Spectrum (Mis)Management: Why India’s Approach to Reserve Pricing Needs a Revisit

Author: Manvee Kumar Saidha

5th year student at School of Law, Christ University

I. Introduction

The recent focus on the Indian Telecom Sector has appreciably increased on account of the 100% FDI approval. In order to ensure that the intention behind this endeavour is successful, it is pertinent that internal concerns be resolved before increased sectoral participation. One of the chief issues remains the continually miscalculated and seemingly unrealistic reserve pricing. This translates to service providers being unable to afford the exorbitant reserve prices and, simultaneously, large spectrum portions remaining unsold. Thus, it has negatively impacted service providers and the revenue-earning potential of the government alike. The spectrum market dynamics are in immediate need of a shift, which is purposive and strategic. In this light, the framework of spectrum auctions in India and the substructure of reserve pricing thereof ought to be revisited. A socio-economic analysis of the current policy suggests setting a smaller reserve price – a step that stands to benefit the Telecom sector holistically.

This article navigates through the determination of reserve prices created in spectrum auctions and the failure of auctions in India due to such unadvised prices. On establishing an immediate and apparent need to review the auction rules for reserve prices, the author concludes by providing suggestions for a more efficient auction framework.

II. Spectrum: A Brief Overview

Spectrum, in reference to telecommunication, refers to a range of radio frequencies or waves allocated to sector-participants to facilitate communication. Though they are merely airwaves, simultaneous sending of signals on different frequencies can lead to interference. This limits the availability of frequencies, thereby requiring that the spectrum be calculably divided and allocated to different service providers. Various methods are utilized for such allocation around the globe, including allocation by way of administrative processes, lottery systems, beauty contests, first-come-first-serve schemes, and auctions, among others.

The first spectrum auction in India took place in 1994 (followed by auctions in 1997, 2000, and 2001). Afterwards, the Indian government assigned spectrums via the administrative allocation model until 2010, when the method of ‘auctions’ resumed with 3G allocation. Further, following the 2G Spectrum Scandal and 2012 Supreme Court decision, spectrum auctions have become the norm. While there is no inherent issue with the practice of spectrum auctions, its benefits can be lost when they are not adequately planned. In this context, the Indian government’s auction design which embraces artificially inflated reserve prices presents a grave concern vis-à-vis spectrum management.

III. Reserve Pricing: Why the Reservations?

Simply put, a reserve price is the minimum acceptable amount to a seller in an auction, i.e., the minimum price at which the seller will place the winning bid. The Telecom Regulatory Authority of India (TRAI) sets the reserve prices for spectrum auctions in India. The significance of setting an optimal and fair price lies in the fact that any disproportionate extreme stands to distort market coherence. While a low reserve price clubbed with a lack of competition is likely to lead to revenue loss for the government, a high reserve price will create an entry barrier, leading to inefficient market allocation/reallocation. Various antitrust scholars have discussed how elevated reserve prices in India lead to decreased market competition and weaken the ability of telecom service providers to invest in rural areas. Thus, escalated reserve prices – which are not reflective of true market conditions, inter alia stand to disturb competition dynamics in the telecom sector.

Considering this, a holistic approach – one that factors in government revenue and stakeholder benefit – is key to the overall advancement of the telecom sector. Unfortunately, India’s spectrum prices have always been much higher than those charged globally in the spectrum auction, and change is yet to see the light of day. Even recently, the Cellular Operators’ Association of India (COAI) identified that the price of 5G spectrum in India was prohibitively expensive” and 30-40% higher than global rates. While government analysis indicates that reserve price is a function of the data available to the seller, which includes the statistics of previous auctions, prevailing market conditions, cross-reference to equivalent goods, etc., TRAI has refused to share details of the reserve price calculation methodology. The refusal forces one to question the motive behind concealing the (reasonably?) deduced modus operandi for determining the reserve price.

