Should 3G spectrum be given away free?

DEBATE

The argument that bidding for spectrum will raise costs dramatically seems easily resolved through appropriate designing of the bid process.

T V Ramachandran
Director General,
Cellular Operation Association of India

Truly a Hamlet-like conundrum "" whether it is nobler for the hapless consumers and operators to suffer an unjustified burden or should we have a fair system that benefits all consumers, the government and industry?

All would agree that an entry fee is relevant and needed only when a new licence is involved "" "ay, there's the rub" ... with the Unified Access Licence Regime now in vogue, "all types of mobile services" are permitted and, hence, no new licence should be necessary to offer 3G mobile services. Obviously, therefore, an entry fee is absolutely unwarranted.

The question could then arise of bidding for spectrum for 3G, or a form of entry fee. However, I would like to recall that controversial phase of Indian telecoms liberalisation in 1995, when aspirants to fixed and mobile services licences bid exorbitantly to win licences.

What started then was the notorious "winner's curse" that fell on the industry, taking it to the brink of bankruptcy. It was only the timely and courageous intervention of the government in introducing a revenue-sharing regime that averted the crisis.

Through revenue share, the government became an active stakeholder in the reforms process and helped deliver an unimaginable extent of benefits to the customers.

Cellular subscribers have since then been increasing at a compound annual rate of 85 per cent a year and their total number now is more than that of fixed phone subscribers!

Thus, thanks to the migration from an onerous licence fee raj to a revenue-share regime, millions of common citizens "" pundits, plumbers, carpenters, electricians, housewives and so on "" have been able to take up mobile service and improve their personal productivity, incomes and quality of life.

Indian cellular tariffs are the lowest in the world because the Indian consumer is extremely price sensitive. Going forward, as the mobile connectivity percolates into the deeper recesses of India in smaller towns and villages, this price sensitivity will become more acute.

Mobile services will have to be made even more affordable if we have to tap and achieve explosive growth in the rural market.

It is in this context that the early introduction of 3G services into India is vital for the successful and timely achievement of India's telecom and social objectives.

3G spectrum, which has a four to five times higher voice capacity than the present 2G services, and can serve as an ideal platform to deliver low cost voice telephony to Indian consumers.

In a market that is driven by affordability, 3G will be an extremely effective tool in driving penetration of the huge addressable market in the rural areas, where price of service will be the key factor for encouraging increased subscriber take-up.

But for 3G services to be affordable, the key factor will be the cost of spectrum. If entry fee is charged, we will just be repeating the same mistakes that were made in 1995 and, in the process, negate the capacity advantages of 3G spectrum.

History will repeat itself and the 3G services will be restricted to a niche elitist urban market. In the process, the tremendous social and economic benefits that India could have derived from 3G will be lost forever.

3G, which could have been used as the vehicle for meeting the government's broadband objectives and enabling social initiatives such as e-education, tele-medicine, e-governance and so on, would instead be used only by a small segment of India's elite urban consumers.

This mobile broadband route could be a most rewarding journey for India and, by sticking to revenue-share model for 3G, the government could ensure that this initiative maximises early benefits to Indians.

Some might argue that the suggested entry fee of Rs 1,500 crore is small compared to the European 3G spectrum prices and, hence, should not matter.

We disagree. From the affordability perspective, Rs 1,500 crore in India is probably like Rs 15,000 crore or more in the affluent European economy.

And, hadn't ITU "" the apex communications body of the world "" recommended through its Regional Working Group Forum in April 2004 that the governments of the Asia Pacific Region should ensure spectrum pricing be such that they help achieve the objectives of affordability, growth and accessibility?

I plead that the 3G "enterprises of great pith and moment" not "turn awry and lose the name of action" through the imposition of an unjustified entry fee.

Nil 3G entry fee and revenue-share spectrum-charge? "Definitely yes "" a consummation devoutly to be wished!"

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Mahesh Uppal
Director,
Telecommunications & Computer Information Systems

The Telecom Regulatory Authority of India's (Trai's) recommendation that the government not charge additional fees for spectrum for 3G services"" such as multimedia and mobile Internet services "" so as not to burden operators with additional costs may sound reasonable, but is deeply flawed.

If there is a well-established demand for the spectrum and one of India's most respected businessmen in India, with a national licence to boot, finds Rs 1,500 crore a reasonable price for the spectrum, how can you argue that the sector's interests are best served when it is free?

Maybe you are sceptical about unsolicited offers. Would you then not want a price to be fixed by the market? Radio frequency spectrum is a limited resource.

Lop-sided pricing affects both current and future users. If 3G is cheaper because of this subsidy, and serves no obvious public policy goals, other services and technologies become less competitive.

Irrational pricing distorts this market when even experts are divided about where technologies are taking it. We already know that farmers getting free power are also its more wasteful users.

Only a transparently determined competitive price for an input can prevent perverse incentives or distortions.

Absurdly high competitive bids for 3G spectrum in Europe nearly bankrupted major companies like BT and Deutsche Telecom, forcing the companies to restructure.

But the companies recovered and did not actually go under. More to the point is that 3G spectrum auctions, with important differences, have been held in countries like Australia, New Zealand, and Hong Kong and the bids were not astronomical.

The International Telecommunication Union cited the Hong Kong approach as an "exemplary licensing process".

Thus, design of the auction is the key. For instance, if an artificial scarcity is not created "" which experts have argued the UK auctions did "" or you rule out future entry, or have a cap on the prices operators can charge, or insist on upfront payment of bid amounts, bidders will behave more rationally.

A case in point in India's own telecom sector is the fourth cellular licence auctions in 2001. In contrast to the controversies of the earlier auctions, the government is owed no money for these licences, nobody has alleged foul play, there has not been a single litigation and prices have not gone up. Surely something was right.

It could be argued "" in favour Trai's recommendation of free 3G spectrum "" that others, for instance smaller companies or public-spirited technologists, could then enter the market.

That could justify the free spectrum in public interest. But Trai has argued that, in fact, we already have around seven to eight mobile operators in most circles and that is enough. So, who is being subsidised?

Maybe free spectrum will mean low end-user prices. This would be justified if 3G services were targeted at poorer subscribers. However, there are hardly any affordable or useable services for them, and the handsets typically cost Rs 25,000.

An upfront cost of Rs 2,000 for the lower end mobile handset is unaffordable for many potential mobile users. So, 3G services are not for the poor and cannot be treated as an extension of 2G narrowband services that offer voice and SMS at typically Rs 400 a month. Virtually every country treats 3G licensing separately.

Trai argues that cheap spectrum will ease the pressure on the ordinary 2G services by migrating the upper end user to 3G. With current levels of demand and availability, is there any data to support this? None is provided.

Trai's argument that operators already pay too much in terms of levies and fees that eventually hurt users has merit. An even lower revenue share for operators may have helped.

A lower charge per user for spectrum in rural areas would make sense. Free spectrum for 3G services is a convoluted way to keep mobile prices down.

The government's target of 200 million mobiles by 2010 is its rationale for free 3G licence. Mobile phones are certainly not luxuries anymore.

Trai admits the mobile coverage in the country is barely 25 per cent and it is negligible and "incidental" in rural areas. Its mandate is to expand access for all, not just urban users.

When Trai brags how the NTP99 targets of teledensity of 7 per cent have been exceeded, it makes no reference to other target of 4 per cent teledensity in rural areas.

Trai's graphs in the spectrum document show that urban lines are skyrocketing, but the number of rural lines "" fixed or mobile "" is stagnant. But Trai's obsession with urban mobile phones continues.