In March 2015, the Department of Telecommunications (DoT) conducted the biggest ever spectrum auction, garnering a total of about Rs 1.1 trillion from the sale of airwaves in the 800 MHz, 900 MHz, 1800 MHz and 2100 MHz bands. Like the spectrum auction that was conducted in February 2014, the latest edition elicited an encouraging response from operators. This was on account of two reasons; the first being that the licences of several operators were due to expire in various circles in 2015-16 and they were required to buy it back to ensure service continuity. The reacquisition of spectrum was also made essential by the fact that a considerable amount of revenue was being contributed by circles where licences were due to expire. For instance, about 74 per cent of Idea Cellular’s service revenues were accounted for by such circles, while Bharti Airtel and Vodafone India obtained 35 per cent and 48 per cent of their revenues respectively from similar quarters. Another reason for the enthusiastic response was that many operators (both incumbents and smaller players) were looking to increase their spectrum holdings with the aim of improving network coverage and offering high speed data services to drive revenue growth.

As many as 29 licences in 18 circles were due to lapse in 2015-16. Among these, nine were held by Idea Cellular, seven each by Vodafone India and Reliance Communications (RCOM), and six by Bharti Airtel. As a result, the government had a significant quantum of spectrum to sell in the 900 MHz band. DoT had put on offer 103.75 MHz, 177.8 MHz, 99.2 MHz and 85 MHz of spectrum in the 800 MHz, 900 MHz, 1800 MHz and 2100 MHz bands, which made it a total of 465.75 MHz of airwaves.

Given the circumstances that made it necessary to buy back spectrum, the majority of it was sold at a higher price than the reserve price set by DoT. The spectrum in the 900 MHz band was sold at a premium of 118 per cent over the reserve price, while the final price discovered in the 800 MHz band was 65 per cent higher than the reserve price. However, there was not much of an increase in the final price of spectrum in the 1800 MHz band, which was sold at a premium of only 17 per cent. Similarly, the 2100 MHz band did not witness much of an increase in this aspect due to limited operator participation on account of spectrum shortage and the high reserve price. In terms of circles, spectrum in Karnataka and Tamil Nadu remained unsold in the 900 MHz and the 1800 MHz bands respectively, while spectrum in the 2100 MHz band was not acquired in the Delhi, Andhra Pradesh and Mumbai circles.

The high premium paid by telecom operators for spectrum in the 900 MHz band could be attributed to several factors other than the need for licence renewal. The band’s excellent propagation characteristics ensure high in-building network coverage and lower network investments due to the need to deploy fewer towers when compared to higher frequency bands. In addition, spectrum in the 900 MHz band can be used for offering 3G services as the device ecosystem for this network has evolved considerably. Given that no operator has pan-Indian 3G spectrum in the 2100 MHz band, acquiring airwaves in the 900 MHz band makes commercial sense as it is liberalised. Another reason for the high demand for this band was the significant availability of contiguous spectrum of 5 MHz in the 900 MHz band, which is ideal for offering 3G services.

There was also significant demand for spectrum in the 800 MHz band as operators had been considering it for implementing long term evolution (LTE) networks for offering 4G services. Due to the fact that the 800 MHz band has become the third most preferred option for LTE network deployment after the 1800 MHz and 2.6 GHz bands, Indian operators are expected to use it for providing high-speed data services. Moreover, like the 900 MHz band, the 800 MHz band’s in-building propagation characteristics would entail lesser investments in network deployment.

The majority of spectrum up for sale in the 1800 MHz band was non-contiguous and acquired by operators mainly as a fallback option for airwaves in the 900 MHz band, or for combining it with existing holdings to offer 4G services on the frequency division duplex-LTE (FDD-LTE) platform. Some operators are also expected to shift their existing 900 MHz customers to the 1800 MHz band so that the former can be used for providing 3G services in dense urban areas.

