Why telcos have little interest in 5G auctions

Bharti Airtel called the prices exorbitant while Vodafone Idea wants the auctions take place in 2020.
The auctions need to happen when the infrastructure is ready for the roll out, be it in terms of fiberisation levels, or optimisation of equipment and software etc.
Spending a hefty amount on that at present offers limited returns is not going to be a priority for the incumbent telcos.

As India readies for its ambitious 5G spectrum auctions, at the current base price, (which the industry finds overly expensive), analysts point out that the internal rate of return (IRR) on incremental investment will be as low as 7 per cent for the telcos.

Last week, the Digital Communications Commission (DCC) sought a review of the telecom regulator’s recommendations on the upcoming spectrum auctions, especially on the reserve prices.

This has been done to ensure competition during the spectrum auctions as well as to avoid having unsold spectrum, as in the previous auctions when only 40 per cent of the spectrum on offer was sold.

The debt-ridden telcos have not shown much interest in the auctions: Bharti Airtel called the prices exorbitant while Vodafone Idea wants the auctions take place in 2020.

Moreover, 5G’s clarion call is fiberisation.

Hetal Gandhi, research director, CRISIL, said that fiberisation is expensive and it comes on top of spectrum costs that are sky-high at current prices.

“To boot, telcos are saddled with a staggering debt of Rs 4.3 trillion as of March 2019.

"That is why India is set to witness some tectonic shifts in the fiberisation landscape and the birth of new business models among telcos and tower companies around the launch of 5G,” Gandhi told Business Standard.

5G technology dictates fiberisation levels of over 70 per cent versus 25-30 per cent levels at present.

CRISIL estimates that if each player were to reach this level individually, Indian telcos may need investments of up to Rs 1 trillion just for laying fibre networks over the next two to three years.

Higher land costs and right of way approvals make the fiberisation cost per km as high as Rs 1 crore per km in the metros.

Analysts believe, therefore, that a lower cost is a must if the government wants better participation in the upcoming auctions.

Global brokerage CLSA said in a recent note that India's exorbitant 5G spectrum cost is a big drag for a ‘reasonable IRR’.

“In India, the Telecom Regulatory Authority of India (TRAI) has recommended the sale of 275 MHz of spectrum in 3.3-3.6 GHz band, implying that individual operators could get 80-100 MHz spectrum in this band.

"However, at TRAI’s recommended reserve price of Rs 490 crore/MHz, operators will have to pay around $ 7billion for 100 MHz spectrum, nearly four times that of Korea,” CLSA said.

Even with aggressive operating assumptions (capex to sales of 20 per cent; incremental margin at 70 per cent) at current 5G spectrum prices, incremental investment IRR will be 7 per cent, the brokerage felt.

“However, 33 per cent lower spectrum cost with the same assumptions can boost 5G IRR to 13 per cent,” said CLSA, adding deferring 5G spectrum purchase is the preferred option.

On top of all this, Bharti Airtel’s and Vodafone Idea’s 4G penetration is still only 25-30 per cent of the subscriber base.

There are limited use cases of 5G at present and the ecosystem for 5G is also very nascent.

“The auctions need to happen when the infrastructure is ready for the roll out, be it in terms of fiberisation levels, or optimisation of equipment and software etc.

"Spending a hefty amount on a technology (airwaves) that at present offers limited returns is not going to be a priority for the incumbent telcos,” said a senior telco official.

Industry sources pointed out that with consolidation in the sector (only three players in the fray) and about 275 MHz spectrum available in the 3.4-3.6 GHz, even if Reliance Jio bids in the current auctions, the incumbents can purchase in subsequent auctions.

Analysts said that deferring purchase will likely also lead to a cut in the price of spectrum.

Historically, the government has cut spectrum prices by 30-40 per cent if it saw no demand in the previous auction.

Meanwhile, India mobile revenues are estimated to grow by 25 per cent to $24 billion by 2021 calendar year, noted CLSA.

On the fibre front too, while the government has ambitious plans such as establishing the National Fibre Authority to enhance fibre penetration, nothing much has moved so far.

The government’s expectation is that demand for fibre is likely to increase manifold once 5G launches and state-owned telco BSNLstarts leasing out to telcos and enterprise operators.

But the telcos feel otherwise.

“First, one has to ascertain the quality of fibre on offer by BSNL and then the areas where it is on offer. Telcos would want to first deploy 5G services in metros where they can get more revenue compared to rural and semi-urban pockets after spending a hefty amount of buying spectrum,” said an official.

In the coming week, a high level meeting led by the DoT including top telecom, radio, and broadcasting stakeholders is expected to finalise India's recommendation of spectrum bands for 5G deployment.

Photograph: Fabian Bimmer/Reuters