Auction Analysis: Modest response as telcos reserve their firepower for 5G spectrum

Modest response as telcos reserve their firepower for 5G spectrum

The government finally conducted auctions for the sale of spectrum for Indian telecom operators in early March 2021. A total of 2308.80 MHz of spectrum across seven bands, worth about Rs 3.92 trillion, was put up for sale.

The auction witnessed moderate participation by telcos, both in volume and value terms, and lasted barely two days. Despite this, it can be considered a qualified success as the revenue earnings exceeded industry expectations. The exchequer netted Rs 778.14 billion, almost double the initial estimates, even though only 37 per cent (855.6 MHz) of the total spectrum was sold. Spectrum in bands such as 700 MHz and 2500 MHz, considered to be premium and most suitable for 5G, had no takers at all.

Aggressive bidding, which has been a trademark of Indian telecom auctions in the past, was clearly missing, as telcos focused on renewing their expiring spectrum and consolidating their holdings in select bands. According to Anshu Prakash, telecom secretary, Government of India, the bidding largely took place at the reserve price as there were only three bidders, with each focused on consolidating its position in its bands. “Also, 5G auctions will happen soon. So I am not very certain if the telcos would have wanted to put all their resources in this auction,” Prakash noted in a press statement.

Reliance Jio emerged as the highest bidder, winning 488.35 MHz of spectrum for Rs 571.22 billion, followed by Bharti Airtel, which picked up 355.45 MHz for Rs 186.98 billion, while Vodafone Idea acquired 11.8 MHz of airwaves for Rs 19.93 billion. Airtel and Vodafone Idea had earlier indicated that they would bid selectively, mostly picking up spectrum for renewing licences that are nearing expiry or for filling coverage gaps in their existing networks. A look at the key highlights of the spectrum auction and its implications for the telecom sector…

Key highlights

Surprise demand for 800 MHz and 2300 MHz bands

The higher-than-expected revenue generation in the recent auctions can be largely attributed to the surprise demand for spectrum in the 800 MHz and 2300 MHz bands. The 2300 MHz band recorded the highest interest, followed by the 800 MHz band.

Spectrum in the 2300 MHz band is ideal for augmenting network capacity. Given that it was cheaper than the sub-GHz airwaves on offer, telcos snapped it up to meet the surging data demand from mobile broadband users. Meanwhile, the 800 MHz band is ideal for deploying 5G services in the future.

As per rating agency ICRA, “The telcos, besides bidding for renewal of their expiring spectrum, focused on consolidating their spectrum holdings in the 800 MHz, 900 MHz and 2300 MHz bands. While the sub-GHz bands will be crucial for 5G technology deployment and improvement of indoor coverage, the appetite for the 2300 MHz band stems from the rising mobile broadband usage and thus the need for improving network capacity.”

No takers for 700 MHz band, yet again

As widely expected, the premium 700 MHz band, worth nearly Rs 2 trillion, went unsold owing to its high base price. Interestingly, this is not the first time that spectrum in this band failed to find takers. Back in 2016, the high price of spectrum in this band had been a dampener. Although the government slashed the price in the recent auction by about 43 per cent over the 2016 level, the telcos were still reluctant to pick up this spectrum. Airtel pointed out that it made no economic case for operators to bid for spectrum at such high reserve prices. Notably, the 700 MHz band coupled with the 3.5 GHz band has the potential to accelerate 5G roll-out in a big way. While DoT’s Prakash is still hopeful that telcos will buy spectrum in the 700 MHz band during the 5G auctions, industry analysts are not so optimistic and believe that a rationalisation of prices will be crucial.

Jio emerges as the highest bidder

Jio emerged as the highest bidder, acquiring roughly three-fourths of the spectrum sold during the auction. Technically, the operator needed to renew its permits in only 18 circles in the 800 MHz band to be able to continue offering services. (The spectrum that it is using as a part of a sharing pact with Reliance Communications is expiring in July 2021.) However, it ended up acquiring spectrum across all 22 circles in the 800 MHz, 1800 MHz and 2300 MHz bands.

As per a Credit Suisse report, Jio has bid aggressively to bridge the gap between its spectrum market share and subscriber market share, as it had been facing network constraints over the past three years. Jio’s post-auction spectrum holding at 1717 MHz is still lower than Airtel’s 2107 MHz and Vodafone Idea’s 1768 MHz. In contrast, its subscriber base stands at 410.73 million, as of January 2021, the highest among all telcos (Airtel’s is at 344.6 million and Vodafone Idea’s is at 285.96 million). The new spectrum will allow Jio to create a capacity advantage to some extent.

