Merge or Lose Out

To offer two
blocks or four slots? What base price to offer for the future auctions? Mergers
and acquisitions for winning operators? Delay of auctions; Spectrum pool; and
still fighting over auctions for 2G while nations of the world plan to launch
4G. This is the current scenario of India's telecom sector.

Operators have shouted themselves hoarse stating that the
delay in 3G auctions has led to business losses amounting to thousands of crores
of rupees. As for foreign players who want to enter into the Indian market, they
are watching and waiting and possibly slowly becoming uncertain of investing in
such a market scenario where confusion and uncertainty prevail, where there is
no clear policy, and where even the issue of de-linking licenses does not have a
clear ground.

Spectrum Hoarded?

Out of 121 new licenses issued by the telecom minister, A Raja, only
thirty-five circles have received services. With the present policy of spectrum
being bundled with licenses, this spells bad news as the scarce spectrum is not
being optimally used, leading to the present demand-supply gap.

According to Payal Malik, sr research fellow, LIRNEasia,
"It is difficult to verify whether the spectrum is actually being hoarded, but
given the way allocation has taken place, I won't be surprised if it is. In an
effort to eliminate competition, the existing players inflate subscriber
numbers. To add to this, the verification process is difficult and has to be
done by Trai which has not done anything about this issue till date." She adds,
"Only 5-7 MHz on an average is the bandwith provided per operator, which is very
little when compared to the 10-11 MHz allocated abroad. This in turn leads to
fragmentation of spectrum."

However, according to Pinal Patel, head, network planning,
Aircel, "Spectrum is not being hoarded as new operators are growing. They will
use up the spectrum alloted to them within one to two years, or else they will
resort to mergers and acquisitions in case they are not doing well."

On the other hand, Girish Trivedi, deputy director, South
Asia and Middle East, ICT practice, Frost & Sullivan feels that since spectrum
allocation is based on the previous policies, there are loopholes. "However,
there cannot be hoarding as we do not have as much spectrum as is available
internationally," he says.

The loopholes, according to him, have resulted due to us
having created our own methodology and not having followed international
standards. "Scarcity is an open debate. We have given out more spectrum than we
can afford. Thus, there needs to be discussions on limiting entry of new
players, since there is not even enough spectrum available," he says.

De-linking Licenses

De-linking of spectrum from licenses has been touted as the way forward and
a fair means for operators to provide a wider range of VAS to customers. It is
felt that operators should have the means to pay for the spectrum, and it should
not be given off freely with licenses as was the case earlier, especially with
the increasing scarcity of this resource. This will also ensure that spectrum is
being used optimally.

However, some analysts feel that de-linking should have
been introduced in the beginning, as today such a policy will affect certain
industry interests, especially greenfield operators.

According to Malik, "Spectrum should not be bundled with
licenses. Instead, DoT can charge a flat fee for licensing. Licensing should
just be a technical verification. There should then be bidding for spectrum in
the open market, and spectrum needs should be met from the secondary market (if
there is need to sell/buy spectrum from the other operators). Spectrum should be
priced properly; when it is linked with licenses, it leads to hoarding."

Satyen Gupta, ex-principal advisor, Trai feels that some
amount of spectrum should be both licensed and unlicensed as per the
international practice. He says, "Unlicensed spectrum will encourage innovation
and experimentation and added services. Ideally, there should be three slots of
100 MHz, that is 300 MHz of unlicensed spectrum. The rest should be licensed as
there is less supply and more demand."

According to a Tata Teleservices spokesperson. "Any new
entrant in the telecom industry can obtain a Special Purpose License (eg,
wireline only) without the spectrum by way of paying the lesser entry fee than
the present entry fee of Rs 1,651 crore. The Department of Telecommunications
should strongly consider this."

New Players

In this scenario, should spectrum be given to new players? If so how much?
And will they be able to optimally use the spectrum allocated to them? Industry
provides divergent views.

According to Nitin Gupta, partner, Ernst & Young, "I feel
no new players should be allowed to enter as the market is already overcrowded
and over-competitive. Only in India are there so many different operators.
Spectrum should be divided among the existing players. If not, then they will
bear losses and tariffs will increase."