Winners and losers

While several operators participated in the spectrum auction, it was clearly dominated by the incumbents, who accounted for 77 per cent of the total spectrum outgo of all operators put together. They bought back almost all the frequency airwaves in circles where their licences were due to expire in 2015-16, and simultaneously augmented their spectrum holdings in other circles. For instance, Bharti Airtel acquired additional spectrum in the 900 MHz band in the Assam, Bihar, Odisha and West Bengal circles, apart from buying back airwaves in the Northeast, Himachal Pradesh, Karnataka, Punjab and Rajasthan circles. It also increased its spectrum holdings in the 1800 MHz band in the Northeast, Andhra Pradesh, Haryana, Kolkata, Odisha and Punjab circles. Similarly, Idea Cellular and Vodafone India increased their holdings in the 1800 MHz band, apart from acquiring spectrum in the 900 MHz band. Reliance Jio Infocomm Limited (RJIL) bought a total of 28 MHz of spectrum in the 1800 MHz band, which increased its holdings in the band to 106.8 MHz.

In contrast, RCOM was not able to buy back spectrum in the 900 MHz band in some circles where its licences were due to expire. For instance, it acquired only 10 MHz of its total expiring spectrum of 39.8 MHz in the 900 MHz band. As a result, it will lose spectrum in this band in the Bihar, Odisha, Assam, the Northeast and West Bengal circles. In addition, given that the operator does not hold spectrum in the 1800 MHz band in most of these circles, it would have to offer mobile services through intra-circle roaming (ICR) agreements. From the revenue perspective, RCOM could see a negative effect on its top line as these circles were contributing about 16 per cent to its total revenues.

Meanwhile, new players like Telewings Communications, Sistema Shyam TeleServices Limited and Videocon Telecom did not buy spectrum in the auction. None of their licences is due to expire over the next 15 years at least, but the acquisition of airwaves in new circles would have enabled them to expand their operations as not much spectrum is likely to be made available in the near future. However, these players intend to focus primarily on operations in their existing circles and improve network coverage. They are also waiting for DoT to issue the final merger and acquisition, and spectrum sharing and trading norms so that they can plan their future strategies accordingly. Spectrum sharing and trading is particularly significant for these operators as it allows them to offer services in new circles without having to pay exorbitant prices for new spectrum.

Defying expectations, Tata Teleservices Limited aggressively pursued contiguous spectrum in the 800 MHz band and won airwaves in the high-ARPU circles of Andhra Pradesh, Delhi, Mumbai and Maharashtra, besides Haryana. The operator’s decision to acquire spectrum in three circles – Andhra Pradesh, Maharashtra and Mumbai – seems to be based on the fact that its licences are due to expire in September 2017.

Subscriber and revenue market share to consolidate further

In the spectrum auctions of the past three years, the three incumbents have significantly increased their holdings across bands. With large amounts of spectrum in their possession, they are well-positioned to dominate the wireless market in the near future, even though the industry continues to have about 10 players. Bharti Airtel, Vodafone India and Idea Cellular together accounted for over 70 per cent of the industry revenue for the quarter ended September 2014 despite having only 58 per cent of the subscriber market share. In 16 out of the 22 circles, they account for over 50 per cent of the total users.

With the continuous expansion of data networks, the incumbents have been attracting interest from a significant number of users. For instance, Idea Cellular had earlier been offering 3G services in collaboration with Bharti Airtel and Vodafone in the Delhi circle through an ICR agreement. However, after having launched its own 3G network on the 900 MHz band, Idea Cellular will not only be able to retain its existing customers but also attract new users. Similarly, Airtel has now launched 3G services on the 900 MHz band in the Kolkata circle, where it had previously been offering them through an ICR agreement with Vodafone.

In addition, it was only the incumbents who managed to buy spectrum in the 2100 MHz band in the 2015 auction, and they did so mostly in circles where they did not have spectrum. Consequently, they mitigated the risks associated with the uncertainty of ICR agreements, to some extent, by acquiring 3G spectrum in other circles. They now have the option of combining spectrum in the 900 MHz and 2100 MHz bands to offer improved 3G services, particularly in indoor areas and cell edges, using the dual-carrier technology. This will help the three operators create a dominant market position in the 3G segment, similar to the kind they had established in the 2G voice segment. Moreover, it will enable them to brace for the imminent competition from RJIL, which is expected to launch 4G services in the country.