Airtel’s focus on enhancing coverage and capacity

Bharti Airtel bid for spectrum across all bands barring 700 MHz and 2500 MHz. Besides picking up spectrum in the 1800 MHz and 900 MHz bands in eight circles, where its existing licences are expiring soon, Airtel secured a pan-Indian footprint of sub-GHz spectrum. As per the telco, this will help it improve its indoor and in-building coverage in every urban town, besides enabling it to deliver 5G services in the future. Airtel also picked up spectrum in some circles that have traditionally been Vodafone Idea’s strongest markets. It has, for instance, acquired bandwidth in the 800 MHz band in Madhya Pradesh, Maharashtra, Uttar Pradesh West and Haryana, and also enhanced its 900 MHz holding in Kerala and Gujarat, which are some of the largest markets in revenue terms for Vodafone Idea. This indicates that Airtel is planning to capture a pole position in these markets going forward.

Limited play by Vodafone Idea

Vodafone Idea bid for only small quantities of spectrum in the 900 MHz and 1800 MHz bands. As per the telco, it had entered the auction already holding the largest quantum of spectrum (owing to the merger of Vodafone India and Idea Cellular). Only a small fraction of its spectrum is coming up for renewal. “We have used this opportunity to optimise our spectrum holding post-merger to create further efficiencies in a few circles,” noted a company statement.

However, analysts believe that Vodafone Idea’s participation was perhaps constrained due to its liquidity issues. Although the telco has substantial spectrum holdings, these remain relatively underutilised. Further, given the telco’s high leverage and constrained balance sheet, it has lagged behind its peers in terms of investments in network infrastructure. Its position is likely to worsen as its competitors enhance their coverage and capacity by using the additional spectrum acquired in the recent round.

Key implications for the sector

Win-win for the government, telcos and users

For the government, the receipt of upfront payment for spectrum, amounting to almost Rs 200 billion by March 31, 2021, will be crucial for driving down its fiscal deficit of 9.5 per cent in 2020-21. For a 4G user, the auction would mean better quality of service as all telcos are expected to deploy the additional spectrum for improving network capacities. Also, with a greater 4G spectrum holding, Airtel and Vodafone Idea will now try to convert as many of their 2G/3G users to 4G as possible. As per industry estimates, 4G penetration in India is still 50-55 per cent, which leaves plenty of room for telcos to improve their ARPUs.

Price rationalisation expected in future spectrum auctions

Since the 700 MHz band did not see any bids, it is likely that the government will go for another significant cut in the reserve prices in the next spectrum auction. As per brokerage firm CLSA, “Historically, the government cuts spectrum prices by 30-40 per cent if it sees no demand in the previous auction. Since 63 per cent of the spectrum remained unsold in this auction, there will likely be cuts in reserve prices.” In fact, the current auction has set the bar for 5G spectrum pricing as well. The industry is hopeful that the government will revisit the reserve price fixed by the Telecom Regulatory Authority of India (TRAI) for the 3.5 GHz band in 2018.

Paving the way for 5G auctions

The modest bidding in the current spectrum auction indicates that Jio and Airtel are conserving their financial firepower for the upcoming 5G auctions. Further, the two telcos have consolidated their holdings in the sub-GHz frequency bands, which will be critical for 5G service launch. While Jio acquired 133 MHz of additional spectrum, over and above its renewal spectrum in the 800 MHz band, Airtel bought 355.45 MHz spectrum across sub-GHz frequency bands.

All eyes are now set on the 5G spectrum sale. Much headway has been made in the past six to eight months by telcos in preparing the 5G ecosystem in the country. Jio claims to have developed a full in-house 5G stack, while Airtel recently held a live 5G demonstration in Hyderabad.

Of course, there are a number of other key factors at play, the topmost being the price of spectrum. As already mentioned, the reserve price set by TRAI at Rs 4.92 billion is simply unsustainable for the sector. As per ICRA, the recent auctions have already driven up the industry’s debt levels, which are expected to touch Rs 5 trillion by March 31, 2022.

With regard to the quantum of spectrum that will be made available to the telcos, any allocation lower than the channel size of 100 MHz per operator will weaken the business case for the industry. Currently, only 175 MHz of spectrum is available in the 3.5 GHz band due to prior allocations to the departments of space and defence. DoT must expedite its discussions and spectrum acquisitions from the departments of defence and space.

Akanksha Mahajan Marwah