The telecom spectrum auction was held from 1st to 6th October 2016 and as many as seven telecom service providers (TSPs) participated in it. Bharti, Airtel, Vodafone, Idea Cellular, Reliance Communications, Tata Teleservices, Aircel and Reliance Jio were in the fray for frequencies that are crucial for next-generation telecom services.As much as 2,354.55 megahertz (MHz) of frequencies were being put up for auction in the mentioned seven bands — 700 MHz, 800 MHz, 900 MHz, 1800 MHz, 2100 MHz, 2300 MHz and 2500 MHz.
The Government had fixed a Pan-India reserve price per MHz of Rs 28.73 billion for spectrum in 1,800 MHz band, Rs 33.41 billion for 900 MHz, Rs 58.19 billion for 800 MHz, Rs 37.46 billion for 2,100 MHz, Rs 114.85 billion for 700 MHz and Rs 8.17 billion each for 2,300 MHz and 2,500 MHz bands.
The 700 MHz band was on sale for the first time in the spectrum auction and it was priced the highest and had a potential of grossing Rs.4 trillion in revenues for the Government. The 700 MHz band would be used by telecom companies to provide 4G Long Term Evolution (LTE) to its customers.
The 700 MHz and the 900 MHz bands did not receive any bids in the spectrum auction but the most in demand were 1800 MHz, 2100 MHz, 2300 MHz and 2500 MHz. The band activity table below shows the quantity put up for sale and the actual quantity sold. The 2100 MHz band was sold out completely followed by partial sale of 1800 MHz, 2500 MHz, 2300 MHz and 800 MHz in a descending order.
The total base price for all the frequencies combined amounted to Rs.5.63 trillion but the total bid value at the end of the auction amounted only Rs.0.65 trillion. Only 41% of the total available 2354.55 MHz which amounts to 965 MHz were sold in the spectrum auction this time. The last auction held in the month of March 2015 fetched the government record bids of over Rs 1.1 trillion.
As per the rules, companies winning spectrum in higher frequency bands — above 1Ghz like 1800 MHz, 2100 MHz, 2300 MHz would be required to pay 50% upfront and the rest in 10 years after a 2-year moratorium. In earlier auctions, companies were given the option to make 33% upfront payment. For spectrum below 1 Ghz band such as 700 MHz, 800 MHz, 900 MHz, the companies would be required to pay 25% upfront and the rest in 10 years after a 2-year moratorium.
The reason for such a big difference in the potential of the spectrum to fetch revenues for the Government and the actual bids is because of the intensifying competition amongst telecom service providers. TSPs it seems did not aggressively bid for auctions across all segments. The high cost of auction coupled with intensifying competition is seen as the major constraint for lower bids at the 2016 spectrum auction. Another reason for low bids would be the sheer amount of debt these TSPs hold which they have piled on primarily due to on-going auctions every year now.
The highest bid was made by Vodafone amounting to approximately Rs.200 billion followed by Airtel at Rs.150 billion, Reliance Jio at Rs.135 billion, Idea Cellular at Rs.120 billion, Tata Teleservices at Rs.46 billion, Aircel at Rs.11 billion and Reliance Communications at Rs.650 million. The total upfront payment is estimated to be Rs.320 billion for all the companies and the Government is the beneficiary for the same. The revenue from spectrum auctions was estimated to be much higher considering the total potential at Rs.5.63 trillion which again is a disappointment from a fiscal perspective.
Most of the stocks were flat to positive on the next day after the conclusion of the spectrum auction. The cost benefit analysis has become a very tricky game for the telecom industry as intensifying competition has led to drastic reduction in fares for data and voice. The entry of Reliance Jio has added to worries with the company planning to provide voice calls for free and charging only for data services with low tariffs in comparison to the existing TSPs.
Reliance Jio would be commercially launching services in the month of December 2016. The earnings growth is difficult to predict for the telecom industry with so much dynamics at play. Increased competition is most likely to give way for mergers and acquisitions in the telecom industry in the time to come. Rising debt and reducing tariffs is expected to reduce the average revenue per user for the TSPs. It would be a tough time for the stakeholders as there is a lot of uncertainty regarding how much the Telecom industry would grow and what value it can create for shareholders in the near future.