The Department of Telecommunications (DoT) is conducting the biggest-ever spectrum auction in India, with a total of 465.75 MHz of airwaves put up for sale across different frequency bands. DoT has offered 177.8 MHz, 99.2 MHz and 85 MHz of spectrum in the 900 MHz, 1800 MHz and 2100 MHz bands respectively. Around 103.75 MHz of spectrum has also been offered in the 800 MHz band. The ongoing spectrum auction holds significance for several operators whose licences in many circles are coming up for renewal in 2015-16, across frequency bands. Therefore, it is imperative for them to acquire spectrum in these circles, so as to continue to offer mobile services.

While the bidding has been taking place as usual, the ultimate outcome of the ongoing auction will be subject to the final verdict of the Supreme Court, the next hearing for which is scheduled for March 26, 2015. As a result, winners in the auction will not be able to claim any rights over the spectrum without the court’s permission in the interim. Consequently, the results of the auction cannot be finalised before the aforementioned date.

Through the auction, the government is targeting the realisation of Rs 820 billion – Rs 648.8 billion from the sale of spectrum in the 800 MHz, 900 MHz and 1800 MHz bands, and Rs 175.55 from the spectrum in the 2100 MHz band. Like the February 2014 auction, the exchequer can expect a huge windfall from this auction as well, as the demand for spectrum continues to be high. Already, at the end of the 12th day of the auction (March 17, 2015) the total amount committed by the bidders crossed Rs 1.07 trillion.

Demand for frequency airwaves has been growing over the years with spectrum having become a major asset for service providers. It also makes commercial sense for operators to acquire the maximum amount of spectrum possible based  on their budgets as only a limited quantum of spectrum will be auctioned in the future, as and when it becomes available with the government.

Given that the data services segment offers a huge growth opportunity for telecom operators, acquiring an adequate quantum of spectrum has become pertinent for operators to ensure future revenue growth. With data services witnessing growing uptake, the share of revenues from these offerings in the overall service revenues of telecom operators is already growing, which has partially offset the decline in income from voice services. In the future, data service revenues will eclipse voice revenues and will become the key driver for profit growth.

In such a scenario, holding adequate data spectrum will be critical to the operator’s long-term business prospects, even if it has been acquired at high prices, as has been the case in the previous auctions. (The final discovered prices have been significantly higher than the reserve prices due to highly competitive bidding.)

900 MHz remains the most favoured band

The overall bidding activity across spectrum bands in the ongoing auction has been encouraging, although spectrum in the 2100 MHz band has hardly seen any demand. Given that the final outcome will be based on the apex court’s decision, DoT has released limited data regarding the auction proceedings. Nevertheless, it can be ascertained that the demand for frequency airwaves in the 900 MHz band has been the highest, followed by that in the 1800 MHz and 800 MHz bands. The Punjab, Uttar Pradesh (West) and Tamil Nadu circles have been witnessing high demand, while most of the Category A circles have seen a relatively subdued response.

As expected, there has been a significant demand for spectrum in the 900 MHz band. This can be attributed to its good in-building propagation characteristics, which facilitate better coverage and ensure relatively lower network investments. It is estimated that the number of tower sites required in the 900 MHz band is half of those required to provide the same network coverage in the 1800 MHz band. Another reason for the high bidding activity in the 900 MHz band is that the licences of several telecom operators will expire during 2015-16. These include the licences of Idea Cellular in nine circles and those of Reliance Communications (RCOM) and Vodafone India in seven circles each. Airtel will also see six of its licences expiring in the same period. In order to reacquire spectrum in these circles, the operators are bidding aggressively.

However, if operators fail to win back spectrum in the 900 MHz band in these licensed circles, they can still continue to offer 2G services using frequency airwaves in the 1800 MHz band. The limited quantum of spectrum on offer in the 1800 MHz band in several circles for the ongoing auction has, therefore, been a cause of concern for these operators. For instance, only 2 MHz of spectrum has been made available in the 1800 MHz band in Maharashtra, as against 14 MHz in the 900 MHz band, which is currently held by Idea Cellular and Vodafone. Similarly, only 1.8 MHz of spectrum in the 1800 MHz has been put up for sale in the Karnataka circle, as against 14 MHz in the 900 MHz band, which is held by Bharti Airtel and Idea Cellular. Therefore, the demand for 900 MHz band spectrum in the Punjab, Andhra Pradesh and Karnataka circles (all of which have limited spectrum in the 1800 MHz band) has been significantly high.

In the 1800 MHz band, the Tamil Nadu circle has seen the maximum bidding activity, as the highest amount of spectrum (20 MHz) was offered in this circle. Among the remaining circles, only Odisha, Himachal Pradesh, Haryana and the Northeast had generated interest among operators as of March 16, 2015. In several circles, including Karnataka, Gujarat, Punjab and Rajasthan, demand seems to be drying up. This can be attributed to the fact that operators might be hopeful of winning spectrum in the 900 MHz band in these circles, and therefore have low interest in the 1800 MHz band currently. Nevertheless, bidding activity in the 1800 MHz band is expected to gain pace following the conclusion of the spectrum sale in the 900 MHz band. Meanwhile, brisk bidding is also being witnessed for spectrum in the 800 MHz band for deployment of 4G services.

