The 5G race begins!

The recent clearance by the Union Cabinet for auction for 5G spectrum is definitely a bold move by the government.

All the available spectrum in 600 MHz, 700 MHz, 800 MHz, 900 MHz, 1800 MHz, 2100 MHz, 2300 MHz, 2500 MHz, 3300 MHz, and 26 GHz bands is part of the auction. Overall, 72097.85 MHz of spectrum has been put to auction. The auction shall be a Simultaneous Multiple Round Ascending (SMRA) e-auction.

Spectrum is an integral and necessary part of the entire 5G eco-system. The upcoming 5G services have the potential to create new age businesses, generate additional revenue for enterprises and provide employment arising from the deployment of innovative use-cases and technologies.

The decision of the Cabinet to allow enterprises to obtain spectrum directly to set-up their own isolated network is aimed at enabling the development and setting up of Private Captive Networks to spur a new wave of innovations in Industry 4.0 applications such as machine to machine communications, Internet of Things (IoT), Artificial Intelligence (AI) across automotive, healthcare, agriculture, energy, and other sectors.

The upcoming spectrum auction has a few incremental positives for telcos. These include:
Spectrum prices for key 3300MHz and 28GHz are same as TRAI recommendation at Rs 3.17bn/MHz and Rs 70mn/MHz, pan-India, respectively. This implies telcos will spend Rs 317bn for 100MHz pan-India on 3300MHz band and Rs 35bn for 500MHz on 26GHz band. This is broadly in-line with ICRA’s estimates for Bharti and Reliance Jio (RJio).

Spectrum auction to begin on July 26 2022. DoT has released a notice inviting applications (NIA) for the auction of spectrum in 600, 700, 800, 900, 1800, 2100, 2300, 2500, 3300 MHz and 26GHz bands. As per NIA, upcoming spectrum auction will start from July 26, 2022. Other key dates are July 8, the last date for submission of application and July 22, the date by which earnest money must be deposited, and will indicate maximum spectrum payout for each telco. Mock auctions will take place a few days before the real thing, though it’s not clear what that will involve. The DoT has given until 22 June for any would-be participants to seek clarifications on the NIA.

Spectrum duration of 20 years implies lower spectrum payout. Spectrum final reserve prices for C-band (3300-3270MHz) is same as recommended by TRAI at Rs 3.17bn/MHz pan-India (Rs 317bn for 100MHz); however, DoT has notified that spectrum right-to-use duration will be unchanged at 20 years. Earlier, the government had hinted at increasing spectrum right-to-use duration to 30 years, and TRAI had recommended to increase reserve price by 1.5x in case of 30 years, which would have meant 50% higher spectrum payout for telcos. Thus, 20 years’ duration is positive for telcos, and significantly restricts the total spectrum payout. Final reserve prices for other critical bands 26GHz is Rs 69.9mn/MHz pan-India (Rs 35bn for 500MHz); and for 700MHz is Rs 39.3bn/MHz pan-India (Rs 196bn for 5MHz).

Payment options eased. Spectrum purchased in the upcoming auction will have two payment options, full or part upfront payment of total bid amount within 10 days of auction completion. Part payment should be made at least for two years’ instalment or multiple complete years thereafter. The buyer will have the option to avail moratorium for the corresponding number of years of payment; and payment in 20 yearly equal instalments with first instalment due in 10 days of completion of auction. The rate of interest of calculating instalment is fixed at 7.2%. Pre-payment of spectrum dues is allowed without any penalty.

Spectrum usage charges reduced to nil. This will significantly reduce the acquisition cost of fresh spectrum in upcoming auction. Bharti / VIL/ RJio paid SUC charges of 3.7% / 3.7% / 3.6% of total AGR in Q4FY22, and if the telco buys C-band and 26GHz, SUC should dip to negligible amount. SUC is calculated based on the weightage of spectrum quantity, and the corresponding SUC %; spectrum quantity purchased in 3300MHz and 26GHz will be huge; it will attract nil SUC, thereby, bringing down the total SUC % to a fraction of the current number.

Telcos are allowed to provide captive non-public network, and enterprises are also allowed to directly obtain spectrum from DoT. NIA has allowed telcos to provide captive non-public network (CNPN) to an enterprise using its network resources (including 5G spectrum). Enterprise can set up CNPN to establish their own isolated network via two routes – leasing spectrum from telcos for which DoT will issue spectrum-leasing guidelines, and obtain spectrum directly from DoT. In this regard, DoT will undertake demand studies and thereafter seek TRAI recommendation for direct assignment of spectrum to such enterprises. Large enterprises establishing isolated network (by obtaining spectrum directly) will accelerate ecosystem and use-cases for CNPN, and help telcos develop new market for medium-sized enterprises, says ICRA.

The spectrum surrender norms are without penalties:

• Telcos are allowed to surrender spectrum that will be auctioned after a minimum period of 10 years from the date of acquisition.
• Spectrum bought in previous auctions cannot be surrendered;
• Telcos need not pay any future instalment post spectrum surrender;
• Pre-payment made towards the surrendered spectrum will not be refunded, and
• Telcos will be barred from taking part in the auctions for surrendered band in particular circle for the next two years.

