India would shoot itself in the foot with proposed 5G spectrum costs

The Indian government aims to make a startling INR9.83 trillion ($84bn) from its upcoming 5G-centric spectrum auction, a policy that will severely curtail the operators’ ability to invest sufficiently in new networks, or to build systems that could support the country’s lofty 5G ambitions.

Many operators admit it will take them many years to generate sufficient new revenue from 5G, or reduce sufficient costs, to balance the investment in the 5G networks and supporting digital platforms, spectrum and infrastructure.  Nowhere is this gap more yawning than in India, where operators have always been plagued by a combination of high spectrum costs, huge roll-out terrain and low ARPUs. That has resulted in under-investment in networks and consequent poor quality of service, which in turn encourages fees to stay low.

The vicious circle has been relaxed somewhat with the rise of data services supported by LTE, and by the recent wave of consolidation which has left three major national operators (Vodafone Idea, Bharti Airtel and Reliance Jio) plus the two ailing state-run providers, BSNL and MTNL. But the circle will not be broken until the Indian government starts to align its ambitious visions for 5G and national broadband, with its spectrum pricing policies. Time and again, huge reserve prices have been set for spectrum that is essential to the MNOs’ ability to deliver good quality coverage and capacity.

The result has been operators with insufficient funds left to invest in high quality cellular expansion, and the continuation of poor quality services and overstretched infrastructure. The high prices operators paid for 3G spectrum in 2010 meant they had very little left to bid in the broadband wireless auction that followed immediately afterwards, leaving the way free for Reliance Industries to snap up national 2.3 GHz holdings and enter the market with the launch of the highly disruptive 4G provider, Reliance Jio.

Now the pattern looks set to continue in 5G, despite the established operators being cash-strapped following major acquisitions, and the need to cut prices and increase quality, to fend off Jio. The Ministry of Telecom said it plans to sell a total of 8,600 MHz of spectrum this year, setting revenue targets of $84bn. Newly appointed communications minister Ravi Shankar Prasad says 5G trials will begin within three months and the auction will take place before the end of the year.

Regulator TRAI has proposed a per-MHz reserve price that averages out at INR4.9bn ($70m) for national coverage in the 3.3 GHz-3.6 GHz band (each of the telecom circles or operating regions has different reserve prices). Since the blocks on offer will be 20 MHz in size, nationwide holdings in this key 5G band would cost a minimum of INR98.4n ($1.4bn). Operators will be restricted to bidding for 100 MHz each. While a full allocation would transform an MNO’s spectrum position, finally giving it enough capacity to launch ‘true 5G’ services, it would cost INR492bn ($7bn).

This is out of kilter even with one of the most expensive 5G auctions so far, in Italy, where Wind Tre and Iliad each paid just under €484m ($543m) for 20 MHz of spectrum in the 3.7 GHz band, with the whole auction, including 700 MHz and 26 GHz licences, raising €6.55bn.

These prices were considered worryingly expensive, raising fears of delays or reduced investment in European 5G, and there have been similar criticisms of the recently concluded German auction (see separate item), which raised a similar total – €6.5bn ($7.3bn). Vodafone Germany paid a total of €1.88bn for 90 MHz of 3.6 GHz spectrum and an additional 40 MHz of 2.1 GHz spectrum.

These sums are dwarfed by the proposed Indian prices. Of course, Indian operators have lower roll-out costs, and a larger addressable market (1.2bn, the second largest in the world) compared to Italy or Germany.

But they also have those very low ARPUs – these have been driven down, after a period of recovery thanks to new data services, by the Jio-initiated price wars, though analysts expect revenues to stabilize from this year. A report from analysts at CRISIL predicts that revenues to the end of March 2020, the current fiscal year, will rise by 7% compared to fiscal 2019.

The recovery of revenues will be helped by rising data usage, but the big MNOs are also taking steps to end the price war and to focus on higher value customers – which will require investment in better quality of service and customer support. Vodafone Idea and Bharti Airtel have both recently axed their lowest cost tariffs to try to boost margins. Vodafone Idea has discontinued its INR199 ($2.87) per month tariff and its entry level price is now INR399 ($5.75) per month. Airtel has also decided to end any plans that cost less than INR499 ($7.08) a month.

However, with ARPUs at their lowest level for 10 years, there is plenty of ground to make up – CRISIL calculates that about 20% of potential revenue has been lost because of the price wars, despite the consolidation. Bharti Airtel argues that even a 7% increase would only bring it INR29bn in extra revenue, not enough to cover 5G spectrum and build-out costs. The Economic Times quotes SBICap Securities anlaysts Rajiv Sharma saying that Bharti will have to spend an extra $8bn over three years on greenfield 5G plus 4G network expansion, even for a fairly selective 5G deployment in terms of locations.

So the Cellular Operators Association of India (COAI) has led the call for TRAI and the government to rethink its spectrum pricing policies. The body’s Rajan Mathews said 5G spectrum in India is overpriced by 30% to 40% compared to international norms.