RJIL, like the incumbents, has increased its spectrum holdings across bands. The company is well on its way to launching its much-awaited 4G services, and poses a significant threat to the leaders in the data services market. RJIL holds frequency airwaves in the 1800 MHz and 800 MHz bands, apart from a pan-Indian licence for broadband wireless access spectrum in the 2300 MHz band. The company intends to use FDD-LTE in the 800 MHz and 1800 MHz bands, and time division duplex-LTE in the 2300 MHz band to offer 4G services. However, given the scale of RJIL’s investments in its data network, it is not expected to indulge in a tariff war with the incumbents to increase its market share, but rather sell its services on the basis of a different business model altogether.

Significant increase in debt burden

With operators required to pay a huge sum of Rs 1.1 trillion over the course of the next 12 years, the debt burden of the industry, particularly the incumbents, is bound to increase manifold. The payments for spectrum acquired in the recently concluded auction, and for those conducted in November 2012 and February 2014, will leave the balance sheets of telecom operators highly leveraged. This will result in a significant rise in amortisation and interest expenses over the next few years, which will negatively affect the operating profit and net profit margins, even though this effect will be subdued in 2015-16 and 2016-17 owing to a two-year moratorium. According to Crisil, the debt to pre-tax profit ratio of Airtel, Vodafone and Idea is set to increase from 3.3 before the 2015 auction to 3.9.

However, the impact on the financial health of operators is not expected to be as negative as it had been in 2010, when most payments were funded by debt. This time around, they are not likely to fund spectrum payments mainly through debt financing, but use a healthy mix of equity and debt funds. In this regard, they have already raised much-needed capital through stake sales or the divestment of non-core assets. For instance, Airtel raised over $1 billion from the sale of its tower business in the African market to investors, and also sold stake in Bharti Infratel. Similarly, Idea Cellular and RCOM raised Rs 37.5 billion and Rs 61 billion respectively from the equity markets in 2014.

Operators are also likely to use their internal accruals and cash flows to fund spectrum payments. Their profits have soared tremendously over the past few quarters on the back of the stupendous growth in data service revenues. Given that such services are contributing a growing share to overall revenues, and are expected to witness massive traction over the next few years, operators will have access to significant cash flows from their operations. Nevertheless, the telecom industry’s overall debt burden is expected to go up significantly, which will curtail the ability of operators to invest in the expansion of data networks in the near term.

Gradual tariff increase

With debt levels expected to swell, operators will be left with no option but to raise tariffs. Industry experts are predicting a tariff hike of Re 0.02-Re 0.07 per minute for voice services. Data services could also see an upward revision in tariffs as operators look to capitalise on their growing usage. However, the tariff hikes will probably be gradual as any substantial increase would result in subscriber churn, which would be counterproductive. The entry of RJIL is also expected to put pressure on the incumbents to restrict tariff hikes.

Meanwhile, operators have limited options as far as tariff hikes are concerned. The Telecom Regulatory Authority of India has recently reduced the ceiling on roaming tariffs for calls and SMSs, which contribute about 20 per cent to operator revenues. The move will not only prevent operators from raising roaming tariffs, but will compel them to bring about a reduction, which will affect revenues. Operators are also increasingly facing intense competition from over-the-top (OTT) service providers, who have started offering both instant messaging and voice calling services. While the issue of net neutrality is still being discussed at the policy level, solutions other than revenue-sharing between OTT players and telecom operators can have major consequences for the latter.

Conclusion

The 2015 spectrum auction can be called a win-win for the government as well as the incumbent operators. The government secured Rs 107.90 billion as upfront payments from some operators, which helped meet its fiscal deficit target of 4.1 per cent. Meanwhile, operators did not just buy back spectrum in circles where their licences were due to expire, but also increased their spectrum holdings. Now that the auction has concluded, they will get down to the real business of expanding data networks and improving network coverage. However, their capex could take a hit in the near term due to significant cash outflows in terms of spectrum payments. Nevertheless, after securing spectrum and risk-proofing their licences for 20 years, the incumbents are expected to dominate the telecom market for years to come.