Spectrum shortage may hit RCom, Vodafone hard

As Bharti Airtel has enough spectrum to insulate itself from any loss, Vodafone and RCom have no choice but to bid high to retain customers in the auction in February

Next year, over 91 million mobile subscribers in 12 telecom circles (out of the country's 22) could see their service being disconnected: in Gujarat, Maharashtra, Western Uttar Pradesh, the Northeast and elsewhere. One out of every six users of GSM phones could be affected, unless incumbent operators like Vodafone, Idea Cellular and Reliance Communications are able to buy spectrum in the auction slated for February next year. Spectrum in the 900 MHz that was allocated in 1995 is up for renewal. But renewal is not automatic: incumbents need to surrender the spectrum first before rebidding. Those who fail to retain spectrum will inconvenience their subscribers.

Even the Telecom Regulatory Authority of India, in order to highlight the gravity of the situation, has identified circles for each of the three operators where retaining spectrum in the 900 MHz band is essential for them. But why is the country's largest telecom company, Bharti Airtel, not on the list? That's because it smartly bought a lot of 1800 MHz spectrum in February as insurance. So even if it fails to retain its 900 MHz spectrum, its services will not get disrupted: the subscribers can be migrated from one band to another. In fact, Bharti Airtel bought an additional 95.4 MHz in the 1800 band, which is exactly the amount that it will have to return to the government in various circles in the 900 MHz band beginning from 2015 and stretching up to 2034.

Keeping the balance
For instance, in Andhra Pradesh as well as Karnataka, Bharti Airtel has to return 7.8 MHz in the 900 MHz band in 2015. But it bought 8.8 MHz in the 1800 MHz band in the February auction. So Bharti Airtel is under no pressure to retain the entire spectrum in the 900 MHz band. Similarly, in Punjab, Bharti Airtel might have to return 7.8 MHz next year, but to ensure there is no disruption, it bought 8.2 MHz in February. Of course, the company would love to retain the 900 MHz spectrum for its voice customers as it plans to use a large part (5MHz) of the spectrum that it has bought in the 1800 MHz band to launch 4G services. But what is important is that it has a cushion which its rivals don't.

Vodafone's case is different. It has over 45 MHz in the 900 MHz band in seven circles which is coming up for renewal in 2015. Unlike Bharti Airtel, it did not bid aggressively in February in these circles: while Bharti Airtel bought a total of 51.2 MHz for its six circles that face renewal in 2015, Vodafone picked up a mere 18.6 MHz for its seven circles. Instead, it concentrated on getting as much spectrum as possible in Delhi, Mumbai and Kolkata which constitute a large part of its revenues and where it will offer 4G services. So over 50 per cent of the spectrum it bought was in Delhi, Mumbai and Kolkata. Earlier it did not have any spectrum in the 1800 MHz band here. As a result, as TRAI says, Vodafone must retain spectrum in the 900 MHz band in Maharashtra, Rajasthan and Tamil Nadu. In fact, TRAI says companies like Vodafone could get impacted in two ways. One, they will have to bid high to retain spectrum and that would put a financial strain on their books just as the 3G auctions did. And two, if they don't retain the spectrum, their subscribers will port out to rival service operators.

Some analysts say Vodafone could be working on a different strategy altogether: it wants to retain and buy more spectrum in the 900 MHz band, even if it comes at a premium, so that it gets an edge in terms of 3G service over rivals that are using the less efficient 2100 MHz. This stems from its belief that 3G will spur the data revolution in India and not 4G, which will be limited to only a few cities for the time being. Analysts say that its strategy is to offer 3G services on 900 MHz, and shift the voice customers to 1800 MHz. "It is flush with cash in the United Kingdom; so buying spectrum at a premium is okay," says a senior executive of a competing telecom company.

Strained cash flows
For Reliance Communications, the challenge is even tougher. The company has to give back its 900 MHz spectrum in seven circles (totalling 39.8 MHz). The cash-strapped company did not buy any spectrum in these circles in the 1800 MHz band in the February auction. With 37 per cent of its GSM subscribers residing in these key circles, it will have to retain its spectrum if it wants to be in contention. However, if analyst assessment of the Vodafone strategy to bid for spectrum aggressively is true, the going could get really tough for Reliance Communications. In most of these circles, it does not have 2100 MHz spectrum to offer 3G services in any case. Reliance Communications, however, is not worried about prices. A senior company executive says: "We are in B and C class circles where prices are unlikely to go through the roof to unrealistic levels. Also, the company is in the process of monetising its non-core business. and so it will have enough cash to fund the finances needed for the auction."

In the case of Idea Cellular, about 59 MHz of spectrum in the 900 MHz band will come up for renewal. While it will face auction in nine circles in 2015, it has bought enough spectrum in the 1800 MHz band in seven of the nine circles to hedge its risks in case of an aggressive auction. The circle it has to worry about is Gujarat where it currently has only 6.2 MHz in the 900 MHz band, and was able to get only 1.2 MHz in the 1800 MHz band in February. The other area of problem is Western Uttar Pradesh where it will have to hand over 6.2 MHz of spectrum, but it bought nothing in February. Of course, all the pressure on price could ease substantially, if additional spectrum is made available in each of these circles. That hope was rekindled last week when Minister of Communications and Information Technology Ravi Shankar Prasad announced that he would soon be meeting new Defence Minister Manohar Parrikar to sort out the issue. Until then, the impasse continues.