Pricing worries

AT A SHOP selling recharge coupons of different mobile providers in Bangalore. India is the world's cheapest mobile market, where unique per second call rates have brought about a massive boom. - NAMAS BHOJANI/BLOOMBERG

Operators are apprehensive that the revision of spectrum prices might impact the pricing policies of the companies.

WHILE the nation still awaits a figure to define the actual loss incurred by the exchequer in 2008 from the grant of telecom licences and the allocation of spectrum at 2001 prices, the Telecom Regulatory Authority of India (TRAI), in its latest recommendations on 2G spectrum pricing, has placed the cost of a pan-India 2G licence (that comes with contractual 6.2 MHz spectrum) at Rs.10,972.45 crore. This is a sixfold hike from what was achieved a decade ago at the time of auction of licence to include a fourth operator in the mobile telephony arena, which was then at its nascent stage.

On the basis of the 2001 price of Rs.1,658 crore for a pan-India licence, former Telecom Minister A. Raja, who is currently being investigated by the Central Bureau of Investigation (CBI) in the 2G scam case, and the Department of Telecommunications (DoT) gave away licences in 2008 on a first come first served basis. He allegedly not only overruled the Union Finance Ministry's plea for auctioning the scarce 2G spectrum but also favoured real estate companies to enter the telecom business and granted dual technology licences (allowing use of both GSM and CDMA technology by a single operator) in violation of rules.

The Comptroller and Auditor General of India (CAG), in its performance audit report on the Issue of licences and allocation of 2G spectrum by the DoT, has put the presumptive loss from non-auction of radio waves while granting 122 new licences and 35 dual technology licences in 2007-08 between Rs.57,666 crore and Rs.1.76 lakh crore (based on four assumptions). However, in its first information report (FIR), the CBI has put the figure at Rs.22,000 crore. But on the basis of TRAI's new valuation, the loss figure is around Rs.90,000 crore. Though the price of a pan-India 2G licence is pegged at Rs.10,972.45 crore (as on April 1, 2010) for 6.2 MHz of start-up or contractual radio waves that an operator gets with a pan-India licence, the real story behind the recommendations is the massive jump in the prices of each MHz of spectrum between 2001 and 2010. From Rs.267.51 crore for each MHz of spectrum (as entry fee for 22 telecom circles) in 2001, the price has now jumped to Rs.4,571.87 crore (per MHz beyond 6.2 MHz) a 17-fold hike in just a decade. The revised per MHz price for spectrum up to (contractual) 6.2 MHz has been put at Rs.1,769.75 crore.

In 2001, the lowest per MHz price of spectrum was that of West Bengal at Rs.16 lakh and the highest was that of the Tamil Nadu circle at Rs.37.58 crore (even higher than those of the metro circles of Delhi and Mumbai at Rs.32.85 crore and Rs.27.53 crore respectively). But in the revised prices (up to 6.2 MHz), the lowest is that of Jammu and Kashmir at Rs.7.6 crore and the highest is that of Tamil Nadu atRs.187.38 crore, followed by Andhra Pradesh at Rs.153.77 crore (Rs.16.61 crore in 2001) and Uttar Pradesh (East) at Rs.149.87 crore (Rs.7.3 crore in 2001). Beyond 6.2 MHz, the lowest is again Jammu and Kashmir at Rs.22.89 crore and the highest Andhra Pradesh at Rs.431.95 crore, followed by Tamil Nadu at Rs.426.05 crore and Maharashtra at Rs.374.47 crore.

Notably, in May 2010 and after the successful auction of the 3G spectrum, TRAI released a report recommending that the price of the 2G spectrum should be equal to that of 3G. This was vehemently opposed by operators, forcing the regulator to relook the entire issue. Hence, these new recommendations. But they are still long delayed since the sector has grown multifold, with India taking the No.1 position globally in terms of mobile subscriber addition, between 1.5 crore and 1.75 crore a month. Now the recommendations are with the DoT, which has to take a final call after discussing the issue with the Telecom Commission, its decision-making body. But before taking any final decision on the recommendations, the DoT will have to take operators into its confidence as they are unhappy with the proposed steep hike in spectrum prices as they feel that it would impose a massive financial burden on them.

The TRAI's recommendations are like changing the goal posts in the middle of the game. We cannot go among subscribers and recover it. The assumptions used by TRAI are open to question. It has used very sophisticated mathematical modelling. These look very disastrous for the industry, said Rajan Mathews, director-general, Cellular Operators' Association of India, which represents GSM operators.

Incumbent operators such as Bharti Airtel, Vodafone-Essar and BSNL have major reasons to worry as they will not only have to shell out huge sums of money for the additional spectrum that they hold beyond 6.2 MHz, but also have to pay a high price for the renewal of the licences, which is due in 2014. For the state-owned BSNL, which is gradually losing its grip in the highly competitive mobile market, the going could be even tougher. Notably, the cash-strapped organisation reported its first-ever loss in its history in the last fiscal.

Old operators also feel that the recommendations are more favourable to operators who entered the market in 2008 at 2001 prices, as their licences come up for renewal only after 20 years. On the other hand, new operators who are still to roll out their services because of the scarcity of spectrum believe that this will force old players to vacate spectrum they have been hoarding, thus helping them to start their services. But they will still have to pay for every additional spectrum they get from the DoT. Operators are also demanding that all spectrum given under 2G bands GSM as well as CDMA should be clubbed and considered as total allocated spectrum for the purpose of pricing and eligibility.

As per initial estimates, the new valuation, if implemented, could force new operators such as Uninor, S Tel, Videocon, Etisalat DB and Loop Telcom, as well as the GSM services of Tata Teleservices and Reliance Communications, to pay around Rs.7,000 crore for their spectrum. On the other hand, incumbent operators will have to fork out around Rs.17,700 crore for additional spectrum beyond 6.2 MHz. However, TRAI has dismissed the GSM operators' charge that its recommendation to revise 2G spectrum prices will hit them hard.

Telecom firms should not look at only payout charges. It is just one element of the recommendations. There are other elements which will result in huge savings for the operators, TRAI Chairman J.S. Sarma said after the release of the recommendations. Apart from estimating the prices of 2G spectrum, TRAI has recommended the fixation of uniform licence fees at 6 per cent of adjusted gross revenue over a period of time compared with 6-10 per cent now, depending upon the circles.

We have also recommended rationalisation of annual spectrum charges which would benefit operators in the long run. Taking all elements of its recommendations in totality, the operators would actually save money over the licence period. Besides lowering the licence fees and rationalising spectrum charges, we have also favoured lowering operators' contribution to the Universal Service Obligation fund, a levy used to subsidise operators to offer services in rural areas and villages, Sarma said. He urged operators to look at the elements of the recommendations collectively and not selectively, on the basis of spectrum prices alone.

But the big question is whether the hike in spectrum prices will have any impact on mobile tariffs in India, which today is the world's cheapest mobile market where unique per second call rates have brought about a massive boom. While operators are apprehensive that the revision of spectrum prices might impact the pricing policies of the companies owing to pressure in their bottom lines, some analysts do not agree to this logic.

In a highly competitive mobile market like India, no operator can choose to increase its tariffs as it will face the risk of losing its subscribers. And with mobile number portability, which gives a subscriber the chance to switch his operator while retaining his mobile number, being introduced in India, users will have the choice of choosing from the best available options. Moreover, with innovations in terms of tariffs and value-added services being a major revenue driver, operators will find a way to strengthen their bottom lines as well as top lines, said the Delhi-based telecom analyst Mahesh Uppal.