T V Ramachandran
Resident Director
Vodafone Essar*
Telecom spectrum and licensing reform are key to India’s economic future. A recent research carried out by Indian Council for Research on International Economic Relations (Icrier) shows a 10 per cent increase in mobile penetration raises GDP growth by 1.2 percentage points. The spectrum and licensing policy will determine whether the industry can deliver a long-term growth or will die a “death by a thousand cuts” — uncertainty and fragmentation may cause higher costs which, in the end, must be passed on to consumers. The long-term future of the industry is at stake. There is no room for complacency, or giving way to vested interests.
The lifeblood of the mobile business lies in achieving a minimum scale, especially when it comes to spectrum. The laws of physics (and economics) are simple — less spectrum means more base stations and higher cost to service the same subscriber base. In any other market, no matter how large in terms of population, geography or wealth, only three-five national operators have proved sustainable. For the rest, mergers and acquisitions (M&As) have ended the misery of unprofitable, sub-scale operators (as is the case in the US, Italy, France, China and many other countries). India, however, has up to 12 operators in each circle with restrictive M&A rules preventing their consolidation!
Most governments have made available 90 to 110 MHz of GSM spectrum, with average allocations per operator at 22 MHz. Indian operators have had to manage with far less — an average allocation per operator of around 6MHz, with customer bases and usage far greater than in most markets. Inevitably, the result is higher costs which will limit future growth, especially in under-served areas.
Delinking operating and spectrum licences is essential to preventing further fragmented allocations. Once coupled with spectrum trading, this would unlock more efficient allocations. Operators could buy and sell spectrum without having to buy and sell whole competitors! Bundling of spectrum and operating licences has led to a “gold rush” speculation in licences which isn’t good for the industry, economy, exchequer or the consumer.
We, therefore, share the view of global regulators and experts who consider that delinking spectrum from the operating licence is a necessary precondition for achieving a step change in spectrum flexibility and efficiency. The path forward, therefore, should be: Separate operating and spectrum licences; move to a market-based system of spectrum allocation and trading; ensure renewal terms of licences are respected so that consumers do not face the massive uncertainty of mandatory re-allocation of spectrum; liberalise M&A rules in line with international approaches and allow the operators to achieve the sustainable scale which is desperately needed.
This approach would ensure spectrum is allocated and used efficiently, meaning that the regulator would not even need to consider the calls for mandatory re-allocation of spectrum which would have disastrous consequences for customers.
Recall that operators have greater spectrum allocations today because they took risks; they paid to enter the market earlier and also because they have more customers. If the benefits of risk-taking are redistributed among firms that chose not to take risks, the consequences would be profound and destructive. How could operators bid for 3G spectrum if the spectrum could later be given to firms that chose not to bid or not to win?
Regulators, in many other markets, have sought to increase certainty and reduce fragmentation, approving mergers which left three-five competitors. They thought consumers were better off with a few large enough operators investing in customers, quality and innovation, than with numerous operators without sustainable business cases. In the most recent international mobile merger (in Australia), the regulator approved a “4 to 3” merger, stating that “… absent the merger, the parties are unlikely to sustain the significant investment in their mobile networks to provide competitive high-speed data services, such as mobile broadband… individually, without this merger, the parties would not sustain vigorous price competition in the longer term …” Less is actually more.
We recognise the legitimate pressure to ensure new operators do not realise substantial windfall gains given the views that they have not paid significant spectrum fee (compared to incumbent operators who have paid spectrum fee year-on-year). However, we would like to have a a reasonable mechanism (such as a modest windfall capital-gains tax levied on the seller) to ensure this concern does not delay spectrum and licensing reform. The potential gains to the Indian economy (and exchequer) from spectrum and licensing reform are fundamental. The Indian economy can’t afford to keep looking back at the past if it delays the right decision for the future.
*Regulatory Affairs and Government Relations,
Mahesh Prasad
President
Reliance Communications Ltd
The Telecom Regulatory Authority of India (Trai) consultation process on spectrum management discusses the issues of managing and pricing spectrum, a scarce and precious wireless communication resource.
While the goal is to achieve an appropriate framework and a methodology for market-driven pricing of a resource for which demand exceeds supply, delinking is simply one of the methods to achieve this goal.
With delinking, the government can provide a mechanism to let market-led competition decide the price for spectrum, while cost of an operating licence can be driven by the administrative cost associated with it.
While the government can choose whether to delink or not in conformance with international practices, it should ensure that its policies do not adversely affect market growth and investor confidence in the sector.
Telecommunications is a capital-intensive industry with a comparatively longer investment-return cycle. Typically, operators take 4-6 years to become EBITDA-positive and even longer to turn cash-positive.
Unlike most global markets, India has a unique market structure where operators fall into two segments — there are 4-5 incumbent networks and about 4-6 operators who have launched or are in the process of implementing new networks.
The telecommunication licences awarded by the government to operators entitle them to a spectrum of up to 6.2 MHz. Despite this legal limit, incumbent networks typically have been allotted 8-10 MHz of spectrum. On the other hand, new networks only get 4.4 MHz of start-up spectrum.
Each incremental MHz of spectrum implies need for fewer towers to cover the same number of towns. Thus, new networks have far higher capital and operating costs despite far lower revenues. To address this very issue, regulators in most markets actually allocate far higher spectrum to new networks rather than providing lesser spectrum. For example, in the UK, the new network Hutch, was allocated 50 per cent higher spectrum than what the incumbent networks were given.
In India, despite very clear rules on the cap of 6.2 MHz and subscriber-linked criteria for new networks to get to 6.2MHz, we see quite the reverse. Incumbent networks have access beyond their legal entitlement while new networks are denied spectrum to 6.2 MHz despite meeting every single criteria laid out.
To make matters worse, new networks face a further challenge. Older networks have access to huge amounts of 900 MHz spectrum, all of which they don’t need, while new networks are denied any access at all. As any school textbook tells you, an electromagnetic signal of double the frequency travels half the distance.
Thus, for the same coverage, 1,800 MHz needs about four times the towers as 900MHz — implying, new networks have a far higher cost structure. The regulatory authorities have also clearly acknowledged this.
To address the injustice, regulators in many markets are implementing what is called ‘spectrum re-farming’; or allowing all operators access to 900 MHz spectrum. Only a small proportion of 900MHz spectrum is enough for coverage, rest of the requirement can be addressed through 1,800MHz. Re-farming hurts no operator at all as long as all operators have at least 2.4 MHz spectrum in the 900 MHz band; yet the benefits of 900 MHz will be available to all operators.
India has seen exponential growth in the telecom services in the last few years. A lot of credit for this telecom revolution goes to innovation in the market place witnessed due to the entry of new network operators.
New networks have pioneered service packages that maximise customer benefits — for example, flat all-India call rates, per-second billing, no conditions-plans, free minute-usage per day, unlimited VAS, bundled handsets etc.
However, the innovation and customer-benefit cycle which is driven by new networks will suffer unless the spectrum policy stops subsidising incumbent networks at the cost of new networks.
In order to maintain the growth momentum, the regulatory regime should enable policy without any prejudice towards any individual or group of operators. While the world over, spectrum policy has favoured new entrants through higher spectrum allocation, we are doing the opposite in India. This will be detrimental for the industry, kill competition and stifle innovation — a situation we must avoid at all costs.
