Idea, Reliance fuelled the spectrum price war

Vodafone and Idea merger can be traced to the bidding war in a large number of auctions

There have been 17 auctions of telecom air waves since 2010, an awesome number by a government anywhere in the world for distribution of common resources for a sector. Monday's announcement of the merger between Vodafone and Idea can be traced to the bidding war in these auctions, mostly between Idea Cellular and Reliance Jio.

While much has been written about how the department of telecommunications kept spectrum prices high, the bidding war has often not been tracked in detail. It has also guided the pushback from the companies whenever they have perceived government interference in their pricing plans, like the latest instance over those of Reliance Jio.

In a way, it is a reprise of the telecom sector's development through the first decade of the 2000s. Most developments then owed their origin to the New Telecom Policy. But in the second decade the effect of the pricing pattern set by the 2010 auctions is more decisive. This is best understood through the chart here. We have examined 10 of the most significant of those 17 auctions to trace the reasons why Vodafone merged with Idea Cellular.

Most of these auctions, as the chart shows, were bidding wars between Idea Cellular and Reliance Jio. These two companies, along Bharti Airtel, will now take up most of the space in Indian telecom. The tussle between the two was also brought on because in 2010 Vodafone and Airtel had a larger basket of air waves prior to the auctions.

Right from the first auction, Idea Cellular was an aggressive bidder, much more so than its now joint venture partner Vodafone. The compliment was paid back by Reliance Jio in later years. This has affected not just the financial metrics of the two companies but those of the sector as well, leading to an escalated leverage level.

In column two of the chart we look at the number of bids till which Idea Cellular and Reliance Jio (or its earlier avatar) had stayed the field in each auction. They could do this because banks were liberal with assurances of debt. In column three, we show the overall operators' interest as a percentage of successful bids made in the total auction-it indicates how intense the bidding was. The next column measures the impact of the bidding, that is, the ratio of actual price to the reserve price set by the government. The extent of money spent to buy air waves in the circles captures the financial pressure on the sector and the consequent desire to lobby with the government for favourable policies.

In the construction of the chart, we have relied extensively on work done by Parag Kar, vice-president, government affairs, Qualcomm, in "Indian Spectrum Auction: The Key Issues and Learnings".

In the 2010 auctions for the 2,300 MHz band, Idea Cellular did not win any spectrum-it did not need to, given its operating environment, but it did give chase till the 53rd round. The bidding, as a result, became intense and went on till 117th round. The final auction price discovered for the Delhi circle was, thus, 14.3 times more than the reserve price.

 

The impact of the aggressive bidding can be measured in the very next auctions for the 2,100 MHz band held less than a month later. This was the spectrum 2G players needed and so in circles like Delhi the bids stretched out till the 183rd round. Again, Idea Cellular gave chase but withdrew after the 109th round. It could not get Delhi but its other acquisitions were costly. The company paid Rs 5,768 crore for its 11 non-metro circles.

Reliance Jio did exactly the same in the auctions for the 900 MHz band in 2015. Just as 2010 was a blind auction, because there was no clarity from the government how much spectrum would come up for bidding later, the 2015 auction was forced on operators whose 20-year spectrum lease had expired. In this auction, Reliance Jio bid intensely, but like Idea Cellular earlier, won nothing. It only drove up the price as the ratios show.

On the rare occasions when no one chased the other, like the auctions for the 1,800 MHz band in 2016, the price discovery was sober. Compare the number of circles each bidder received against the money they laid out on the table against the bids for the same bands two years ago.

The high prices have now made life expensive for all concerned, though the intensity has abated as the two auctions for the 800 and 2,500 MHz bands show. Reliance Jio went solo in the former and left the field open for its rival in the latter. When auctions opened for the prized 900 MHz band in 2014, Idea Cellular paid a massive Rs 3,705 crore to win just one band in the Delhi circle. The bids here again pushed up prices to the delight of the government.

The bidding war is closing and is the reason Vodafone has given up the fight. In every one of these auctions it has bid defensively despite the price war around it.