Reliance Jio the clear winner in spectrum auction

Company already has the infrastructure and the bandwidth required for data; all it needed was airwaves which it acquired through the auction

There is only one winner in the recently concluded spectrum auction -- Reliance Jio.

This is best understood if we look at the comment made by Himanshu Kapania, Managing Director of Idea Cellular. He is quoted in Economic Times as saying that the importance of the auction stems from its relevance to data rather than voice. "We have to first break the myth about this being a 2G auction, this is a data auction," he adds.

This might be true for Idea, Bharti Airtel and Vodafone but not for Reliance Jio.

 

Reliance Jio already has the infrastructure and the bandwidth required for data. All it needed was airwaves which it acquired through the auction by bidding for the cheaper 1,800 MHz spectrum.

The company has acquired spectrum in 14 circles by paying Rs 11,000 crore. Compare this with sales of 900 MHz which cost the three telecom companies Rs 23,589.6 crore. Smaller frequencies (900 MHz) are conducive for data transfer as compared to higher ones (1800 MHz) which is generally used for voice transfer.

 

Reliance Jio on the other hand acquired broadband rights for 22 circles across the country for Rs 12,847 crore. The low cost base of Reliance on account of low cost acquisition of rights for voice and data clearly gives the company more room for aggressively planning its tariff. 

 

Among the top-listed telecom companies (Bharti Airtel and Idea Cellular) Reliance is the only one which has the financial muscle to aggressive roll-out its offerings. The stress of high price of spectrum is reflected in Marten Pieters, Managing Director and CEO of Vodafone India's statement when he says commenting on the high cost of spectrum said that much of the cost will end up as debt on the balance sheet of the mobile operators which will hurt their ability to invest in the rollout of new technologies and invariably result in higher prices and reduced service levels for consumers. 

 

News reports say that Reliance Jio is partly to be blamed for the high rates of spectrum in 900 MHz. Though the company did not bid in the final round, it did so in initial resulting in repeated round of higher bidding. Himanshu Kapania of Idea says that no clarity on the next round of spectrum bidding and the non-contiguous nature of blocks caused aggressive bidding.

 

Though the total spectrum amount is high, telecom companies will have to cough up only 30% of the amount upfront the remaining will have to be paid up after a moratorium of two years but will attract an interest of 10 per cent per year. Though it might look like a reasonable payment schedule, the scenario can change drastically if Reliance Jio prices its products aggressively. On a consolidated basis both Bharti Airtel and Idea Cellular have high levels of debt to equity ratio of 1.32 and 1 respectively. 

 

It is very unlikely that companies will be able to increase tariff rates in order to compensate for the high cost of spectrum. Absorbing the cost will result in lowering of margins, which can shrink further post the launch of Reliance Jio's offering. Servicing of the existing and incremental debt will now be tougher.