Moving forward, telcos will now be seen brokering important, relevant partnerships that can help them secure and retain lucrative enterprise business and not miss out on the business growth opportunities that are emerging in the enterprise services sector. They have already been forming partnerships with the hyperscalers, such as Amazon Web Services, Google Cloud and Microsoft Azure to develop affordable and scalable end-to-end offerings that can meet the evolving needs of enterprise users.

Airtel has partnered with Nokia to offer LTE private networks to enterprises. Airtel and Tech Mahindra have also announced a strategic partnership to jointly develop and market enterprise-grade digital solutions across 5G, private networks, and Cloud. Vodafone Idea has partnered with Athonet, a private LTE and 5G solutions provider. L&T Smart World & Communication and Vodafone Idea have created a use case for a private 5G enterprise network in India. Global firms, Verizon and Capgemini are also optimistic about 5G private networks in India.

To maximise their opportunities, telcos will now develop offerings that deliver scalability to businesses, have a global footprint, which include cloud- and edge-computing capabilities, and incorporate data analytics applications.

Tech companies maintain that private 5G networks will lead to increased productivity for enterprises and drive revenue for telecom service providers. A private network uses cellular technology to create a dedicated local area network with unified connectivity within a specific geographic area. It is intended for non-public use, especially for large manufacturing complexes and enterprises.

Different enterprises will have different needs and priorities depending on their business and size. They can deploy their own private 5G network or outsource it to a telecom service operator while deploying it affordability for small businesses.

“The spectrum auction for 5G services heralds the start of a new era for Indian communications. India has its own stack of 4G like radio, equipment, and handset. 4G is ready to deployed in the field and 5G is ready in the lab, and 5G will be ready to deploy in March 2023.”

EXPERTS SPEAK

“The spectrum auction for 5G services heralds the start of a new era for Indian communications. India has its own stack of 4G like radio, equipment and handset. 4G is ready to deploy in the field and 5G is ready in the lab, and 5G will be ready to deploy in March 2023.”
Ashwini Vaishnaw, Minister for Communications, Electronics & Information Technology and Railways.

“It’s a forward looking step and the harbinger of digital transformation which is critical for Digital India. It will make Indian enterprises globally competitive, will boost Atmanirbhar Bharat and industry 4.0.”
T V Ramachandran, Chairman, Broadband India Forum

““TRAI has come out with recommendations of relaxed payment terms, which allow telcos to pay for the spectrum in 20 instalments, thus ensuring very low upfront payment. This also avoids any dent on the liquidity position and is also likely to boost participation. This makes the basis for ICRA assumption of the participation in the upcoming spectrum auction to be around Rs. 1.0–1.1 lakh crore, in which the upfront payment is likely to be close to Rs. 10,000 crore only. Adding this to the existing payments, the industry needs to shell out only Rs. 17,000 crore annually toward spectrum instalments, till the moratorium ends.

The telecom operators implemented a round of tariff hikes in Q3 FY2022, which, coupled with consistent upgradation of subscribers to 4G from 2G and increase in usage of telephony services, is expected to result in improvement in industry ARPU (excluding BSNL) to around Rs. 170 by the end of FY2023. The industry is expected to report a growth of 10–12 percent in its operating income in FY2023, which will translate into OPBDITA expansion by 15–18 percent. Industry consolidated revenues are expected to be around Rs. 2.6–2.7 lakh crore with OPBDITA of around Rs. 1.2–1.3 lakh crore for FY2023. These are likely to translate into a ROCE of around 9–10 percent for FY2023 for the industry.”
Ankit Jain, Vice President and Sector Head, Corporate Ratings, ICRA Ltd.

“Wide availability of spectrum across all bands is encouraging as potential bidders can opt for bands and quantum as per their strategy. Having said that, the base price remains an issue for the bidders who were expecting a much lower rate. Clarity around captive spectrum allocation to enterprises directly has been another issue,”
Jaideep Ghosh, COO, Shardul Amarchand Mangaldas & Co.

“The scrapping of the SUC is one of the key highlights of the 2022 spectrum auction NIA. SUC paid by operators currently varies between 3 and 5 percent of adjusted gross revenue (AGR), depending on the year of acquisition and the zero percent SUC will be a welcome relief to operators and enable a faster 5G rollout.”
Prashant Singhal, EY Global TMT emerging markets leader

“The roads are now clear for the 5G auctions. This is probably one of the most awaited spectrum auctions which will bring significant advancements for the industry and the consumers. The good part is that the spectrum across bands will go under the hammer shortly. The government has also announced auction of mmWave band which will not only help in unlocking the true potential of 5G but will also help strategically manage costs for the operators.

Another aspect which will spur a good auction is that the operators will have the flexibility to surrender the spectrum after 10 years without any liabilities. To boost technological advancement the government has also announced development of private networks which will pave the way for Industry 4.0 applications. Together these steps will open up newer avenues for deeper penetration and access, rich user experience via consolidation as well.”
Peeyush Vaish, Partner and Telecom Sector Leader, Deloitte India

CT Bureau