According to Malik, "If licenses are given without
spectrum, it sends out wrong signals and delays competition. This is exactly
what has happened for a year and a half; there has been competition only on
paper, but not in reality."

Tata Teleservices feels that those new entrants who have
paid the stipulated entry fee of Rs 1,651 crore are entitled to start-up 2G GSM
spectrum and should be given the same immediately, even if those operators who
are hoarding additional spectrum have to be asked to return the same. This will
ensure that deserving operators are not denied their due right.

A spokesperson of the company says, "If you look at
today's scenario, four new players who have paid the entry fee are yet to get
the start-up spectrum in Delhi.

Gupta says, "New operators should be given the same amount
of spectrum as the existing players if they have paid the necessary dues. If an
operator has paid money, they will definitely use the spectrum, else they will
be under pressure. There would be a trade-off between the number of subscribers
and towers. As an operator gets more subscribers, they will add more towers."

Agreeing with him, Patel says, "It is obviously not
possible for new operators to give a fixed time for a specific subscriber base,
but with an ever-growing market, they will definitely be able to use their
spectrum. At the same time, a benchmark of more than say 5 mn subscribers per
circle, per operator should be followed, and there should be such restrictions
followed in each city. This is because density of subscribers in an area is an
equally important parameter, and a crucial decision factor for allotting
additional spectrum to established operators."

Spectrum Redistribution

In case licenses are not de-linked, there will be rollout obligations. Some
analysts suggest penalties to be enforced, like taking away extra/unused
bandwith for spectrum that is not used optimally. According to Kunal Bajaj, MD,
BDA Connect, "Open auction will remove all these problems. Adequate spectrum
will be allocated to the best player. However, there should be local benchmarks
like existing players should get the first right of refusal." According to Malik,
"There should be no restriction on services as this inhibits competition. In
fact, licenses should be given free, as they are meaningless without spectrum.
After trading or auctions, those players who have enough spectrum should be
allowed to use it the way they want."

In this scenario, Tata Teleservices has suggested the
formation of a spectrum pool, wherein players can pool their extra spectrum and
trade it in a free and fair market. Furthermore, it is argued that currently a
large chunk of the spectrum is being wasted as each operator requires start-up
frequencies as well as guard frequencies to ensure that there is no interference
between networks. "The concept of introducing a single radio frequency (RF)
network based on the maximum available spectrum and controlled by an independent
body will address this problem of scarce spectrum. It will provision the RF
network in such a way that the complete spectrum is available to operators a
on-required basis. This will resolve all the contentious issues related with
spectrum, and provide an efficient RF network to all the existing as well as
future service providers. This concept will drastically reduce the capital
expenditure and operating expenditure of individual operators, and result in the
most efficient use of the available spectrum," it said on its official website.

Malik explains, "I am in favor of re-sale of spectrum.
However, it depends on the micro market structure of pool for resale." However,
according to Satyen Gupta, "Whatever spectrum you can afford to put in a pool
should be de-linked from license, as this procedure cannot work while being
linked to a license."

The Delay

According to the calculations by Tata Teleservices, "6.2 MHz GSM spectrum is
the ideal allocation, and is as per the contracted amount. Else, there will be a
huge impact on both capex and opex payouts-running into thousands of crores of
rupees-if no additional spectrum beyond 4.4 MHz is given.

Delays in 2G allocation is delaying rollouts for voice,
leading to congestion problems like call drops, especially in urban areas.
However, Gupta believes that operators need not wait for additional spectrum,
but can instead make optimum use of their existing spectrum. He says, "There is
a trade-off between the spectrum, base station and technology. If you have less
spectrum, you can still provide more services by the use of better technology
(based on packetization), for example, IP. Another alternative is reuse of
spectrum by doubling the number of towers, which is almost like re-doubling
spectrum (frequency reuse). Fixed mobile convergence should also be used to
conserve spectrum."

According to another industry source who did not wish to
be named, "QoS will go down as the subscriber base will keep on increasing, and
at one point of time some operators may not be able to further add subscribers."

