Spectrum Sale Didn’t Fail, But There Are 3 Important Lessons To Learn From It

The last thing one should do is call the recent spectrum auctions a flop. They may not have fared as well as the government hoped, but that does not spell failure. No auction that garners more than Rs 65,800 crore, an amount that’s more than the industry’s annual operating profits of Rs 50,000 crore, can be called a failure.

In fact, the auctions could well have failed but for the timely launch of Reliance Jio in September 2016, which forced incumbent operators to load up on 4G data spectrum. It is competition that helped the government garner such large amounts of money, not its pricing. Between them, Jio’s three main rivals – Vodafone, Airtel and Idea – bought over Rs 47,000 crore worth of spectrum.

What the auction gives us is useful lessons on the factors that should dictate future reserve pricing for spectrum. Here are some of them.

First, earnings at previous auctions should not be the primary basis for pricing the next auction. For example, the enormously successful 2015 auction garnered over Rs 1,10,000 crore. But in that auction operators who had completed 20 years (the life of the spectrum licence) were bidding for what they already were using. They were thus particularly keen to retain what was already theirs for fear of losing existing customers. Reserve prices must thus be based not only on the latest auction pricing, which may be determined by special circumstances, but through a moving average.

Second, the new 700 Mhz band, the most versatile on offer, was too highly priced, at over Rs 11,485 crore per Mhz. Any operator buying 5 Mhz of all-India spectrum would have ended up paying almost as much as what the government ultimately garnered from all bids at the recent auction. No operator was willing to risk his all to buy this band, which offers better coverage indoors and needs fewer booster towers for signals. Pricing the 700 Mhz at more than twice the 800 Mhz band was a mistake. A reserve price marginally above that of 800 Mhz, and involving part payments all through its 20-year lifetime, may have worked better. But the biggest reason why no one took even a nibble of 700 Mhz could be wrong timing. There will be takers for the 700 Mhz when the data market explodes and when the industry’s debt profile is in better shape. With nearly Rs 4,25,000 crore in debt, buying all the 700 Mhz bands on offer would have doubled the industry’s debt, assuming only 700 Mhz was bought this time. It made no sense for anybody to go for this band.

Third, high-priced spectrum will be bought when the rules for allowing its lease to other operators become fair and free. Once you buy a house, you would want to rent it and not expect the previous owner to claim a share of that rent. Spectrum sharing and leasing should be driven by operator economics, and not government revenue considerations.

The so-called failure this time is not a failure, but future ones could become failures if government fails to learn the lessons of October 2016.