Rs 19 and Rs 15 a share - hardly impoverishing, given that this calculation does not take tariff hikes into account.

The reason why most assessments - though broadly negative about the impact of high spectrum prices on the industry’s profitability - are not predicting doomsday is simple: there is to be a near 75 percent reduction in spectrum usage charges, which are currently an average of 4 percent of adjusted gross revenues (AGR) of mobile players.

So what is one to make of the yelling and screaming going on in the industry?

The chances are the industry, for the first time, will have to work hard to become competitive, and improve services to customers to earn top dollar.

Gone are the days when a mere licence to roll out services could be sold for several thousand crores almost without any investment (Unitech, Swan Telecom).

To make money after paying high spectrum prices, telecom companies will have to provide superior services to get and retain customers.

Bottomline: while no one is saying Trai has priced spectrum correctly (there is no such thing as a right price; it all depends on what the market is willing to pay), the reason why our telcos are protesting so much is that the era or rent-seeking is over.

One simple mechanism can be used to cut both their screaming and their objections: hold the auctions not on the basis of pure cash bids, but a mix of cash-and-revenue share.

This way, the base cost of spectrum recommended by Trai would fall by, say, half, with the other half depending on revenues generated from operations. This will cut out the risk from bidding too high while giving government an upside from higher telecom growth.

If current spectrum usage charge is around 4 percent of AGR, and Trai has proposed 1 percent, telcos could bid for spectrum at half the rate and offer the other half by bidding in terms of AGR - in the range of 1-4 percent.

Bidding through revenue share would also eliminate the need for telcos to pay their spectrum fees in instalments - something that Telecom Commission has objected to.

Giving telcos both options - cash bids, or a mix of cash and revenue share - may just about work.