Key steps to get this spectrum auction right

The government must avoid the 2016 situation, of a swathe of unsold spectrum block; reserve prices must be revisited

Published - December 22, 2020 12:02 am IST

The Union Cabinet has cleared the much-awaited auction of radio spectrum in various bands for commercial mobile services. Following this decision of December 16, the auction that will use the well-proven methodology of Simultaneous Multiple Round Ascending (SMRA) Auction will be the seventh of its type and is being held four years after the last one.

Based on the recommendation of the Telecom Regulatory Authority of India, the government is planning to auction spectrum in the sub GHz bands of 700, 800 and 900 MHz along with mid-band frequencies in bands of 1800, 2100, 2300, and 2500 MHz across the 22 Licensed Service Areas (LSAs) of the country. The total spectrum to be auctioned is about 2,251 MHz, compared to about 2,355 MHz put on the block in 2016. The cumulative reserve price — and hence the potential revenue accrual to the government at reserve prices — is about $50 billion. Total reserve price of spectrum put on auction in 2016 was about $90 billion while the realised value was just about one-tenth of that, with none of the 700 MHz spectrum band being sold. Hence, while the 2016 auction could be considered as a failure from the auctioneer’s point of view, will this auction scheduled in March 2021 be successful? There are a number of factors that determine the success of spectrum auction. First is the reserve price. Our research on a cross-country spectrum database shows that the reserve price significantly and positively correlated to the winning bid price. However, a higher reserve price also inhibits bidders from bidding for more spectrum blocks, resulting in lower amounts of spectrum sold. If the quantity effect is more than the price effect, then it results in reduced revenues for the government exchequer, as it happened in 2016.

Factor of VoIP subscribers

Second, the willingness to pay by the telcos depends on their position vis-à-vis Over The Top (OTT) providers who are providing substitute goods such as Voice Over Internet Protocol (VoIP); and capturing a greater mind share of customers while remaining relatively invisible to government regulators. Our research indicates that the rise of VoIP subscribers could have a positive effect on winning bid prices. However, the erosion of the position of telcos vis-à-vis OTTs in the context of their relationship in the overall digital value network of devices, connectivity and apps, could result in a lower willingness to pay.

Third, is the allocation of unlicensed spectrum for Wi-Fi. By off-loading mobile data, Wi-Fi supplements the carrier network and reduces the demand for mobile network capacity. A number of countries including the United States have unlicensed the V-band spectrum in 60 GHz — pencil beam band. Referred to as “wireless fibre”, the 60 GHz spectrum provides huge capacities in a limited area, ideally to be used for Wi-Fi and fixed wireless access. Wi-Fi 6 (a.k.a. IEEE 802.11 ax) that operates in the 2.4/5 GHz unlicensed band requiresadditional unlicensed spectrum allocation to provide Gigabit speeds. The more the unlicensed spectrum allocation, the lower will be the demand for licensed spectrum.

Spectrum visibility

Fourth, is the visibility of spectrum that will be up for auction, henceforth. While there is an indication by the government that the spectrum for 5G auction, namely 3.4-3.6 GHz, will be held in late 2021, the amount of spectrum that will be made available is not clear. There is still uncertainty about the release of 26 GHz by the Department of Space for mobile services. With this limited visibility, the bidders will be in a quandary whether to acquire the spectrum now, or wait for subsequent auctions. Further, some part of the current spectrum holding of all the operators is coming up for renewal in mid-2021, and hence there is additional pressure on them to retain them in the forthcoming auction.

The reserve prices of different bands for the forthcoming auction as recommended by TRAI indicate that the average price per MHz per population (a common metric used for comparing spectrum prices) is around $3 for sub-GHz band and $1.70 for mid-band. These are comparable to only some of the higher winning bid prices in other countries.

The right price

Hence a word of caution. Higher reserve prices, though they increase spectrum prices, may leave again a swathe of spectrum blocks unsold as in the 2016 auction. This will indicate a failure of the auction. Spectrum is a perishable scarce resource. If it cannot be used, then its value is lost. When the whole country is adopting a new norm for Work from Home due to the COVID-19 crisis, it is important for the government to ensure that the spectrum put on the block is sold successfully. Hence, we recommend the following before the auction begins:

A re-visit of reserve prices and lower it further, especially that of 700 MHz (even though it was re-estimated to be lower by TRAI) which is the “golden band” for covering the hinterlands of the country;

Releasing more unlicensed spectrum in 2.4/5/60 GHz for proliferating Wi-Fi as a suitable complement to [the] carrier network; this will also augment the deployments of the Public Wi-Fi project which the cabinet approved recently;

Provide visibility of future auctions, especially the quantum of spectrum that can be put on the block in 3.3/3.6/26/28 GHz;

Now that OTT firms have been brought under regulation under the ambit of the Ministry of Information and Broadcasting, the government should release guidelines on how they will be regulated and what will be regulated so that the telcos and OTTs can join hands to provide superior services for the benefit of the consumers.

Paul R. Milgrom and Robert B. Wilson, the Nobel Laureates this year in Economic Sciences pioneered the SMRA (partly with Preston McAfee) as a proven methodology for successful auctions. However, the methodology alone cannot guarantee a successful auction without the accompanying features mentioned above.

V. Sridhar is Professor at IIIT Bangalore. Rohit Prasad is Professor at Management Development Institute. The writers acknowledge the research support by dot.econ and the IIM Ahmedabad Telecom Centre of Excellence for their work

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