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5G Spectrum Auction – A Spectacular Bidding

5G

5G Spectrum Auction in India concluded on seventh day of the sale with the government netting a record over 1.5 lakh crore, government and industry officials said.

The evolution of mobile communication technologies has been nothing short of phenomenal. After introduction of the first generation network in the early 1980s, we are now knocking the doors of fifth generation communication systems that are designed to deliver ultra-fast internet and multimedia experience for customers.

Communication airwaves, also known as radio frequency spectrum are an important resource for mobile communication technologies

Before we get in to the topic lets discuss what Spectrum Auction is.

Spectrum

Spectrum is the intensity of light as it varies with wavelength or frequency. An instrument designed for visual observation of spectra is called a spectroscope, and an instrument that photographs or maps spectra is a spectrograph.

Auctions
An auction is usually a process of buying and selling goods or services by offering them up for bids, taking bids, and then selling the item to the highest bidder or buying the item from the lowest bidder.

India and Spectrum Auctions

  • From mobile phones to police scanners, TV sets and radio, virtually every wireless device is dependent on access to wireless spectrum.
  • However, radio spectrum is not uniformly applicable, physical and natural conditions can constrain its application to some technologies. To optimize its use radio spectrum is divided into bands of varying frequencies.
  • Usually, low frequency spectrum is preferred for better propagation characteristics, while high frequency spectrum is deployed to push greater volumes of information in each frequency band.
  • In India, the Department of Telecommunications (DoT) conducts auctions of licenses for electromagnetic spectrum. India was among the early adopters of spectrum auctions beginning auctions in 1994.
  • A telecom company that wishes to offer services in any of the 22 telecom circles in India must purchase a Unified Access Services (UAS) license to operate that circle. Licenses are awarded by auctions.
  • The UAS, introduced in November 2003, is valid for a period of 20 years, which can be extended by an additional 10 years once per license per circle.
  • The first telecom spectrum auction in India was held in 1994.
  • The government divided the country into 23 telecom circles and awarded licenses and spectrum to two operators per circle. In the four metro circles – Chennai, Delhi, Kolkata and Mumbai – the DoT fixed several prerequisites for potential bidders to meet in order to be eligible for the auction.
  • The criteria included financial resources, reliability, and investment in research, as well as specific details such as rate of network rollout, pricing, quality, and competitiveness.
  • In India allocating and managing spectrum has often been at the core of disputes between the operators and the state. India has, over time, moved away from the subjective administrative assignment to a market based auction mechanism to assign spectrum under what may be called a ‘quasi-property rights’ regime.
  • This means that the operators’ rights to alienate the frequency are subject to various government-imposed limitations regarding trading, leasing and use.
  • By 2016, the spectrum management regime in India had become much more flexible compared to the past. To a large extent these measures helped address the twin problems of transparency and scarcity in the market for spectrum in telecom.
  • On the other hand, auctions created an unintended consequence. Spectrum acquisition increased costs to operators even in the face of significant competitive pressure from within the sector. It also triggered consolidation.
  • The number of operators has declined from a peak of 12 operators per circle to an average of 5. In order to ease the pressure on operators the government is considering moderation of spectrum trading rules and regulatory charges.

Spectrum Allocation and Management

The advancement in new technologies and proliferation of wireless communications has made spectrum management and allocation a critical task.

Governments and regulators have to balance the twin objectives of resource mobilization and public welfare.

The three basic models for regulating spectrum are

  • a command and control model
  • a market-oriented model or
  • a generic licensing or common use model

Types of Spectrum Auctions

  • Since 1990s, auctions have become the preferred method of assignment in several countries. However, auction design is also at the center of academic debate.
  • The choice of auction format is crucial since it can influence auction outcomes as well as the resulting competition.
  • The popular auction formats include simultaneous multiple-round ascending auctions (SMRA), sealed bid auctions and combinatorial clock auctions (CCA).
  • In SMRA, the most established auction format, related lots are auctioned simultaneously in a sequence of rounds. One of the primary drawbacks of SMRA is the existence of ‘aggregation risk’ i.e. a bidder may end up with certain superfluous blocks of spectrum.
  • The CCA is a variation of SMRA in which bidders bid on packages. It is a complex design that addresses the risks of SMRA while building on its strength.
  • The sealed bid auction permits regulators to include non-financial criteria in the selection process but it does not permit a bidder to see how spectrum is being valued by other auction participants.
  • In fact in large markets with many bidders and regional licenses there may not be a single optimal auction design.
  • It is imperative that auction design considers the local circumstances to achieve policy goals.

