Last week, the Telecom Commission recommended raising the reserve prices for the auction of 900 and 1800 MHz spectrum likely to be held in January. The Telecom Regulatory Authority of India (TRAI) had earlier recommended — and then reiterated — reserve prices which were 20 per cent lower. The Commission rejected TRAI’s other recommendation to withhold auction of 800 MHz and wants the body to propose an appropriate reserve price so that it could presumably be auctioned along with the 900 and 1800 spectrum.
Technology neutrality
The reserve prices proposed by the Commission are still substantially lower than those in the previous unsuccessful auctions and will likely interest bidders.
However, setting a reserve price for 800 MHz needs attention to “technology neutrality” — a sound regulatory principle that requires that technologies chosen by players have no bearing on any rules, e.g. reserve prices in this case. Ignoring it may bring back avoidable disputes that are, in no small measure, responsible for the sector’s poor health today.
The Telecom Commission’s insistence on the auction of 800 MHz spectrum raises two types of issues: the wisdom of tinkering with the regulator’s recommendations and the specific decision itself. The Commission is wrong on the first count since even courts do not usually overturn technical decisions of expert bodies, except on grounds of process.
However, on the second count, the Commission is right to demand the auction of 800 MHz spectrum. There is still considerable interest in CDMA technologies for broadband data services. This is amply demonstrated by MTS, the aggressive new player in the market place, as well as the many representations of the relevant players. The Telecom Commission is empowered and entitled to demand a reserve price for 800 MHz spectrum. By not providing it earlier, TRAI arguably came close to picking winners and losers, a job best left to markets.
The physics of it
Determining a reserve price for 800 MHz is a sensitive task because it is intimately linked to that for 900 MHz. The Telecom Commission has taken a view on the reserve price for 900 MHz, but only for metros, where the licences of current holders will expire by end of 2014. However, the situation will change considerably when 900 MHz spectrum will need to be auctioned in the remaining 18 Circles when licences expire there. So, for the vast majority of telecom circles, we do not yet have reserve price of either 800 MHz or 900 MHz.
A particular frequency of spectrum is characterised by its propagation characteristics or distances its signal can cover. Typically, 900 MHz spectrum is considered more valuable since it provides twice as much coverage as 1800 MHz. TRAI has wisely based its regulation on incontrovertible physics of propagation characteristics and, like most regulators, wisely ignored other criteria — over which there is less consensus — such as market prospects, price of equipment or devices, etc. In 2010, it recommended the same reserve price for 800 MHz and 900 MHz spectrum, since the difference in their propagation characteristics is minor.
It did propose a lower reserve price for 800 MHz spectrum in 2012 arguing that the non-contiguous 800 MHz spectrum allocated to CDMA made it less attractive and justified a lower reserve price for the auction. This argument seems less relevant today. For one, MTS already offers 3G services in its circles with 2.5 MHz spectrum. Also, whether any spectrum is non-contiguous — 1800 MHz spectrum with Indian players is — was wisely ignored in TRAI’s computations of other reserve prices. The players treat this and other intangibles in their auction bids.
Treating 800 and 900 MHz differently would come with its own risks. The current rules permit liberalised use of spectrum obtained through auction. So, 800 and 900 MHz spectrum can now be used for new technologies such as Long Term Evolution (LTE). Differential pricing of the two types of spectrum can cause new distortions and controversies if the rules for spectrum auctions determined which technology was deployed, rather than its strength or weakness in addressing consumer needs.
India’s telecom sector is no stranger to such distortions created by spectrum rules. Recall the many damaging controversies and litigation over differential rules for GSM and CDMA spectrum.
Telecom technologies are by no means all identical or even similar. There can be considerable difference in their functionality, features, prices, etc. Similarly, the availability and price of equipment that network operators will deploy as well as the devices that users will need. The future of any technology in the market place, including the price paid for spectrum in an auction, will depend eventually on these factors.
Correct past mistakes
Other abstract and psychological factors too will impact how customers value the products and services, as the image of Apple products clearly indicates. It is sensible that regulators refrain from pre-judging any of these issues. The least contentious way to arrive at a market determined price of spectrum is to rely on a well-designed auction. This will probably work best if auctions attract enough bidders to compete for the spectrum. This did not happen in the last two 2G auctions, in 2012 and 2013, when almost all spectrum went at the reserve price or remained unsold and without any productive use. It would be worrying if the next auction for spectrum went the same way due to a high use or some other distortion in auction design.
The new reserve prices for 900 MHz for the metros, despite being higher than what TRAI had recommended, are considerably lower than in the last auction. Barring Kolkata, they are lower than the corresponding reserve price for 800 MHz. New auctions for 800 and 900 MHz are imminent in all other service areas. It makes regulatory sense to have a common reserve price for both types of spectrum.
Safeguarding and even aggressively promoting technology neutrality is an opportunity to correct past mistakes and bring back new energy to a sector with serious ‘health issues’.
(The author is a consultant on regulatory issues.)