Financial Daily from THE HINDU group of publications
Thursday, Jun 02, 2005
Info-Tech - Insight
3G: Questions crowd the spectrum
Though TRAI's proposal to allocate spectrum in the 2000 MHz band for 3G with zero entry fees appears well intended, it is imperfect on several counts. In the two weeks since the TRAI recommendations have come into the public domain, three contentious issues relating to the process of opening up 3G services in the country are being debated on. These are:
It is crucial for the Government to address each of these core issues comprehensively before it starts allocating 3G spectrum to existing service providers.
3G, an extension of 2G services
The regulator has recommended that 3G spectrum (in the IMT-2000 band) be allocated as an extension of 2G services to the existing mobile operators, as this will help the Government reach the mobile subscriber base target of 200 million by 2007.
Moreover, TRAI proposes to open up the 3G spectrum, as there is a better chance of allocating this faster than the 2G spectrum in the 1800 MHz band to existing mobile providers. Since this is only a stopgap arrangement, TRAI has indicated that there is no need for a separate 3G-spectrum policy at this stage. However, these arguments are flawed on several counts and will have to be reviewed by the Government until a comprehensive policy is worked out. TRAI's recommendation, in a sense, almost sounds like Marie Antoinette, suggesting, "Let them eat cake" (read 3G spectrum) when the starving masses in France demanded bread (2G spectrum).
If 2G operators are offered spectrum in the 3G band, their obvious priority will be to start 3G service. And this, in effect, will become the de facto policy governing 3G service and will be difficult to shake off at a later date, whenever the Government decides to frame a comprehensive 3G-spectrum policy. However, to be fair to TRAI, it has recommended this strategy though it goes against international telecom practice owing to the lack of spectrum availability in the 2G band. After all, there is no country that has treated 3G as a continuum of 2G, and TRAI has indicated as much in its recommendations.
National policy on 3G
There are two key assertions that TRAI makes in the course of its recommendations. One, 3G spectrum and licence globally (be it Europe, the US, Hong Kong, Malaysia, Australia or Singapore) have been issued separately from 2G. And, two, the nature of 3G service is distinct from that of 2G. While 3G is predominantly driven by bandwidth rich, high-speed data services demand, say, from multimedia messaging or video/audio streaming of movies or music, 2G has been dictated mainly by voice and low data services such as short messaging. As a distinct class of service, the handset, equipment and technology requirements of 3G are also different from that of 2G.
Considering these two factors, it is clear that allocating 3G on a piecemeal basis would go against the interests of the entire telecom industry. Such an exercise could lead to lobbying by vested interests and risks in execution. Addressing policy issues on a piecemeal basis unified licensing and access deficit charge, for instance often end in a fiasco.
Instead, evolving a comprehensive national policy for 3G makes greater sense. If the Defence sector vacates from the unused IMT-2000 band and 1900 MHz spectrum and the same is parcelled out, there is a good chance that it will work in favour of all the key constituents the operators, the Government and consumers. This was the kind of spectrum allocation/auction exercise undertaken in the UK, Germany, Australia and Hong Kong.
Since there are five national operators, a clear allocation of 3G spectrum will help them tailor their capital investment policy in a single stroke, rather than in a piecemeal manner. For the Government, it is likely that the 3G spectrum, which is a scarce resource, will fetch them fair returns through entry fee or revenue share. And, for the consumer, a cap on 3G tariffs fixed by TRAI will be good to start with till market forces push down prices well below the cap. Finally, framing a national 3G policy will give the Government flexibility in terms of allowing new operators to enter the fray and compete with the existing ones when spectrum auctions are held. For instance, in November 1999, Hutchison sold Orange, its European 2G business, to Mannesmann. And it used the sale proceeds to enter the 3G service by participating in the UK 3G spectrum auction in April 2000. In the UK spectrum auctions, the government paved the way for the entry of new 3G operators in order to infuse greater competition.
Spectrum auctions, no unmixed blessing
If one starts on the premise that spectrum is a scarce resource, especially for 3G, then it can be parcelled out either in the form of spectrum auctions or `beauty contests'.
The auctions are ideally suited in situations where efficient use of spectrum is important and, incidentally, they also help the government raise non-tax financial resources. However, in Europe, avarice led to failure of the well-designed mid-2000 auctions. The overall bullish sentiment in the telecom industry and the hype surrounding the potential for 3G, saw the players in the UK, Germany and the Netherlands bid huge amounts (close to $100 billion) as auction fees. Such high licence costs contributed not only to a longer payback period, but also led to a sharp slowdown in network rollout for 3G investments.
Rattled by the European experience, countries such as Malaysia and South Korea decided to play safe, choosing `beauty contests' as a method for allocating 3G spectrum. Licencees were selected based on a combination of technical and financial bids, and scrutinised and short-listed based on guidelines framed by the government.
Though this method does not generate significant financial resources for the government, it is equitable as it elicits conservative bids. However, the downside is that it offers scope for the government to be partisan, favouring select companies and the existing operators, and exercise undue influence in the licensing process.
Considering the extreme experiences in Europe and South-East Asia, India will be better off adopting a hybrid model (as employed by Hong Kong, for instance), weaving in the positive features of auctions and beauty contests in allocating 3G spectrum.
Thus, for effective allocation, an all-India 3G policy should consider the following:
Initial entry fee: If 3G licences are issued on a national basis, there is a case for charging an initial entry fee. Whether it should be Rs 1,500 crore as proposed by Mr Ratan Tata or a higher/lower sum, is a matter of detail which the Government can determine in consultation with experts in the Wireless Planning and Co-ordination Wing under DoT and other ministries.
But a zero entry fee, as proposed by TRAI, is unacceptable, as this alone will ensure that scarce spectrum is used efficiently and not unnecessarily hoarded. Also, financial resources raised through this exercise can be used by the Defence forces to vacate unused spectrum in the existing bands.
Revenue share through auctions: Instead of a fixed revenue share as proposed by TRAI, the Government may be better off auctioning the 3G spectrum to the bidder willing to pay the highest revenue share.
If the Government, in consultation with national/international auction experts, can design a viable and transparent auction (if necessary, with a floor and cap for revenue share) as proposed by Mr Ratan Tata, it will stand to benefit all the constituents in the industry.
If necessary, the Government may even consider a revenue share of, say, 4 per cent for the first three years and a staggered increase in revenue share over the next 5-10 years.
This will be a more equitable solution, as the nature of the 3G business continues to remain highly risk and uncertain for bidding, both in terms of forecast, market penetration rate and average revenue per user. Ultimately, the revenue share determined through the competitive auction mechanism will be the least contentious of solutions for the Government.
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