Spectrum: Sibal's plot or are telcos protesting too much?

The Telecom Regulatory Authority of India’s (Trai’s) proposals on auctioning spectrum have drawn heavy fire from the big boys of telecom. Not surprising, since no one likes paying more for anything anyway.

However, Friday’s note from five telcos to the government - Bharti Airtel, Vodafone, Idea, Uninor and Videocon - needs to be taken with bags of salt. Their demand for an 80 percent cut in the reserve prices indicated by Trai should simply be seen as a starting point for bargaining, not their real position.

The fact that many other biggies - Reliance Communications, Tata Teleservices, etc - have not joined in the protest (as yet) shows that not everybody agrees with their assessment. The CDMA lobby clearly sees its interests as different from the GSM majority represented by Bharti and Vodafone.

A cursory look at the letter sent by the five companies to Kapil Sibal, the Communications Minister, itself suggests a huge inherent contradiction between their formal opposition to Trai’s proposals, and what they really want.

The letter says that if Trai gets it way, mobile charges will rise by 25-30 percent. Let’s assume their calculation is true. The contradiction is here: they want an 80 percent reduction in spectrum price to keep prices 25-30 percent lower than it would be if spectrum is sold on the lines suggested by Trai.

So we can assume that they are trying to grab a part of the gains from any cut in spectrum prices as a result of their lobbying. What the 80-30 disconnect establishes is what the Trai has already said: that spectrum is a very small segment of costs. Trai has said that call rates should rise by only upto 2 paise per minute due to its proposals.

The second point about the 25-30 percent hike being threatened is this: given double-digit general inflation over the last four years (between A Raja’s throwaway pricing and now), a 25-30 percent tariff hike is exactly what would be anyway warranted in terms of sheer cost escalation - this implies a zero or even negative real change in tariffs over 2008. So why would consumers not be willing to pay this when they pay more for everything else?

The third point, made by Surjit Bhalla in The Indian Express , is this: why should spectrum prices in India be astronomically higher than in the West? Asks Bhalla: “….if concern is with the poor of India, then why set the reserve price at a level 80-100 times that observed in the US, Germany and France?”

While one is not sure the Trai price is really 80-100 times the US level given differing densities of population, the point to note is that even the Big Three of Indian telecom are asking for an 80 percent cut, and not 99 percent, which is what the cut should be if western prices for spectrum are really 100 times higher.

However, there are several good reasons why spectrum should be much higher priced in “poor” India than in “rich” America or Germany.

First, the Indian telecom story has grown in a lopsided fashion through profligate use of wireless spectrum instead of wireline. Instead of wiring up the last mile with wirelines, we have opted for the cheaper route of expansion through wireless. This made sense where teledensity was very low, but now, when teledensity is high, there is no point in this kind of pricing. We need to invest more in last-mile wirelines. The imbalance between wireline and wireless cannot be addressed by keeping spectrum prices low.

Second, India’s population is simply too large to be served almost entirely by wireless - which is the case now. Once again, wireless pricing has to be much higher to make wirelines viable over the medium term.

Third, the spectrum prices suggested by Trai are about the next 20 years, and not the past 20. Assuming that the number of uses for spectrum will only rise exponentially as the country gets richer, with data trumping voice usage, we need a pricing that forces telcos to optimise spectrum use and not waste it. Since the new policy “liberalises” the use of spectrum - in that any spectrum bought can be used for anything from 2G to 4G, voice or data - there is little doubt that revenues will start moving up steadily over the next 20 years.

Fourth, the concern for the aam aadmi is overblown: it is always possible to keep wireless costs for small-time users low either through cross-subsidisation or by regulatory means. We do this with electricity bills, water, and even basic banking to serve the poor. So what is the big deal about doing this in telecom? In fact, it may make commercial sense for telcos to take on low-paying customers to create a broader base for the future, when they may be able to afford more services.

The next 20 years will - if we don’t blow it - see India’s demographic advantage peaking. It is the time when more and more people will be able to afford more and more services from telcos. So Trai is on the right track.

This is not to suggest that no comma can be changed in the Trai proposals, or that spectrum prices cannot be cut a bit. Not by a long chalk. The provision for offering only 5 Mhz for auction immediately is clearly wrong. It can distort the market by creating an artificial scarcity of spectrum. So, clearly more must be offered, especially since the telcos who lost licences need to be given an option to return to business quickly, before the Supreme Court’s 31 August deadline ends.

Why has Trai offered only 5 Mhz in the first instance?

Bhalla sees the hand of Kapil Sibal in Trai’s proposals. He believes that the purpose of Trai’s proposals is to show the Supreme Court the folly of pricing spectrum too high - and that there could be public benefits from lower prices.

Ever since Sibal got egg on his face for his zero-loss theory on Raja’s spectrum pricing - which the Supreme Court resolutely rejected - he has been working for two goals: one is to claw back policy space from the court-suggested auction route (which is legitimate), and the other is to muddy the waters on auctions so badly that even the Supreme Court backs away from the problem (which is questionable). (Read this and this )

This writer believes that Trai is broadly on the right track. Sure, it can reduce spectrum reserve prices in the beginning and also place a cap on auction bids so that bidders don’t bloat the price to unviable levels, but there is no case for listening too attentively to the industry’s concerns.

The telcos do protest too much.