Demand in the 2100 MHz band has been subdued since the auction began, even in the coveted circles of Delhi and Mumbai. One of the reasons for the lukewarm response from operators is the limited quantum of spectrum that has been put up for sale in the band. While operators had been demanding 15 MHz of spectrum in the band, DoT is auctioning only 5 MHz. Further, most operators are not focusing on the band at this stage of the spectrum auction, as spectrum in the 900 MHz band can also be used for offering 3G services. Once the bidding for spectrum in the 900 MHz band is concluded, operators might turn their attention to 3G spectrum in the 2100 MHz band.

Airtel and Idea Cellular hold the advantage

The ongoing spectrum auction is important for several incumbent telecom operators, given that their licences are due to expire in 2015-16. On the other hand, new entrants would be looking to acquire spectrum in key circles, in order to expand their footprint in the market.

Among the incumbents, Bharti Airtel seems to be the most comfortably placed in terms of the risks associated with the expiry of the existing licences. In February 2014, the operator bought a significant quantum of spectrum in the 1800 MHz band to fall back on. If the operator is unable to reacquire spectrum in the ongoing auction in the circles where its licences are due to expire, it will still have adequate back-up to shift its subscribers to the new network and continue offering services. Given this scenario, Airtel is likely to be selective in its bidding approach and may initially focus on only circles with high ARPU customers or those where it currently holds inadequate spectrum to offer data services.

Idea Cellular has followed a similar strategy. However, it has not acquired fall-back spectrum in all the circles where its licences are valid till only 2015-16, which makes it more vulnerable to risks. For instance, the operator still needs to acquire frequency airwaves in the Gujarat and Uttar Pradesh (West) circles, where it currently holds 6.2 MHz of spectrum in each. Together, the two circles contribute 16 per cent to Idea Cellular’s total services revenues and therefore, reacquiring spectrum in these service areas is essential for it. Further, Idea Cellular would be considering increasing its spectrum holdings even in circles where it bought frequency airwaves in the previous auction.

Similarly, Vodafone India had acquired fall-back spectrum (1800 MHz band) in only a few circles among those in which its licences are due to expire in 2015-16. The operator generates around 49 per cent of its total revenues from these services areas. Consequently, it is imperative for Vodafone to either reacquire spectrum in the 900 MHz band or increase its spectrum holding in the 1800 MHz band in these circles, so as to prevent losing out on customers as well as revenues.

In contrast, RCOM would be bidding aggressively in the ongoing auction to reacquire spectrum in the 900 MHz band, since it did not purchase alternative spectrum in the February 2014 auction. However, for RCOM, the seven circles where its licences are due to expire in 2015-16 account for only 26 per cent of the total service revenues, of which 50 per cent comes from the Bihar and Madhya Pradesh circles. Thus, they would be the key focus areas for the operator.

Another player that would be following an aggressive bidding strategy is Reliance Jio Infocomm Limited (RJIL), which acquired spectrum in the 1800 MHz band in 14 circles, in the February 2014 auction. These 14 circles are estimated to provide around 75 per cent of the industry’s overall revenues. The company is expected to offer both voice and data services, as against the earlier view that it would provide only data services. RJIL’s focus on voice services is corroborated by its high level of interest in purchasing spectrum in the 900 MHz and 1800 MHz bands. Given that spectrum in the 900 MHz band can be used for offering both 2G and 3G services, RJIL may be looking to acquire these airwaves in order to gain a modest customer market share within a short span, a proposition that looks difficult with 4G services at present, due to the lack of a proper ecosystem. However, initially RJIL is likely to focus primarily on urban markets with high-ARPU customers.

Similarly, Telewings Communications would be considering expanding its operations beyond its six licensed circles. The company may also want to acquire spectrum in the 900 MHz band in its operational circles, so as to provide both 2G and 3G services, which will help it retain its high-value customers. Tata Teleservices Limited and Aircel, on the other hand, do not have any licences that are due to expire in 2015-16. Therefore, the two operators may not participate aggressively in the auction, especially given their significant debt burden.

Inequality between the incumbents and new entrants may widen

There are growing concerns in the industry that the ongoing spectrum auction may result in an increase in the disparity between the incumbents and the small players (including new entrants). While the incumbent players have been acquiring spectrum in the auction at a significant rate to improve their customer market share and revenue market share (RMS), the participation of smaller players is expected to be limited. Already the incumbents have increased their combined RMS from 66 per cent in September 2011 to 72 per cent in 2014. With the acquisition of spectrum, the incumbent players will dominate the telecom market in the near future.

In this scenario, smaller players, especially those with financial troubles, may look at achieving synergies in terms of revenue enhancement and higher operational efficiencies through mergers and acquisitions (M&A). For instance, the Tata Group is reportedly in talks with Telewings Communications for a merger, with the former looking to own a minority stake in the merged entity. This would help the Tata Group bring in a new joint venture partner for its telecom business and allow Telewings to get access to Tata’s assets (spectrum and tower sites, etc.) across the country. However, consolidation in the market would depend largely on the final M&A guidelines, which are currently somewhat restrictive. Nevertheless, in the long term, smaller players will stand to gain significantly from M&As, especially when the incumbents are expanding their footprint aggressively