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After spectrum auction, major telcos armed for 4G war

700 MHz remains unsold on unrealistic prices. Another auction with lower prices being considered

India's latest spectrum auction began October 1 and ended after just five days of bidding. The government had hoped to raise $84 billion from the sale. But the auction ended with sales of just over $9.8 billion - and 60% of the total bandwidth on offer was left unsold. There were no bids at all for the expensive 700 MHz and 900 MHz bands. The 700 MHz band alone had accounted for about 70% of the government's expected earnings.

The industry has said financial strain on the industry and unrealistically high reserve price were the major reasons for the 700 MHz band not getting any bidder.

The latest auction was a far cry from the 2010 one which went on for more than a month, and the 2015 auction which lasted 19 days and 115 rounds.

Besides the 700 MHz and 900 MHz bands, the government offered spectrum in 1,800MHz, 2,100MHz , 2,300MHz and 2,500MHz.

Bharti Airtel acquired 173.8 MHz spectrum in 1,800/2,100/2,300 MHz bands for Rs 142.44 billion. The company now has 4G and 3G spectrum in all the 22 circles. According to Airtel, it has "secured its spectrum requirements for the next 20 years"

Vodafone, which spent about Rs 200 billion buying in the 1,800/2,100/2,500 MHz bands, will now have 4G airwaves in 17 circles, covering 90 per cent of its total revenues and 94 per cent of mobile data revenues.

Idea Cellular is paying Rs 127.98 billion to acquire 349.20MHz of spectrum in the 1,800/2,100/2,300/2,500 MHz bands, and is now able to offer 4G services in 20 circles. It says it has procured "a substantial part of its broadband capacity needs for the next decade"

Reliance Jio, which already had a 4G footprint across the country, has enhanced capacity by buying 269.2 MHz of additional spectrum in the 2,300/1,800/800 MHz bands for Rs 136.72 billion.

According to a Bank of America Merrill Lynch report, as the top three incumbent telcos now have adequate 4G spectrum, it will make it difficult for Jio to poach their subscribers. "We now see faster consolidation among smaller operators given the lack of data spectrum," the report said.

It added that the top three operators, however, still lack a sub-1 GHz 4G band that Jio has and therefore, there is a possibility that these companies may purchase spectrum in the 700 MHz band in future.

"With 60 per cent of the spectrum unsold, we expect the government to reduce prices of 700/900 MHz in future auctions to entice demand," it added.

"Telcos bought more spectrum than what we had anticipated, and at 50-60 MHz of average spectrum holding per circle, we do not expect Bharti and Jio to need additional spectrum in the near-to-medium term," said Goldman Sachs.

It added that while Vodafone and Idea bought 2500 MHz spectrum in the auction, neither of them has plugged all their 3G/4G gaps and instead consolidated holdings in many existing circles.

The auction witnessed aggressive bidding for 4G airwaves with 2,300 MHz band being fully sold out and intense bidding in some circles in the 1,800-MHz band. Vodafone and Idea, which have so far been offering 4G on 1,800 MHz, bought spectrum in the 2,500 MHz band.

"We are surprised by the demand for 2,500 MHz band given a still nascent device ecosystem in India," Goldman Sachs said. However, Himanshu Kapania, managing director of Idea Cellular, said the ecosystem would be developed fast as China and some other countries have already started deploying 2,500 MHz.

Tata Teleservices defended its spectrum in Mumbai winning a spirited bidding tussle with Idea Cellular in the 1800 MHz band, but at a huge cost - it shelled out over half of its overall auction spend of over Rs 40 billion on this circle alone.

However, experts say this would help the firm stay relevant to a potential buyer.

The outcome of this auction is a clear indicator that Tata Teleservices will now focus on being a niche operator at some key service areas where it has a chance of breaking even, said industry experts.

Tata Teleservices' only choice is to stay relevant to incumbents with a 4G play that could hurt others in key service areas such as Mumbai.

In Mumbai and Karnataka, Tata has over 10% revenue market share - a benchmark often used by experts to determine potential profitability.

Making airwaves in the 1800 MHz band was critical for Tata Teleservices that faces spectrum renewal in almost all its holding in the upcoming five years. To secure this, it had to overcome Idea Cellular that was looking to consolidate its position in the country's financial capital, but backed down.

Another auction for 700 MHz?

The 700 MHz band is considered the most efficient for 4G services and telcos had been eyeing it for long. But despite the government offering 770 units of this band, telcos refused to bid as they found the reserve price of Rs 114.75 billion per unit exorbitant. Said Sunil Mittal, CEO of Airtel, "Nearly Rs 600 billion for 5 MHz for 20 years?.These prices are unreal".

Industry executives believe that if the 700 MHz reserve price is reduced, telcos will participate in a fresh round of bidding. Analysts with HSBC predict a 15-20% cut.

"Such a move would price 700 MHz cheaper versus 900 MHz in select circles, after which some take-up in 700 MHz could be seen," HSBC added.

From Economic Times, Business Standard, Business Line

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