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Working the phones

Spectrum auctions may be clean but big upfront costs can slow telecom’s spread.

india Updated: Apr 29, 2010 22:03 IST

Radio frequency sold for a song to telecom operators two years ago is making headlines yet again when auctions are on for spectrum that can provide Indians high-speed internet services on their cellphones. The highest bid for countrywide third-generation (3G) spectrum has already crossed Rs 9,000 crore in a month-long online auction with another week to go before the hammer comes down. Comparisons are being drawn to the first-come first-served process conducted by the Department of Telecommunications in 2008 when pan-India licences for slow-speed telephony were handed out at Rs 1,600-odd crore a pop. Subsequently, a couple of start-ups sold stakes to foreign telecom majors that valued them upwards of five times the fee they paid for the licences — without having a single cell tower or subscriber to their name. Essentially, these companies were as valuable to their buyers as the licences they held. This underselling of scarce airwaves, argue auditors, courts and a section of our lawmakers, cost the exchequer anything between Rs 26,000 crore and Rs 100,000 crore.

The ongoing auctions could be a better proxy for the revenue forgone in doling out spectrum for second-generation (2G) telephony services at prices set in 2001. Especially since bids in the 3G auctions are being pushed higher by cities where mobile networks are choking up for lack of frequency and where analysts expect a big chunk of the new spectrum will be used to carry the regular voice traffic. Upgrading a 2G cellular network to 3G costs around a third of what it takes to set up a 2G network from scratch. Factor that into the final bids for 3G spectrum and we get a fix on the extent of markdown in 2008.

All this must be read with a caveat, though. India is adding 20 million cellphone users every month as the cost of calls dip to levels the countryside can afford. Huge upfront costs, like spectrum fees, must be passed on to customers and don’t permit the bruising price war Indian telecommunications’s been witnessing. Auctions at home in 1995 when the first bunch of companies bid for telecom licences and Europe’s 3G spectrum sale show companies tend to bid themselves out of the market. The larger goal of universal telecom access may not be best served by setting the entry cost so high that subsequent investments get delayed or scrapped. Spectrum auctions might yield better price discovery for high-end niche services like streaming cricket matches on your cellphone. But a more statist approach may be needed for the spread of India’s telecommunication revolution to its villages. Which is all the more reason this mechanism should be above board.