Trai’s curious ‘multiple’ offers best scope to cut prices
Though it is not clear if today’s EGoM meeting will take a final call on the reserve price should be for the 2G auctions – a lot depends upon what Trai chief Rahul Khullar says is the likely tariff impact of the reserve price – the decision is critical. Theoretically, as some news reports have suggested, older telcos may not participate in the auction if the reserve price is very high – over 10 times the existing cost of 2G spectrum and 1.1 times the final 3G bid. But since the reserve price is linked to what telcos are to be charged for ‘extra’ spectrum or to the price they have to pay when their licenses are renewed, this hardly helps. Higher reserve prices also make it difficult for BSNL/MTNL to survive as they have the highest amount of spectrum in the most expensive 900 MHz band and are unprofitable even now.
Nor is it clear how a tariff impact analysis will help the EGoM decide the reserve price since the cost-impact depends on the assumptions made – will usage rise as assumed by Trai under JS Sarma, or won’t they, especially if tariffs rise?; will there be a big shift towards higher-priced data? … Khullar has made one set of assumptions, the GSM-cellular lot have made another. Moreover, with so many telcos, the link between costs and tariffs aren’t that straightforward – which is why Vodafone never raised tariffs after it spent nearly $11 bn to buy Hutch’s India-operations. While costs will rise immediately, telcos will absorb a large part of these, at least for now, if they don’t want to lose customers – in the long-run, it will affect their ability to roll out new capacity, including in rural areas.
In which case, why not just hand the whole thing back to Khullar’s Trai to come up with a solution. While using the 3G auction price as the base, Sarma’s Trai used a multiple of 0.8 times this to arrive at a reserve price – it said reserve prices are usually 0.5 times the final price globally, but took a 0.8 value for India given the higher demand. But was this justified – in any case, for BWA, the reserve price was a seventh the final bid price, and for 3G it was a fifth. The industry’s travails don’t stop here. The reserve price not changing is one thing if there is no re-farming but very different if there is re-farming; ditto, if firms are going to pay for their ‘extra’ spectrum or whether, based on their existing spectrum holdings, they’ll all renew their licenses for the next 20 years at the same rate – this is one of the proposals being discussed. The industry has a long wait ahead.