TV Ramachandran
Broadband India Forum

Maximizing benefits to Economy and Consumers from Spectrum in the 5G era Optimal Auction Pricing both Essential and Possible

It is inarguable that mobile spectrum’s greatest value comes from its usage rather than from the short-term revenues generated by its sale proceeds. In-use spectrum delivers established multiple socio-economic benefits that drive economic growth significantly. An idle spectrum is one of the greatest destroyers of value. Moreover, the loss is completely irretrievable and can never be made up later. Short-term revenue generation must therefore be balanced with the potential subsequent flow of severalfold higher gains to GDP growth and the multifarious socioeconomic benefits to the end-users. Auction designs and allocation processes that result in unsold and unused spectrum are therefore harmful to society and growth and need to be remedied on topmost priority.

Auctions are accepted to be one of the best ways of allocating the limited and important resources of a spectrum in an open and transparent manner while determining the true market value of the spectrum. Two key results would determine whether an auction has been successful or not. The first would be the sale of most, if not all, of the goods being put up for sale. Secondly, since one is looking to find the true value of the spectrum, one needs a result where the final clearing or winning price is substantially above the set reserve price (RP). As Hamlet would lament, “Ay, there’s the rub” since neither result is a shining characteristic of our Indian auctions till date.

Except in the 2010 and 2014 auctions, when artificial scarcity combined with license extension/renewal compulsions led to spectrum sale virtually under shotgun conditions, a large proportion of the spectrum offered for auction has remained unsold. In the 2016 Big Bang auctions where a total of 2350 MHz in seven bands were put up for auction in 22 circles, only 964 MHz, or barely 41 percent, got sold and thus the big bang ended in a whimper. Even after taking all the six e-auctions held since 2010 together, only about 60 percent has been sold. In the case of 700 MHz (very close frequency to the US 600 MHz) auctioned in 2016, nil quantity was sold – clearly a total failure. There is obviously much to be done to improve the effectiveness of our auctions.

It is not the case that Indian operators are flushed with spectrum and hence did not need to pick up more from the 2016 auctions. Even after those auctions, while India might get by for a narrowband age, it still needs an average of 20 MHz per operator to meet the current global average and is ill-equipped for the broadband era.

As stated earlier, the success of an auction is determined not only by the ability to sell a large proportion of spectrum up for auction, but also by the market/clearing price being significantly above the RP, viz. the auction process must help discover the true market price of the spectrum. In most cases, RP turned out to be clearing price. Hence, there was no market discovered price. In 2016 in India, 700 MHz got no takers at all; even the other bands saw a very poor response. There were only four circles in 800 MHz, six circles in 1800 MHz, 11 circles in 2300 MHz, and seven circles in 2500 MHz where spectrum was sold at a premium to RP. The average sale price was hardly 5 percent above the RP, that is, there was hardly any market discovered price in India. Moreover, the prices emanating out of past auctions are highly erratic and arbitrary. For example, the price of the 800 MHz band (with equal or better propagation characteristics) being valued at 50 percent of the 700/900 MHz band!

How did we come to this pass? In India, it all started with an overenthusiastic bidding by the operators in the year 2010 (3G and BWA auction) and became worse at the time of the renewal auctions of the 900 MHz band in 2014 and 2015. The 2010 auctions were held at the backdrop of the license cancellation when spectrum was earlier given to new operators at a subsidized rate (without auctions). This increased the number of bidders, thereby raising the price of the spectrum disproportionately high. In 2014, and 2015, the operators whose licenses were expiring had no choice but to bid an enormous amount to stay in business. Apart from these few instances, the spectrum auctions in India remained largely subdued resulting in a large quantum of unsold spectrum. But the RP always stayed high and was never curated to correct these abbreviations, resulting in huge chunks of unsold spectrum and whatever got sold was taken only at the RP. This high and distorted RP, coupled with forced bidding (to protect existing business), totally destroyed the value of spectrum acquired in the auctions. So, the prices discovered in the Indian spectrum auctions are not a true reflection of its value.

There is obviously much to be done to improve the effectiveness of our auctions and balance the socio-economic benefits over revenue maximization. The auction design has to change significantly before any new auction is announced and it can be optimized to meet public policy objectives. There is a need to set RPs at levels, which are high enough to keep non-serious bidders at bay and low enough to achieve vibrant price discovery and help make business case for serious buyers. There needs to be a meaningful correlation across bands based on factors such as efficiency, coverage, and existence of the eco-system.

There is a need to review the auction rules for RPs, which are out-of-line with international norms and result in non-discovery of market prices. Reserve prices should be set at levels that are high enough to keep non-serious bidders at bay, but low enough to achieve vibrant price discovery. In the past, the RPs were mostly linked to the most current auctions. This resulted in its exponential increase, as it was hardly ever corrected to curate market distortions. Hence, well-defined formulae based on sound assumptions will not only increase transparency in the system but will also empower the government officials with the ability to take the right decision. The formula for calculating RP must be declared in advance to avoid/minimize bidding distortions, promote responsible bidding, and ensure optimal prices.

We propose a model that corrects the past RPs to curate market distortions and also aligns them with revenue generating potential of the circle. The inputs needed for calculating RP for future auctions are:

  • Auction prices of all past years
  • Propagation weights of all spectrum bands
  • Cost Inflation Index for past years
  • Using auction prices adjusted to cost inflation and 800 MHz band (Rs Cr), the prices for all auctions adjusted to the year 2010, and mapped to the 800 MHz band can be calculated. The RP can be now determined by carrying out some simple steps over the information listed in the given table. These steps are listed as under.
  • Calculate the average price for all years and for all circles individually
  • Add the numbers in step 1 to get a single pan-India number
  • Readjust the price above (step 2) using the inflation index to map it to the current year
  • Multiply the number above with the average percentage revenue distribution across circles to arrive at the circle numbers
  • The circle price calculated above (step 4) is mapped to the 800 MHz band
  • Readjust the number above (step 4) with the band weights to arrive at the prices for the respective bands
  • Discount this number by a factor (anything between 20 percent and 50 percent) uniformly to arrive at the final RP across circles

The prices calculated above are not arbitrary but based on a clearly defined principle. One might choose to tweak these principles/assumptions, but once finalized these should not be changed randomly. Doing so not only curates distortions on account of irrational bidding but also corrects for value of the band and the revenue potential of the respective circles – lower bands are valued more, and so are the circles with greater revenue potential.

India is gearing up for 5G. The National Telecom Policy is expected to be out soon and provides a great opportunity to relook at the pricing of allocated resources and correct the anomalies that the sector is facing. If we can get pricing of spectrum resources right, we surely will be on the right track for ushering in 5G and the digital revolution!

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