Unrealistic reserve prices for 700MHz spectrum let to a failure of the October 2016 spectrum auction in India. None of the 700MHz spectrum was sold. This is an ICT development failure resulting in negative consequences for mobile users, a blow to ICT development in India and failure to deliver National Telecoms Policy 2012. The auction also failed in fiscal terms because of its failure to reach the revenue target from the sale of spectrum. Based on advice from TRAI, the Government of India planned to raise Rs 536,239 crores (US$ 80 bn) but only raised Rs 65,789 crores (US$ 10 bn).
It is often assumed that spectrum has value on its own. However, spectrum has no intrinsic value; investment is required to build networks that extract producer and consumer value from spectrum. Mobile operators value spectrum based on the net present value of incremental cash flows that can be generated from the investment.
The reserve prices for the spectrum aiction in October 2016 amount to INR 536,239 core (INR 5,362 billion) which equates to around 22 times annual free cash flow of the mobile industry in India. Even with extremely optimistic revenue growth assumptions, Indian mobile operators will not generate sufficient operating free cash flow to justify the business case for purchasing the spectrum at the prices.
Coleago previously stated that if the prices recommended by TRAI are maintained, there is a high risk of auction failure with most or even all of the much needed 700MHz spectrum remaining unsold. As a result, auction proceeds would be well below the Government’s target and Indian consumers and businesses will not benefit from better 4G mobile broadband services.
TRAI’s recommendation of the reserve price is based on some inaccurate assumptions. Firstly, as described below, using the prices previously paid for 1800MHz as a benchmark is inappropriate. Secondly, the assumption that 700MHz is intrinsically four times more valuable than 1800MHz does not recognise difference between the business case at the time and the current business case.
- At the time of India’s 1800MHz auction, the 1800MHz spectrum was already in use by the Indian mobile operators. Operators would not have been able to continue in business without retaining the spectrum. Hence the value of spectrum to operators was close to the entire Enterprise Value of their business. In contrast, the forthcoming auction offers additional spectrum and hence the value of spectrum to operators is only based on incremental cash flows that can be generated from deploying the additional spectrum.
- TRAI assumes that, due to better propagation characteristics, 700MHz spectrum is four times as valuable to operators as 1800MHz spectrum. However, the 700MHz spectrum does not result in a cost saving because it is a complement to, not a substitute for, other spectrum. The incremental investment to deploy 4G (LTE) in the 700MHz band across India amounts to INR 75,822 Core (INR 759 billion). There will also be additional operational costs.
At the reserve price of INR 4,044 crore for the 700MHz spectrum, demand was always to be low or even non-existent. However, if prices had been reasonable, 7 or 8 operators would have want two blocks of 700MHz spectrum each. The resulting demand for 14 to 16 blocks will easily outstrip the supply of 7 blocks. If reserve prices were set at, say 10% of the price recommended by TRAI, auction receipts are likely to exceed the reserve as bidders compete for spectrum and total auction proceeds would have been much higher because all 700MHz spectrum is likely to be sold.
Additionally, the coverage roll-out obligation for 700MHz spectrum recommended by TRAI is based on a misunderstanding of the cost structure of mobile networks in India. The notion that capex and opex is reduced if only one operator serves a rural area is incorrect.
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