According to Gupta of Ernst & Young, "There is no effect
on subscriber capacity available, the main effect is on spectrum and capex; that
is if spectrum is less, capex will be more, and this capex impact can be
significant. Quality of services will also be affected in high density regions.
Capex may go up by 10-20%, and revenue costs will thus increase." However,
Trivedi of Frost & Sullivan argues that since there are only three slots in 3G,
there will be enough 2G spectrum; thus there will be no significant impact.
However, he feels that those with 2G will lose out subscribers to those who have
3G, and hence a new policy of mergers and acquisitions should take place to
ensure market conditions remain stable.

Better Models

While most industry players and research analysts feel that auctions are the
best policy for 3G, as well as for 2G spectrum allocation, as it has worked
abroad, some operators believe that spectrum trading or selling in an open
market is a better idea.

According to Gupta, "There are two models. The first one
is spectrum auction and trading. Let the industry players decide the right price
of spectrum, as this this will help avoid any confusion regarding price.
However, before that can be done, we have to bring all players to a level
playing field, so that there is no hoarding of spectrum. We have to revisit
criteria for allocating spectrum with room for any operator. Secondly, whatever
the policy of the past, today there should be auctions for 2G spectrum which
should be divided among the existing players instead of new players."

Bajaj feels that there are many elements to this.
"Firstly, as far as auctioning is concerned, there is the question of how to
define usage. Ideally it should be technology neutral instead of the current
policy today, wherein the government defines the spectrum usage. Secondly, there
should be an open policy for spectrum trading and sharing; prices should be
known to the market, and those not using their spectrum optimally can share
their spectrum," he says. Agreeing with him, Satyen Gupta says, "With this
policy, there will be optimum spectrum utilization."

Expert Advice

In an uncertain market where conditions change on a daily basis and policies
are unclear, operators are left to find their own path to keep up with an
expanding market and the demands of subscribers for internationally-offered
services. From competitive pricing to mergers and acquisitions, like in the
recent case of GTL winning the bid for Aircel's tower stake, operators will do
all they can for standing a better chance for fewer slots in the 3G auctions.
Despite cut-throat competition and regulatory policies, established players will
do all they can to win the remaining 2G spectrum, competing with greenfield
operators to offer better services with the existing restrictions. In this
scenario, it would probably be a good idea to have experts give some advice to
the operators.

While Bajaj of BDA Connect suggests an open environment,
where spectrum should be available optimally for 3G, BWA, etc. Malik feels that
the industry should think as a collective unit, instead of only putting forth
their own selfish interests. She says, "The first proposal by Ratan Tata for
spectrum was put forward in 2006. Delayed response has been equally due to
private business interests as well as the regulatory body. Foreign companies
have only been given stand alone 3G, and hence it makes no business sense to
offer 3G services using 2G spectrum for foreign players. In this way we are
restricting competition even before auctions are held."

According to Satyen Gupta, "Technology and service
neutrality should be the order of the day. The industry should use the most
efficient technology when they get spectrum and use fixed mobile convergence,
etc. There should be a trade-off between the amount of spectrum and the number
of towers, and the government should make more spectrum unlicensed." Another
suggestion put forth by an industry expert who did not wish to be named is that
we follow the Singapore model of FBO (facilities based operators) and
SBO(service based operators).

As Anil Kumar Sardana and Arun Kumar Singh in a concept
paper on 'Single Cellular RF network controlled by an independent body'
explained, "With the participation of a large number of SPs in each circle, it
is not feasible to allocate adequate spectrum to each, as per the international
practice, as sufficient spectrum is not available for each SP. At the same time,
it is not possible to reduce the number of SPs, as that will restrict healthy
competition. Thus, the concept of introducing a single RF network based on the
maximum available spectrum, and controlled by an independent body will address
this problem of scarce spectrum. It will provision the RF network in such a way
that complete spectrum is available to SPs, as on required basis. This will
provide an efficient RF network to all existing, as well as future SPs, and this
concept will help drastically reduce the capex and opex of individual SPs as
well, resulting in the most efficient use of available spectrum."

With the Indian telecom sector becoming increasingly
competitive in the last six months, it is hoped that a clear policy from Trai,
based on multi-farious suggestions on its consultation paper and a clear roadmap
will lead the way for India to use its technology to compete in an international
market that is both free and fair for all players.

Beryl M

berylm@cybermedia.co.in