The other side of 5G sale: High base price, less spectrum a worry

The government’s ambitious target to mop up $70 billion from telecom operators in the high-speed, fifth-generation 5G spectrum auction slated for later this year could be upset not only by the steep base prices recommended by the Telecom Regulatory Authority of India (Trai). An even more contentious issue is the fact that the Department of Telecommunications (DoT) might not even have enough spectrum on offer. Telcos need a minimum of 100 MHz each to efficiently power a 5G network.

There is now a host of new claimants for the 5G spectrum bands, including the departments of space, defence and the railways. They are demanding that part of the spectrum in the 3300-3600 MHz band, the 2600-2800 MHz band and even the 700 MHz band be reserved for them. Says Rajan Matthew, Director General of Cellular Operators Association of India (COAI): “In the key 3300-3600 band, ISRO has from the beginning asked for 25 MHz. But now even defence wants another 100 MHz for security reasons. So only 175 MHz is left compared to 275 MHz earlier. With such low spectrum availability, who will bid for 5G?"

Matthew has a point. In fact, some telcos fear that the government might release lesser amounts of 5G spectrum in order to force competition in the auction and jack up prices. Says a top executive of a telecom company: “The government may release only 175 MHz for 5G auction in the 3300 band. With limited spectrum, only two players will be accommodated instead of three; there will be an auction war and prices will move up.”

On the other hand, if the entire 275 MHz were to be released for auction, there would be no pressure for telcos to buy 5G spectrum this time round, the executive points out. Even if Jio went ahead, there would be enough available for the other two in subsequent auctions and prices could be driven down. Historically, Trai has cut prices when there have been no takers. Telcos say that even in the 700 MHz band, which is needed to increase 5G coverage, the base price is too high. That apart, out of the 35 MHz available in this band, the railways have asked for 10 MHz, once again shrinking the total spectrum available in this band. 

The other popular 5G band is the 2800 band but department of space and Isro wants it for space and terrestrial operations. Currently, it is locked in a tussle with DoT over this as the latter wants it for the telcos. As a result, Trai has not even considered this band for pricing. "The 2600 -2800 band is very important both for 4G and 5G and many countries like US, Korea and Japan have already auctioned and deployments have started," says Matthew. But he points out that as the band has still not been defined by the International Telecommunication Union for mobile services, a cabinet clearance might be required for its use in 5G.

Even if the government can resolve the competing claims of various departments, DoT has to contend with the stiff base price recommended by Trai. In the case of the 3300-3600 MHz band, the regulator excepts telcos to fork out as much as 40 per cent of what they have cumulatively paid for buying spectrum since 2010. The price tag is a staggering $19 billion.

As for the 700 band, which the telcos will need to provide coverage in 5G circles, Trai has kept the base price at $33 billion. Hence, for the 3300-3600 and 700 bands taken together, Trai wants telcos to pay much more than what they have collectively paid since 2010 to buy spectrum for the rollout of 2G, 3G and 4G. This is an unrealistic expectation, telcos say.

Experts feel that neither the government nor the regulator seems to have learnt from previous auctions when stiff base prices have kept telecom operators away. Says a senior executive of a leading telco: “If your goal is revenue maximisation then no one will buy 5G spectrum. With consolidation, there are now only three players, so you cannot create scarcity and hike prices like it was done earlier.”

According to CLSA, in 2016 only 33 per cent of the spectrum on offer were sold. No one bid for the lucrative 700 band because of a very high reserve price. In fact, this has forced Trai to reduce its base price for this band by 43 per cent. Despite that, telcos say it is too expensive.

Moreover, both the government and the regulator seem to have overlooked the fact that the highest revenue that they earned from an auction was in 2015, when telcos collectively bought spectrum for $16 billion. The demand was high at the time mainly because the spectrum held by many telcos were about to expire and they had no choice but to retain it so that their services would not get disrupted. With 5G, though, it is a buyers’ market.

The government is banking on the hope that if the 5G auction succeeds, telcos would be paying it a cool Rs 50,000 crore per annum as deferred payment for the next several years. That is double the amount they are currently paying the government for spectrum which they bought in earlier auctions. And this, incidentally, is equal to 8 per cent of the country’s fiscal deficit of FY19.

But clearly, the telcos are not ready to join the party. There is a clamour for the reduction of the base prices and DoT has sent back the recommendations to Trai for a review. Whether Trai relents or sticks to its guns will determine whether the government will meet its revenue target from the sale of spectrum.