Challenges for Spectrum Auctions in India

Low fiberization:

  • Currently, 34% of the mobile towers are fiberized and the government wants this number to increase to 70% by the end of the 2023-24 financial year.
  • This is necessary to roll out 5G in an efficient manner and will also boost 4G services. But there are several challenges to achieving this, starting from the right of way (RoW) rules and approvals to lengthy and complicated bureaucratic procedures and lack of skilled manpower.

Bidding intensity:

  • The base price reduction is positive news but not enough to give breathing space for an effective rollout and expansion of 5G services in the country.
  • Considering the financial stress of the operators and their inability to raise tariffs to more profitable levels due to fierce competition, keeping a high base price will adversely impact participation.
  • It may be noted here that Vodafone Idea is yet to attract noteworthy funding and is continuously losing subscribers to Airtel and Jio. This may result in muted bidding intensity and the auction process may become a battleground for only two operators — Jio and Airtel.

Trends in 5G Auctions

  • With 24.5 million people expected to be subscribed to at least one 5G service by the end of 2021 and an astounding 1.1 billion by 2025, the next generation of mobile services is likely to transform consumer experiences and business utility across the world.
  • The successful rollout of 5G services relies on timely access to the right amount and type of spectrum. Spectrum in the frequency range 3300 to 4200 MHz is likely to emerge as the primary band for 5G.
  • A total of 45 countries are either formally considering introducing certain spectrum bands for terrestrial 5G services, holding consultations regarding suitable spectrum allocations for 5G, have reserved spectrum for 5G, have announced plans to auction frequencies or have already allocated spectrum for 5G use.
  • Of these, sixteen countries have announced formal plans for allocating 5G suitable frequencies by the end of 2020 and thirteen countries have announced formal plans for allocating technology-neutral frequencies between now and the end 2020.
5G Auction in India
  • Market leader Reliance Jio has emerged as the most aggressive bidder, followed by second ranked Bharti Airtel, with cash strapped
  • Vodafone Idea bidding for 5G airwaves in its priority circles. New entrant Adani Data Networks is said to have bid for 5G airwaves in the 26 GHz band to be used for its captive private networks.
  • The auctions over the last few days was driven by intense bidding for 1800 MHz airwaves in the key Uttar Pradesh (East) market.
  • The per unit price of 1800 MHz spectrum in UP-East circle jumped to Rs 160.57 crore — almost 76.5% higher than its Rs. 91 crore per MHz base price. The current auction price for 1800 MHz in the circle is also well above the Rs. 153-crore per MHz base price of the March 2021 sale.
  • Analysts estimated that Jio’s aggregate spectrum buys is upward of Rs. 84,500 crore, while Airtel’s were estimated above Rs. 46,500 crore. Vodafone Idea’s spends are pegged over Rs. 18,500 crore, while Adani is said to have spent Rs800-900 crore.
  • The mop-up from the 5G spectrum, capable of offering ultra-high speed mobile internet connectivity, is almost double at Rs 77,815 crore worth 4G airwaves sold last year and triple of Rs 50,968.37 crore garnered from a 3G auction in 2010.
  • Reliance Jio was the top bidder to the airwaves capable of offering speeds about 10 times faster than 4G, lag-free connectivity, and can enable billions of connected devices to share data in real-time. It was followed by Bharti Airtel and Vodafone Idea Ltd.

Conclusion

  • Designing spectrum auctions are always fraught with risk. The over reliance on reserve prices may not necessarily yield successful market outcomes.
  • There are several other factors that influence auction outcomes such as bidder turnouts, market conditions and choice of auctioning agent.
  • The auction design is also crucial. India currently follows a Simultaneous Multi-Round Ascending Auction (SMRA) which, while providing the option of price discovery, also poses an aggregation risk.
  • Many countries use a combination of formats for auction of spectrum. A cookie cutter approach may not always work.
  • Spectrum auctions in India should try to balance transparency in allocation and revenue expectations for the government.
  • Setting high reserve prices could actually reduce government revenue and stifle sector growth. Building trust between operators and government is crucial for the long run viability of the sector. This deficit needs to be bridged, now.
  • India’s telecom industry needs an action plan that simultaneously sees the development of the entire ecosystem. Striking a balance between revenue generation through spectrum auction and long-term sustainability of the telecom sector is crucial.

  • The potential of what 5G technology has to offer is unprecedented. The policymakers, operators, hardware vendors and enablers should solely focus on the advancement of the technology and the proliferation of one sector should not come at the expense of the other.

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