Telcos gear up for fierce battle in spectrum auction from Wednesday

When a new round of telecom spectrum auction opens on Wednesday, it will be a do-or-die battle in many circles for incumbent operators — Idea Cellular, Vodafone, Reliance Communications and Bharti Airtel — which will be slugging out to retain their 900-MHz as their licences approach expiry.

Unlike last year, most operators expect, the auction will go on for two weeks or more, as this is the first time that telecom firms have been allowed to use their eligibility points for bidding across spectrum bands — 800-, 900-, 1,800-, and 2,100-MHz — shuffling from one to another. They earlier had to stick to one band and bid within it.

The eight eligible operators will place their bids from 9 am to 7.30 pm (Monday to Saturday), except on central government holidays like Holi, till the auction process ends. The government, though, will not be allowed to declare the final result of the auction without the Supreme Court’s permission, thanks to a recent order in this regard. The court order came after several telecom companies challenged certain aspects of the note inviting applications.

The intensity of competition this time could be gauged from the fact that the eight operators have already deposited a combined Rs 20,000 as earnest money fixed by the government (a percentage of the spectrum base price, depending on circles). Companies get eligibility points on the basis of their earnest money deposits — the higher the deposit the higher the points for participation in the auction. 

A senior executive of a mobile company says: “The earnest money deposited by eight telecom players is twice as much as an operator would need to pay (at base price) for all the spectrum available in the auction (worth about Rs 10,376 crore). Clearly, demand is about double the supply.”

Bidders are not allowed to use all their participation points in the beginning of the auction. In the first phase, 80 per cent of the points can be used; when these get exhausted, another 10 per cent could be used in the second phase, and the remaining 10 per cent in the third phase. This arrangement is primarily aimed at maximising the government’s realisation from the auction. 

Operators and analysts have differing views on how much the spectrum price might shoot up as the auction progresses. There, though, is a consensus that the highest price rise will be seen in the 900-MHz band. According to telecom companies involved in the auction, the final price of 900-MHz spectrum could be twice or thrice as much as the base price. For 2,100-MHz, primarily meant for 3G services, the rise might not be more than 1.5 times the reserve price, they say. But analyst reports suggest the price rise could be in the range of 50 to 60 per cent over base price for 900-MHz spectrum, and marginally higher in other bands. 

The government has its own projections. It says it is looking at overall realisations between Rs 60,000 crore and Rs 100,000 crore — about Rs 22,000 crore of that in the current financial year, as companies make only 25-33 per cent upfront payment. These proceeds are seen as crucial for the government to balance its fiscal deficit. 

For an industry already burdened by debt, the coming round of spectrum auction is likely to add to the debt. This is why operators have already started giving feelers that customers might see a substantial increase in average rates for telecom services.

Incumbent operator Idea Cellular has a serious challenge — it must retain 900-MHz spectrum in nine circles, which account for over 72 per cent of its revenues. Though the company hedged its bets by buying 1,800-MHz spectrum last year — it can shift customers from 900-MHz to 1,800-MHz band without major disruption of business — it remains vulnerable in two circles of Gujarat and Uttar Pradesh West. In these circles, accounting for a little more than 15 per cent of Idea’s revenues, the company has inadequate or no back-up in the form of 1,800-MHz spectrum.

Similarly, Vodafone is venerable in circles like Maharashtra, Gujarat and Rajasthan, where it has no choice except retaining its 900-MHz spectrum. For instance, in Maharasthra, which accounts for nine per cent of its business, Vodafone has no back up in 1800-MHz spectrum. Even in Gujarat, which has a 9.7 per cent share of its revenue, the company did not buy additional 1,800-MHz airwaves last year. 

For Reliance Communications, there is little 1,800-MHz back-up in the seven circles that come up for renewal.

Only Bharti Airtel seems to have sufficiently hedged its bets last year in the six circles where its licences come up for renewal, by buying large chunks of 1,800-MHz spectrum. For Bharti, the pressure might be retaining some part of its 900-MHz airwaves in the Andhra Pradesh and Karnataka circles, which account for 20 per cent of its revenue. But since the company is planning to use 1,800-MHz to support rollout of services based on the long-term evolution (LTE, or 4G) technology, a large chunk of its last year’s purchase might have to be kept aside. So, retaining 900-MHz airwaves will be crucial for the long run.

Besides the incumbent operators, there is the new entrant Reliance Jio Infocomm, whose aggressive stance seems to be spoiling the party for others. The company has deposited Rs 4,500 crore as earnest money, the highest by an operator. Opinion is divided on whether Reliance Jio will use its participation points to buy 900-MHz spectrum or to first raise the prices for incumbent operators and then withdraw. But if it indeed is going to seriously bid for 900-MHz, there will be three-cornered battles for the band in most circles — among two incumbent operators whose licences are and Reliance Jio. 

There is another angle, too. To address the penetration issues with 2,300-MHz spectrum — these airwaves do not reach indoors — Reliance Jio had last year purchased 1,800-MHz spectrum in 14 circles. Now, it needs to fill the gaps in the circles where it did not get 1,800-MHz — particularly in North India. But in the coming auction round, five MHz of contiguous 1,800-MHz spectrum (the minimum needed for data services) is available only in Rajasthan. In four other circles — Bihar, Uttar Pradesh East and West, and Punjab — there is less than five MHz each.

Reliance Jio might, in that case, have to settle for 900-MHz or 800-MHz spectrum to fill the gap. But, though 800-MHz is available in 20 circles, in the circles where Reliance Jio has interests, the spectrum is not contiguous. That might be a serious impediment for a company looking to roll out 4G LTE services on 800-MHz spectrum, which is one of the less developed bands. One option for the company could be leasing out 800-MHz spectrum from other players, when an enabling policy is put in place. 

In the 2,100-MHz band, currently used for 3G services, no one is expecting serious competition. With one block of five MHz on offer, companies like Bharti, Vodafone and Idea could buy only in the circles where they do not have their own spectrum, and such circles have limited scope for 3G.

Idea cellular      
    Coming for renewal (Mz of spectrum)
Telecom zone % of business 900-MHz 1,800-MHz
Uttar Pradesh (West) 8 6.2 1.8
Gujarat 6.7 6.2 0
Vodafone India      
    Coming for renewal (Mz of spectrum)
Telecom zone % of business 900-MHz 1,800-MHz
Gujarat 9.7 7.8 2
Maharashtra 8.8 6.2 0
Rajasthan 4.9 6.2 0
Reliance Communications      
    Coming for renewal (Mz of spectrum)
Telecom zone % of business 900-MHz 1,800-MHz
Madhya Pradesh 11 6.2 0
Bihar 8 6.2 1.8
West Bengal 5.5 4.4 1.8
Assam 3.3 6.2 0
Odisha 3 6.2 0
Himachal Pradesh 1.5 6.2 0
Northeast 1 4.4 1.8
Operators participation points for the auction
Company Points  
Reliance Jio 4,500  
Bharti Airtel 4,340  
Idea Cellular 4,000  
Vodafone 3,700  
Tata Docomo 1,500  
Reliance Communications 1,180  
Uninor 720  
Aircel 500  
Source: Trai, DoT, industry