TRAI spectrum plan: Too late?

In July 2008, the Telecom Regulatory Authority of India (TRAI) made a number of recommendations to the government’s Department of Telecommunications (DoT) with regards to the allocation of 3G spectrum bands. However, it is understood that the DoT has only partially accepted some of the recommendations as it is intending to maximise economic return. After a number of disagreements and delays, the DoT eventually kicked off the auction process in April this year and has already managed to drive the cost of a nationwide 3G license to US$3 billion.

But TRAI seems to care more about long-term market sustainability than short-term cash injections to reduce the country’s deficit. In its final recommendations published this month, the regulator strongly suggests that the priority should be to reshape the existing market to make it more efficient.

According to TRAI, there is a clear need to bring in additional spectrum for commercial cellular services. Spectrum requirements by 2015 have been estimated in the range of 500-800 MHz – including 275 MHz for voice services alone – but current spectrum availability is only in the range of 287-450 MHz. In addition to spectrum scarcity, other market dynamics are challenging, such as the large number of mobile operators present in each service area as well as the need to expand network coverage to rural areas.

To better address those challenges, the regulator recommends that no more Unified Access Services (UAS) licenses should be awarded. 3G spectrum should be limited to existing Indian operators which are expected to use it optimally and to provide services to rural areas. TRAI therefore suggests a review of network coverage obligations with a more granular segmentation which will then define the cost of licenses. The regulator even suggests applying a 2 percent discount on annual fees for operators that have covered more than 90 percent of service areas with 500-2000 inhabitants (as well as imposing penalties if coverage targets are not met as per license obligations). This goes against previous methodology under which 3G spectrum allocation would be based on the number of connections held by each operator – which is distorted by the phenomenon of multiple SIMs per user.

In addition, TRAI recommends that spectrum in the 800/900/1800 Mhz bands should not be auctioned. Instead, re-farming the 900 MHz band for 3G services should be a priority; on the renewal of a license, spectrum held by an operator should be re-farmed by assignment of equal amounts of spectrum in the 1800 MHz band. Additional spectrum should be assigned depending on operators’ fulfillment of roll-out obligations. For instance, operators that have covered 50 percent of a district headquarter would receive the additional committed spectrum – 6.2 MHz for GSM and 5 MHz for CDMA.

On top of that, TRAI believes 3G license prices should be set at ‘the current price’ of 2G 1800 MHz bands. Operators would pay an additional one-time charge for the spectrum they hold beyond the committed spectrum – for spectrum held beyond 8 MHz, operators will have to pay 1.3 times the price of 3G spectrum. Uniform spectrum charges should be banned, TRAI argues; instead, operators owning larger spectrum should pay a higher fee than those with lesser spectrum. But large operator groups have already slapped this recommendation as Bharti Airtel and Vodafone described it as “perverse”, “illogical”, and “discriminatory”.

Finally, TRAI encourages spectrum sharing and merger and acquisition. Under this form of spectrum consolidation, there would be no distinction between wireline and wireless operations, and leasing of spectrum will not be permitted. The regulator suggested that spectrum trading should not be allowed since it could lead to anti-competitive behaviour which would see large operator groups prevent the expansion of smaller players. On top of that, TRAI suggests capping the market share of merged entities at 30% of the total connections base which could limit Bharti Airtel’s M&A activity since it already owns 22% of the cellular market.

It is clear that TRAI is trying to shape a landscape where mobile operators will ideally expand 2G and 3G network coverage to rural areas. At present, there is a risk that the high cost of a 3G license will lead to delayed and low 3G roll-out investments mainly focused on dense urban areas. As a matter of fact, the regulator noted that 15 years after the introduction of mobile services in the country, urban-centric roll-out obligations have led to a low 25 percent penetration in rural areas.

Nevertheless, such final recommendations are being published a little too late as the 3G auction process is expected to conclude in the coming weeks.