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Telcos at wrong end of spectrum

Once a poster boy of resurgent India, the telecom sector is now reeling under severe competition, rock bottom tariffs and cash crunch following the outgo on 3G spectrum auction last year.

Adding to its current woes, the Telecom Regulatory Authority of India (TRAI) has proposed a steep increase in price of spectrum.

TRAI’s recommendations, which are not binding on the government, can deal a staggering blow to the beleaguered industry and lead to a steep increase in call rates. Telecom stocks fell five to seven per cent this week.

As per these recommendations, mobile phone companies that lost permits following the Supreme Court verdict will have to pay a minimum of Rs36.22 billion for every unit of 2G spectrum. This is more than 13 times the amount they paid in 2008, when they got pan-India permits bundled with 6.2 MHz of 2G spectrum for a mere Rs16.59 billion. Industry experts say telco will require about five units of 2G airwaves to offer mobile services. This means Norway’s Telenor will have to shell out at least Rs181.11 billion to get a new pan-India permit.

Existing players can carry on without participating in the auction. However, TRAI has recommended a major disruption in their functioning as well. Over two-thirds of the revenues of firms like Bharti Airtel and Vodafone come from their networks based on the more efficient 900 MHz spectrum. This was the first spectrum given to firms; later on 1800 MHz spectrum was given. In the name of ‘refarming’, TRAI wants this to be taken back. Give Bharti/Vodafone/MTNL/BSNL/etc spectrum in the 1800 MHz band (at the new price, of course) and re-auction the 900 MHz spectrum at a base price of Rs7,224 crore per MHz. While the government can still do this when the existing licences come to an end, TRAI wants this done at the earliest.

The refarming proposal is an unmitigated disaster for incumbent operators like Bharti, Vodafone and Idea who may have to pay colossal amounts of money just to retain the spectrum that they have. Initial estimates indicate a burden of Rs30,000 crore for Bharti, Rs45,000 crore for Vodafone and Rs21,000 crore for Idea.

It is no surprise that, in a rare show of unity, all cellular operators offering services based on GSM and CDMA technologies condemned these “arbitrary, regressive and inconsistent” proposals that could “derail the industry”. Incumbent operators are unlikely to evince much interest in the bidding. They have enough spectrum in different frequency bands to sustain their current operations. If they participate in bidding and thus push up prices for spectrum, it could then become a benchmark for their own bids two years later when their licences come up for renewal. TRAI does not seem to have reckoned with the possibility of auction not securing any bid.

TRAI’s recommendations, if accepted, would spell doom for this vital sector. High capital cost will act as a strong entry barrier and confer huge pricing power on incumbent operators. It will result in a massive transfer of resources from the industry to the government. Call tariffs will have to rise steeply. Affordability and rural penetration will have to be given a go bye. This can nip in bud India’s nascent broadband revolution. At a time when net connectivity has come to be regarded as part of good life all over the civilised world, India is on the verge of making it an expensive privilege. The best the government could do with TRAI’s report is junk it.

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