To be or not to be: India’s post-auction roadmap
On March 1st, India concluded its first spectrum auction of 2021, evoking a “best of times, worst of times” Dickensian image of the state of the telecom sector. India’s Department of Telecom (DoT), through a Notice Inviting Applications (NIA) issued in January 2021, had put up spectrum for auction in multiple bands, including 700, 800, 900, 1800, 2100, 2300 and 2500 MHz bands. These frequencies cut across 2G, 3G and 4G service bands and included both FDD (paired) and TDD (unpaired) bands.
There are several triggers for this auction but the most pressing one was that several of the licenses were coming up for renewal. There was also an element of political grandstanding, with the ruling dispensation putting up huge amounts of spectrum on the block despite clear indications of lukewarm interest from industry. One plausible reason for this exercise is that India’s regulator, the Telecommunications Regulatory Authority of India (TRAI), has long followed a policy of “indexing” auction reserve prices to those discovered in previous auctions. This has been a controversial policy in many respects and led to more contorted and forced consultations and policy justifications than a regular game of Twister. If the Government was facing a stalemate with respect to the ridiculously high reserve prices, the only way to break the policy logjam was to put up spectrum for auction, have the majority left unsold and then send it back to TRAI for a fresh start and new pricing.
The focus of India’s Telcos is on 4G, not 5G
First, the good news. The auction was not as bad as initially feared! If that sounds like a mixed bag or a less than enthusiastic endorsement, that would be true. While the auction netted the Government US$10.6 billion and was almost double initial estimates, the reality is that barely 37% of the total spectrum put up for auction had takers. The 700 MHz band saw no bids at all!!!
The main takeaway from this auction is that the focus of India’s telcos is 4G, and not 5G. With several licenses coming up for renewal, it was imperative that telcos bid on expiring spectrum to renew but also to consolidate with new holdings. The biggest bidders were Reliance Jio (US$7.8 billion), Bharti Airtel (US$2.55 billion), followed by VodafoneIDEA a distant third with bids worth US$272 million.
The high priority on 4G spectrum saw the highest bidding activity take place in the 800 MHz band. Jio had no choice but to bid aggressively to retain their holdings in this band as well as consolidate those that were “shared” with the now defunct Reliance Communications. For its part, Airtel has surprisingly bid for 800 MHz in some circles, boosting its coverage but also likely forcing Jio to bid more than they had originally envisaged.
There was also keen interest in the 2300 MHz band which should be viewed as a capacity booster for data traffic for both Jio and Airtel through carrier aggregation. The 2300 MHz band represented affordable spectrum for these carriers and both Jio and Airtel have rolled the dice in this auction. The common theme for both Jio and Airtel’s auction strategies was to shore up existing spectrum, acquire new frequencies to consolidate holdings per circle and boost capacity, and lay the groundwork for an eventual 5G network launch.
For its part, VodafoneIDEA (VIL) has taken a very frugal, optimization strategy to spectrum. Their public position has been that they have abundant spectrum and therefore were not hard pressed to bid aggressively. This is true, with VIL holding ample spectrum but there is no doubt that they would have had very limited means due to a stressed balance sheet.
Will there be a 5G auction in 2021? Not so fast.
5G spectrum was not a part of the recently concluded auction. The Government has already indicated its intent to hold a spectrum auction for the 3.5 GHz band in late 2021. However, we believe that this timeline has a very good chance of spilling into early 2022. There are a number of factors at play here, but we will focus on what we believe to be the top three challenges that need to be overcome.
The biggest issue continues to be the price of spectrum. The reserve price set by TRAI of 492 crores (US$ 66.5 million) per MHz of spectrum in the 3.5 GHz bands is, to put it mildly, prohibitive. The spectrum price has been the subject of much hand wringing and debate between the TRAI, the DoT and the telcos in India, none of whom have budged in their relative positions on the reserve price, and as a result, have put the auction in jeopardy. For perspective, India’s reserve price is roughly 8 times higher than Korea and 14 times higher than Australia in the APAC region.
The next issue relates to the quantum of spectrum being made available to the telcos. In the 3.5 GHz band, only 175 MHz is currently available due to prior allocations to the Department of Space, and Defense. With the three incumbent, private players the likely bidders and asking for a minimum channel size of 100 MHz per operator to make the business case, this would work out to a highly sub-optimal allocation of spectrum. DoT has reportedly had very fruitful discussions with their counterparts in Space and Defense but the reported breakthrough is yet to be made official.
Finally, there is the question about ecosystem readiness in the Indian context. At first glance, this would not seem to add up. After all, scale and availability are not an issue with equipment already available and all of the major vendors active in India. But there is more to this than meets the eye. Somewhat lost in the news flow around the auction were recent moves by both Reliance Jio as well as Airtel to showcase their “readiness” for 5G. Jio has claimed they have developed a full stack in-house, while Airtel has showcased its 5G lab in Hyderabad and a recent partnership with Qualcomm to stake its claim to readiness for 5G. The juxtaposition of India’s desire to build a local manufacturing base for telecom equipment, ongoing geopolitical challenges, as well as recent momentum behind technologies like OpenRAN and telco cloud, has opened up a window of opportunity for an Indian ecosystem to be created. There is also the question of India’s attempt to create a variant of the 5G standard called “ 5Gi” that is suitable for India’s unique conditions, with support for features like Low Mobility Large Cell (LMLC) that have been approved by the ITU. Such an ecosystem will need time before it can be deemed worthy of commercial deployment.
What’s coming next?
Industry watchers can expect a lot of movement behind the scenes over the next six months, ranging from policy initiatives to updates from the telecom operators. We are hopeful of the following happening:
Fundamental policy reform. There are several areas that need urgent reform. The current policy regime that indexes spectrum reserve prices to past proceeds must be junked and spectrum prices need to come down drastically. Beyond spectrum pricing reform, there also needs be a clear roadmap of spectrum availability for the next decade. The Government has already indicated its desire to address shortcomings in its implementation of the Rights of Way (RoW) policy on a nationwide basis, which will be crucial to enable speedy and cost-effective deployment of digital infrastructure that will be crucial to 5G. There have even been calls to reform TRAI itself.
Green shoots of recovery and a focus on broadband. India’s telcos are still heavily leveraged and capital starved. However, there are palpable signs of recovery. Recent tariff hikes, while not dramatic, have been enough to boost ARPUs and make an impact on the bottom line. The most likely driver of further tariff hikes will be VIL, if for no other reason that pure survival, and Airtel and Jio will be only too happy to follow suit. Beyond tariff hikes, there is an urgent need for a review and reform of taxation and other levies that are hampering the operations of India’s telcos. There will also be a major push on broadband connectivity, with investments in fiber to the home (FTTH) as well as a major push on Fixed Wireless Access (FWA).
A “Make in India” ecosystem will take root. With Government policies like the Production-Linked Incentive (PLI) scheme now made official, 2021 will be the first time that there is a serious chance of telecom manufacturing, beyond mobile phones, getting set up in India at scale. While Nokia and Ericsson already have manufacturing in India, we can expect significant investments from other vendors like NEC, as well as local vendors like Sterlite Technologies, as well as from contract manufacturers like Foxconn.