Further, issues with such a reckless approach can be identified in reference to the economics of the market. Inflated reserve prices are bound to result in the goods (spectrum, in this context) going unsold or being sold at such exponential prices that quality and accessibility are unfavourably affected. The former situation simultaneously endangers government revenue and consumer experience while the latter leads to decreased affordability and consequently lower market demand, thereby impacting service providers and consumers in the process. Consequences are not limited to speculation, and evidence of this effect exists for the Indian telecom sector. The share of the spectrum that goes unsold has consistently increased from 2010, with the average over the years being 38%. In more alarming news, the 700MHz spectrum, introduced in the 2016 auctions, remains unsold till date owing to its exorbitant reserve price. In addition to setting the stage for government debt, Indian operators have 20 MHz spectra less than the global average on account of non-affordability. This fate is not unique to India. As highlighted in Broadband India Forum’s (BIF’s) Report, Australia’s unrealistically high reserve price resulted in one operator quitting before the auction. This led to a valuable portion of the 700MHz spectrum being left unsold and unused, affecting market competition. In the European Union as well, research suggests that some countries had set reserve prices for 4G spectrum so high that they “choked off demand”. The exaggerated predetermination of reserve prices thus leads to an apparent case of lose-lose whereby neither party to the transaction profits, and the end-consumer is at the receiving end of limited and expensive services.

Proponents of the beauty contest method emphasize the aspect of customers having to bear the cost of increased spectrum prices – a consideration that must receive significant attention in India, which has a large, heavily communication dependent, low-income population. Despite TRAI purporting in its Consultation Paper that ‘efficiency’ and ‘equality’ are the cornerstones of its efforts, the text is yet to transition into practice. It has been found that reserve prices have been continually increasing disproportionately over time, by factors as high as 72 times. Researchers find it more appropriate to refer to the process as lottery-based rather than an auction. Moreover, the inability to secure bidders for scarce spectrum suggests an auction design that prioritizes government revenues over serviceability, optimal division and improved usage. In a Thailand-centric comparative research article based on the 2.1GHz-Spectrum auction, even international scholars identified the manifest misdirection and commented that the Indian auction rounds were “designed to maximize revenue while sacrificing efficiency“. Furthermore, with just three major players remaining in the market, the objective needs to shift to selling all the spectrum put-up for auction. Acquiring spectrum will help service providers to enhance consumer experience and positively contribute to the country’s digital economy.

IV. The Way Forward

Spectrum sale is a major revenue earner for governments, and an optimal selection of reserve prices will help in increasing such revenue. As adeptly put forth by TRAI itself, “unlike many other natural resources, it (spectrum) can be repeatedly reused and hence does not deplete. However, it has been considered as a limited – even scarce – natural resource because, given present technology, there is only a finite portion available for being put to valuable use at any point of time and thus, its valuation gains importance.” In this regard, regulators must be mindful that a spectrum’s greatest value comes from its usage instead of its sale, which is only a source of immediate or short-term revenue. Research, in fact, has proven that the expected gain from setting a small reserve price exceeds the expected loss. Moreover, just as with any other commercial entity, an increased financial burden on telecom service providers will steer their endeavour towards cost-cutting. The resultant decrease in quality, heightened prices, and lack of innovation will ultimately harm the end-users.

Since auctions are more transparent than administrative schemes that may fall victim to corruption, they have become the sought-after resource allocation mechanism. India, as a patron of spectrum auctions, must utilize this platform to breed competition. The entry of new players will foster sectoral development and intrinsically invite higher bidding amounts, thereby possibly even increasing government revenue. Thus, while the suggestion is not to settle at a ‘small’ reserve price, it must not be arbitrary and should be based on a fixed set of parameters laid down by TRAI in advance. This would decrease, if not eliminate, the information asymmetry between the telecom operators and regulatory authorities. Moreover, increased clarity in the spectrum auction process will inspire the confidence of service providers and stimulate a responsible and competitive affair. This would translate to tangible benefits for the consumers, including alternative services and easier switching infrastructure, while also aiding the country’s overall digital advancement. Though revisiting reserve prices may alone prove exiguous in revamping the design of spectrum auctions, it is a definite step forward in facilitating a win-win situation – and therefore warrants serious consideration.