Pricing spectrum

The arguments put forward by Tata Teleservices for charging future allocations of 2G spectrum have some flaws""the suggestion that the price charged for entry should be half of that for 3G spectrum is in fact quite arbitrary. On the whole, however, there is surely considerable merit in what the Tatas have recommended.

For, as this newspaper has argued on previous occasions, spectrum is a scarce resource and the current system of allocating it on the basis of subscriber numbers has various flaws. One, it encourages firms to overstate subscriber numbers and even offer completely uneconomic tariff packages just to drive up the user base""the exceptionally large "churn" shown by some operators is perhaps a recognition of this. Second, it limits the market to only the current players since if spectrum is not bid for, no newcomer can ever hope to get into this rapidly growing market""except perhaps by paying a huge price to buy into existing telecom firms who""almost by divine right""will keep getting additional spectrum. Third, past experience""like the time when the fourth cellular licence was bid out""shows that a bidding process does not necessarily lead to higher consumer prices, which is the usual argument made by those opposed to bidding. Indeed, after the fourth cellular licence was bid for, tariffs only fell.

It must be pointed out there is nothing in the existing licence agreements that indicates that the government has made any commitment to provide users an unlimited amount of spectrum, or that this cannot be auctioned. If anything, the licence agreement talks of granting operators spectrum up to 6.2 MHz (in the case of cellular licences) and even this is subject to review from time to time. While it is obvious that it would be unfair to deprive operators of spectrum beyond this, it is equally true the guarantee of spectrum cannot be unlimited.

What makes the review of the current 2G spectrum model even more important is that it is creating distortions even in the way 3G spectrum is being dealt with. Under the proposed 3G policy of the telecom regulator, existing CDMA players such as Reliance or the Tatas can provide 3G services in the existing 800MHz band by getting one extra "carrier" (that is 1.25 MHz of spectrum). They can do this by either buying this extra "carrier" or by just releasing one of their existing carriers to do this. But, since 3G spectrum is to be auctioned while the 2G one is not, the Reliances and the Tatas of the world just have to buy this additional "carrier"""the argument being that if cellular players have to pay for their 3G spectrum, there is no reason why the CDMA lot should be allowed to get it for free. This is clearly a sub-optimal solution. There is another stipulation that once the CDMA lot buys this "carrier", it can't bid for 3G spectrum in the 2,100 MHz band, which is reserved for cellular players. In other words, no firm will be allowed to offer 3G services in both the cellular and CDMA space. Both the restrictions are illogical in this day and age. If, however, the auction of 2G spectrum follows the 3G route, such restrictions will no longer need to be there.