Indian telecom turns monopolistic, proposed 5G auctions will step up trend

Indian telecom pipeline firms are cash-strapped, will find it hard to roll out 5G services soon. But if they do, the pace would be erratic, keeping rural and semi-rural areas under-served

The tortuous sale of RCom’s spectrum to RJio, whenever it happens, or the recently concluded acquisition by Bharti Airtel of Tata Teleservices should make one thing clear. Just as administrative allocation of airwaves during the last decade created conditions for business monopolies, auctions in this decade are also taking the sector closer to a monopoly. The difference is that while the government lost revenues in the former case, it is now fattened.

The reasons are clear. Pricing of airwaves or spectrum in India cannot be a one-way street going only upwards, and has to take into account business realities too. Since 2010, when the first auction for 3G spectrum was held, the reserve prices at the 14 subsequent ones across different bandwidths have just been multiples of those discovered prices. They have saved the state from charges of crony capitalism but the sector remains sub optimal from the point of view of consumers.

One of the reasons for this mean reversion is the design of the auctions. The department of telecommunications has sold spectrum in bits and pieces in the auctions, at a stiff price. Companies with small holdings are now unable to migrate to offer data business that consumers demand. Data demands buying even more airwaves. Consolidation of those fragmented holdings can only be done with companies with very deep pockets to scour the market. Like RJio. Or like Bharti Airtel, which has struck lucky with a cash-free, debt-free deal with Tata Tele. 

Why does harmonisation of spectrum matter? Taking the analogy of roads, not harmonising spectrum means a road peeling out from a city ends suddenly in the middle of nowhere. Road users would have to lift their cars to find another lane to drive into another city. In telecom parlance, the equivalent of lifting of a car is done by the operator to link two consumers, thus dropping efficiency and raising costs all round. 

The most vivid manifestation of this problem is RCom. The company is sitting on a total pile of 256.45 MHz of spectrum. Of this, a third is in the 1800 MHz band. This band is what most countries use to transmit data. But to transmit data, operators need to hold at least two channels of 5 MHz each, one for downlink and one for uplink. RCom’s holding, as the table shows, has little of it.

Table 1: RCom spectrum holdings
Band	Total (MHz)	% to total	Circles with at least one 2X5 MHz
800 MHz	96.25	36.1	3
900 MHz	10.00	3.9	2
1800 MHz	85.2.0	33.2	1
2100 MHz	65.00	25.3	13*
TOTAL:	256.45	100.0	19
*Satisfied 2x5 MHz criteria as auctions for this band were primarily for data that needs larger space than voice

Table 2: Tata Tele spectrum holdings
Band	Total (MHz)	% to total	Circles with at least one 2x5 MHz
800 MHz	77.0	34.9
1800 MHz	98.6	44.7
2100 MHz	45.0	20.4	9*
TOTAL	220.6	100.0	9
*Satisfied 2x5 MHz criteria as auctions for this band were primarily for data that needs larger space than voice

Some of the reasons why RCom or Tata Tele bloated themselves with scattered 1800 MHz band spectrum was the scarcity created by the pricing design in the auctions. For instance in the auctions for this band in 2015, of the total 6.3 MHz of spectrum that was made available, 68 per cent was discontinuous. At one stage because of the differences between the department of telecommunications and the defence ministry, this discontinuity could be resolved only city by city across the country instead of for a full telecom circle. (Circles are mostly contiguous with state boundaries. For all India this patchwork created 800 adjustment points. Compare this with the fact that India has only 22 telecom circles.) 

The same pattern played out in the auctions for the attractive 900 MHz band held later in the same year. Twenty seven per cent of the spectrum was fragmented but the reserve price for all circles were set at multiples of three to four times the discovered price of the first auctions of 2010. The competition spilled over into the adjacent 800 NHz band where 80 of the spectrum that was offered was fragmented.   

As the holding pattern for both RCom and Tata Tele shows it is difficult for anyone to extract value from this mosaic. The pall of gloom about the telecom sector in the run up to the 2014 general elections has thus again come back to haunt before the 2019 elections. All this despite no fresh evidence of malfeasance among the telecom service providers in the intervening five years to corner spectrum except through auctions. It is significant that reforms in the sector has pushed the companies to such listless state. 

Thus, while companies like Samsung will globally launch new variants of their 5G spectrum-based products this week, India will not see these products, such as remote monitoring of medical health conditions, soon. This is because the Indian telecom pipeline companies are massively cash-strapped and will find it difficult to roll out 5G services soon. Even if they do, the pace would be erratic, serving metros and Tier-I cities, typically keeping semi-rural areas underserved. Yet 5G services could make up for the lack of fibre capacity in these places, the most. The high prices realised by the state in the auctions have served to suck capex out of the sector. One data set shows only 22 per cent of mobile towers in India are connected to fibre, unlike countries such as China. 

Consequently unless the government goes about making amends in the pricing of spectrum, the sector is not expected to offer any meaningful recovery in 2019-20 as this report by India Ratings and Research (Ind-Ra) notes. The rating firm has maintained a negative outlook. The pricing of the spectrum recommended by the sector regulator, Trai does not show this advice has been heeded. The estimated base price of over Rs 4.94 trillion is multiple of 2010 prices several times over.