Is the 5G auction a turning point for India?

The long-awaited 5G spectrum auction is finally upon us. The government has put up 72 Ghz of spectrum for auction with a validity of 20 years. In its entirety, the spectrum is worth 4.3 trillion rupees at base price.

So, what strategies will the participants adopt? A company's earnest money deposit amount impacts its spectrum buying capacity. Through the earnest money, the company gets eligibility points, which have a bearing on the quantity of airwaves it can pick up across various bands and circles. However, telcos do sometimes go in for a higher earnest money deposit just to confuse their competitors. Otherwise, what the telcos plan to spend on the auction is estimated to be eight to 10 times the earnest money deposit.  

The market leader among telcos, Jio, had submitted 14,000 crore rupees as earnest money deposit, which was the highest among all companies that are bidding. This suggests that it will adopt an aggressive strategy at the auctions. Meanwhile, Adani Data Networks had deposited only 100 crore rupees. This suggests that it will opt for limited airwaves, and that too in select areas, for its captive networks. Bharti Airtel submitted an earnest money deposit of 5,500 crore rupees. While much lower than Jio's submission, this does suggest that it will be able to comfortably pick up pan-India 5G spectrum. However, it was cash-strapped Vodafone Idea that surprised industry watchers with its 2,200 crore rupees amount as earnest money. This signals that it will at least pick up 5G airwaves in limited quantities, albeit only in its priority markets perhaps.  

Gautam Adani's decision to participate in the spectrum auction to create the group’s own private networks had left Telcos bristling at the prospect of Adani poaching their 5G enterprise business. Telcos had been particularly worried as analysts had said that Adani would also offer private network solutions to other enterprises to expand the business. Moreover, telcos feared that despite stating that it wouldn't enter the consumer telecom space, the Adani group’s long-term strategy could be to acquire a telco or take a strategic position in one of them.

However, Adani's small earnest money deposit amount will have removed most of the fears of the upcoming auction witnessing fierce competition. The most likely scenario now is that Jio and Airtel will buy more than enough 5G airwaves needed for their respective ambitions, leaving Vodafone Idea as a very distant third in the 5G pecking order.  

The run-up to the auctions saw a mixed bag of decisions as far as the telcos are concerned. In June, the government removed the spectrum usage charge, in a move that would enable companies to save costs on spectrum purchases. A Nomura Global Markets Research report said that in the longer term, the scrapping of SUC for future spectrum auctions could lead to 3,000 crore rupees in annual cost savings for Jio and Airtel and 1,400 crore rupees for Vodafone Idea.

This was welcome news for telcos, who had demanded a 90 per cent reduction in the 3.5 GHz spectrum base price, compared to the Telecom Regulatory Authority of India's recommendation in 2019. This particular demand was not met. However, at 317 crore rupees for a pan-India 1 MHz of spectrum, the base price has been reduced by 36 per cent for a validity of 20 years.

The government has also allowed companies to pay for the spectrum in 20 equal annual installments, which will be paid in advance at the beginning of each year. This should significantly ease cash flow requirements and lower the cost of doing business. Furthermore, the bidders will have the option of surrendering the spectrum after 10 years without suffering future liabilities with respect to balance installments.

Telcos will go into the auction with one major worry, as they estimate that the 5G enterprise business could account for more than 40 per cent of their revenues. India has scope for over 150 captive private wireless networks after all. However, the Cabinet has permitted enterprises in India to run such networks by directly acquiring spectrum through an administered price, which is a victory for the likes of Amazon, Google, Cisco, ITC, L&T Technology Services, and Tata Communications. But, this has raised the hackles of telcos, who fear that 5G will become unviable without the enterprise business, especially given the huge investments needed for building networks and buying spectrum. Telcos also feel that the decision has done away with a level playing field.

Earlier, telcos participating in the 5G auctions said that they expected only a fourth of the value of spectrum on offer to be sold. Meaning that mobile operators, collectively, would pick up spectrum of only around 1.1 trillion rupees. In fact, telcos believe that the 5G spectrum auction could turn out to be a short affair. We will have to wait a bit more to find out if that is indeed the case. But, what we do know for sure is that the predictions of billionaires Mukesh Ambani and Gautam Adani giving each other stiff competition at the auctions have come a cropper.