Bhupesh Bhandari: Spectrum fear factor

Sunil Mittal of Bharti Airtel on Tuesday spoke out against profiteering by telecom companies - the ones that sell their spectrum. He suggested that any company that makes a windfall from spectrum sale should be made to share a substantial portion of it with the government.

These comments by India's top telecom service operator, a veteran of many a regulatory battle, came days after Idea Cellular said it will acquire spectrum in the 1800 MHz band from Videocon Telecommunications in two telecom circles, Uttar Pradesh (West) and Gujarat, for Rs 3,310 crore.

Videocon had paid Rs 1,330 in 2012 for this spectrum - it stands to make a net gain of one-and-a-half times in three years. In these tough days, any businessman worth his calculator can only dream of such returns.

More good fortune awaits the Dhoot family. Videocon has said that it will sell spectrum in its four other telecom circles too: Madhya Pradesh, Haryana, Uttar Pradesh (East) and Bihar. It can be expected to make similar gains in those transactions as well.

Rewind to 2008 when Unitech Wireless and Swan Telecom had offloaded shares to Telenor of Norway and Etisalat of the United Arab Emirates, respectively, at a substantial premium to the price at which they were allotted spectrum. These transactions showed the extent to which spectrum was undervalued in the old regime, when airwaves were allotted on the "first-come, first-served" basis.

The fat deals made people suspicious and opened the sluice gates for the 2G controversy. The allegations of impropriety gained momentum when the Comptroller & Auditor General said the government had suffered a potential loss of up to Rs 1.69 lakh crore by handing out spectrum cheap. The 2G scam, coupled with the coal block allocation scam, played no small role in the downfall of the United Progressive Alliance government in 2014.

The Idea-Videocon deal is totally above board. Videocon had brought the spectrum in an auction, so nobody can say it profited at the cost of the government. Moreover, the government has allowed companies to trade in spectrum, so there is no illegality of any kind here.

But Videocon's gains suggest that spectrum is still undervalued in the country. The money paid by Idea represents a substantial premium over the price discovered for the two circles in the last round of auctions in March, 2015.

One brokerage has said that a part of the premium can be explained by the "Jio fear factor" - the imminent big-bang entry of Reliance Jio into the market, now expected to happen sometime next year. This is true to a large extent. Uttar Pradesh (West) and Gujarat are important circles for Idea and it has to do all it takes to guard its turf.

Reliance Jio, it is expected, will focus on data. That's because the telecom market has moved rapidly in favour of data in the past few years. The trend will only gain momentum in the days to come. And 4G LTE (long-term evolution) is the service of the future for data - it offers faster downloads of higher traffic of data.

Globally, 4G LTE services are hosted the most on the 1800 MHz band. That's how the ecosystem has developed. As a result, most equipment and handsets are geared to that spectrum. If there is a core band for 4G LTE services, it's 1800 MHz.

Since data moves in heavier packs, at least five MHz of contiguous spectrum is required to offer 4G LTE services. A consultation paper floated recently by the Telecom Regulatory Authority of India shows that five MHz in the 1800 MHz band is not even available in one circle for the upcoming auctions! (It includes spectrum left over from the March 2015 auctions as well as what the incumbents will vacate from May, 2016 to March, 2018 because of licence expiry.)

Of course, there is ample spectrum going to be available in the 2100 MHz, 2300 MHz and 2500 MHz bands to launch 4G LTE services, but propagation of signal is an issue in higher frequencies. The service quality could drop inside buildings.

This means that the only way a telecom company can launch 4G LTE is by acquiring 1800 MHz spectrum from an incumbent - it becomes a seller's market. The kind of windfall Videocon made, and the one that Mr Mittal cautioned about, is bound to become the norm.

The problem can be solved.

Traditionally, the 1800 MHz band was used by the telecom companies as well as the armed forces. Some three years ago, the armed forces agreed to release large chunks of spectrum for commercial use.

What complicated the matter further was that defence and commercial assignments were scattered all over the band. As a result, spectrum in the 1800 MHz band is highly fragmented: As much as 67 per cent, according to one analysis. This spectrum has to be harmonised.

The government can help the situation by hastening the harmonisation before the March, 2016 auctions. Or else, the response to the auction will be lukewarm, which means less money in the government's coffers, and telecom companies will try to acquire spectrum through expensive private deals.