Largest spectrum auction worth Rs 5.63 lakh crore kicks off today

Telecom companies are all set to battle it out today. This time, though, their warzone is not the market but the auction room.

The largest spectrum auction for over 2,354.55 mega Hertz (MHz) of airwaves in seven bands — 700 MHz, 800 MHz, 900 MHz, 1,800 MHz, 2,100 MHz, 2,300 MHz and 2,500 MHz – worth Rs 5.63 lakh crore at reserve price kicks off today and will go on for more than a week.

And, against the backdrop of the ongoing fourth generation (4G) or data war and muscled players such as Mukesh Ambani's Reliance Jio Infocomm Ltd (RJIL), Vodafone and Bharti Airtel in the fray, industry watchers are expecting one of bloodiest auctions.

A telecom expert, who spoke on condition of anonymity, said Reliance Jio, which skewed the telecom market landscape by announcing free voice service and pricing its 4G Long Term Evolution (LTE) data services at a fraction of what other players were currently offering, could "intentionally" push up airwave prices in many bands to outbid rivals and financially weaken them. He said Reliance Jio, which has spectrum in 850 MHz band and pooled adequate airwaves through an alliance with Reliance Communication (RCom)-Aircel-MTS combine, is not in dire need for more spectrum but it has the intent to make it expensive for others.

"They (Reliance Jio) don't have the need (for more spectrum) but they have the means and intent to make it expensive for other players," he said.

G Krishna Kumar, a Bangalore-based telecom expert, had a contrasting view. He did not see the government being able to garner its target revenue even at the floor price. "I am not expecting a blockbuster auction because of the changed industry dynamics, where spectrum trading and sharing have been allowed and merger and acquisitions (M&As) are happening. With these things in place, the need to acquire spectrum in the auction is not so great," he said. However, Krishna Kumar said the flipside of the same argument was that "the more the spectrum the merrier it is for telcos".

"Because you will always use it (spectrum) for providing additional services," said the telecom expert.

Even the earnest money deposit (EMD), which telecom operators commit upfront to show their seriousness for bidding for the radio waves, does not signal aggressive bidding. The government has collected a total EMD of Rs14,653 crore with Reliance Jio topping the list at Rs 6,500 crore, followed by Vodafone at Rs2,740 crore, Idea at Rs2,000 crore and Airtel at Rs1,980 crore. Tata Teleservices's EMD is Rs 1,000 crore, Reliance Communications' Rs313 crore and Aircel's Rs120 crore.

Since EMD is reportedly around 10% of what a telecom operator can bid for, many experts say it indicates that the revenue generated from the auction may well be below government's expectation.
One frequency band, which will be keenly watched by everyone, is 700 MHz, which is exorbitantly priced at Rs11,485 crore per unit. This band alone can fetch the government Rs4 lakh crore if the entire airwaves put on the block is sold.

Spectrum in 700 MHz band is one of the most efficient in terms of cost as it requires fewer Base Transceiver Stations (BTSs) for rolling out services. Despite its prohibitive pricing, some telcos could be motivated to bid for it. Given below is what could guide the top players to participate in this band.

Vodafone: They look to be serious bidders. Right before the auction, they have announced an investment of $7.2 billion in the domestic market. Telecom industry observers are expecting a large chunk of it to flow into spectrum auction. Its intention to come out with an initial public offer (IPO) some time next year, could also push it to stock up airwaves.

"I am presuming they (Vodafone) will see action because going to IPO without spectrum in 700 MHz band would simply not be viable," said a telecom expert.

One analyst said while the UK-headquartered telco had means, it did not have the need and intent for bidding in the 700 MHz band. A top-level executive of Vodafone, who did not want to be named, told dna the second largest telecom service provider was interested in bidding in several circles.

"Our auction team has put a strategy for the same in place," he said.

Reliance Jio –It doesn't have the need because it has plenty of spectrum in the 850 MHz band but it certainly has the means and it is in its interest to get people to buy 700 MHz spectrum because that will financially weaken its rivals further.

"They (Reliance Jio) don't have the need but they have means and they have the intent to make it expensive for other players. But they will be playing a very risky game because you end up actually buying (the spectrum)," said a telecom analyst.

Idea Cellular – It has the need but doesn't have adequate means. So, it's hard to guess know how they will play.

Bharti Airtel – It has the means but the least need for spectrum among all operators. "They already have enough spectrum. Although, 700 MHz is much better than the 900 MHz and 1800 MHz spectrum. The question is if they can make do without it (700 MHz). The answer is yes. Can they make do without it in this round? Again, the answer is yes. Will they need it sometime later? The answer is yes. So, they can afford to sit it out in this auction," said the same analyst.

According to him, the only two players who desperately need spectrum, come what may, are Tata Tele and Idea; "For Tata's a lot of spectrum is expiring soon".

The Department of Telecom (DoT) has come out with easier and more bidder-friendly norm to make the auction a huge success. The telcos will have rights over the airwaves won in the auction for 20 years. It has offered easier payment mode by staggering the instalments over a longer period and snipped interest rate to 9.3% this year against 10% in 2015. It has also reduced the lock-in period of equity in the company to one year instead of the earlier stipulation of a minimum period of three years or completion of roll out obligation, whichever is later.

In this year's Union budget, finance minister Arun Jaitley has estimated a revenue of Rs 98,995 crore from communication services. This includes proceeds from the auction, fees and other charges levied by the telecom department.