In Telecom, Markets Alone Triumph?

Visitors to the website of TRAI, India's apex Telecom regulatory body, are first subject to a splash screen featuring a black and white photo of Mahatma Gandhi speaking on a telephone. Underneath it are printed the following words, in bold type, "Truth Alone Triumphs."

But for many years now that photo and message have signified nothing but irony, even a perverse sense of humour, for most visitors thanks to the rotten state of regulation in the world's fastest growing telecom market.

Till 2nd February, that is. Because that's when India's Supreme Court delivered a resounding judgement cancelling en masse 122 licenses issued in an arbitrary "first come, first served" manner by erstwhile Telecom minister A.Raja, who is currently under imprisonment in Delhi's Tihar Jail. Here's the full PDF text of the judgement, worth saving and going through due to the immense ramifications it will have on this sector for years to come.

While such large scale cancellation of licenses was in itself a major decision, there was another even bigger bomb hidden in the judgement: "while transferring or alienating the natural resources, the State is duty bound to adopt the method of auction by giving wide publicity so that all eligible persons can participate in the process."

The Intelligence of Markets

By specifying the auction as the preferred way for the State to allot precious and scarce natural resources - of which radio spectrum is a prime example - the Supreme Court has indirectly favoured the intelligence of markets versus that of ministers, bureaucrats or industry experts.

"When you pay a price for something, it automatically ensures efficiency," says Alok Shende, Principal with telecom consulting firm Ascentius.

There were immediately some cries of alarm. In an unsigned editorial, The Economic Times, India's largest business newspaper, called the Supreme Court's preference for auctions "a simplistic assumption devoid of economic analysis."

"Low-cost telecom spreads fast, increasing, with each additional connection, the utility of being connected for everyone on the network. The result is efficiency and productivity gains across the board, leading to faster economic growth. Crores of lives improve and the government nets superior tax receipts, far in excess, over the years, of auction proceeds. Auctioned spectrum jacks up the telecom industry's capital costs, which will either raise tariffs or delay further expansion and upgradation."

Why not distribute spectrum through a draw of lots, among financially and technically qualified aspirants, asked the editorial.

Why indeed? Here are a few:

• In no market are all aspiring participants equally capable. While they all may be financially and technically above the minimum cut-off threshold, some will be better at converting allotted resources into consumer services than the other. So spectrum will be far more productive in Bharti Airtel's hands than in, say, Videocon's. A random draw of lots does not guarantee that.
• Practically no one today - Indian or foreign - has any confidence in any "draw of lots" that will be conducted by Indian Telecom regulators, no matter the oversight or audit controls they bring in.
• In any auction, rational bidders ensure that their bid prices take into account future profits as well. There is no need for the State to be concerned about that.

Unfortunately in Indian telecom, things have been purposely muddied for so long, that even rational and publicly-listed operators like Bharti Airtel have ended up "over bidding" during auctions.

For instance industry experts tell me that 3G adoption among consumers is so abysmal in India today that most operators who spent billions of dollars on it aren't even able to service the interest on their debts from customer revenues. Which is the reason why we're seeing a gradual increase in the prices of 2G voice services.

"All the big operators are making money on 2G, so there is no reason for them to hike prices further. Yet they continue to keep doing so, because their balance sheets are saddled with 3G debt," says a partner with a strategy consulting firm who did not want to be quoted directly.

But the fault for that doesn't lie in auctions, instead in the deliberately unpredictable nature of Telecom regulation till now.

Taking Regulation Back to the Drawing Board

The reason sane firms end up overbidding in Indian telecom auctions is because they have no visibility into the future roadmap. So when an auction comes round, everybody piles on, not knowing when the next batch of spectrum will be made available.

The troika of TRAI, Department of Telecom (DoT) and Ministry of Communications have over the years created a climate of opacity and randomness, that practically no operator, large or small, can take anything for granted.

In light of the Supreme Court order, might we suggest they genuinely revamp the sorry state of Telecom regulation in India?

A starting point could be the US telecom regulator, the FCC. Head over to the section titled "FCC Reform" on its website, and you can have a look at various elaborate tools that explain how the sector operates.

There's the "Spectrum Dashboard" that allows anyone to graphically view and analyze the allotment of hundreds of different spectrum brands, including who own them and to what use they are being put to.

In India that process is managed by an arcane group within the DoT called the "Wireless Planning and Coordination Wing" which mostly prefers to keeps its cards close to its chest.

Imagine if there was a web-based, easy-to-understand spectrum map for India that not only shows who owns and does what with various spectrum bands, but also what spectrum is likely to come up for auction during the next few years. Operators can confidently plan their future strategies knowing what resources they have the potential to buy, leading to much more rational prices during auctions.

FCC's "Data" initiative exposes to citizens and developers tons of data from its underlying databases, including tariffs, fees, equipment authorizations and radio call signs. It encourages software developers to build applications that access this data to present information in innovative ways to consumers.

In comparison, information about Indian Telecom regulation is hidden inside hard to read PDFs across multiple websites, often just typewritten notes that have merely been scanned.

Imagine if all decisions, orders, applications and reported data is electronically stored into databases, open to any citizen through a web browser or software developer through an API?

Another regulator whose work is worth looking at is UK's Ofcom. It's Spectrum page is a great resource for operators to understand its philosophy and spot opportunities to acquire additional spectrum, through auctions.

In addition to the list of bands that are currently being auctioned, Ofcom has also listed bands that will come up for the same in the future.

While Indian newspapers occasionally publish rumours or unconfirmed reports of spectrum being made available in India, especially in the lucrative "digital dividend" band, iImagine if regulators could publish the same in a timely and transparent manner on their website?

Re-imagining Telecom

The Supreme Court's direction on having auctions determine allocation of resources in spectrum has the potential to change many equations within Indian telecom.

Spectrum Allocation: assuming the government is unable to impress upon the court, through an appeal, to reconsider its decision, we will see over 500 Mhz of spectrum becoming available for auctioning after 4 months (the period determined by the court).

All talk of a "base price" of over $2 billion for 6.2Mhz of spectrum should be thrown out the window. Simply because those prices aren't realistic in today's economic environment and Telecom sector. The classical idea of a reserve price was to discourage frivolous bidders, but over the years governments across the world have jacked up prices many times over, usually by benchmarking it to frothy past auctions.

But in a sector saddled with too many players, too less innovation and bloated balance sheets, high reserve prices can act as a deterrent for new and existing players. And spectrum is a perishable commodity in a sense, meaning any that isn't auctioned or used, is essentially waste and serves no economic benefit to society.

Our regulators would do well to understand that their long term objective is to create a vibrant, competitive and healthy sector instead of maximizing the revenue from one auction.

So bring down reserve prices, allow all serious and qualified players - domestic or foreign - and let the market determine the correct price.

Mergers and Consolidation: It's actually a travesty that in a telecom market as large, growing and competitive as India, we haven't see any meaningful mergers for so long. Our short-termed regulators have ensured that far too many competitors were wasting effort and capital copy-pasting the exact business models of earlier players. Its no one's case that consumers vastly benefited after the entry of many new operators since 2009. The market share of all 122 licenses that were cancelled amounted to roughly 5 percent.

India's existing M&A policy and approach has been to discourage mergers, by setting impossible conditions around combined market share that seem targeted at preventing all economically-sensible mergers. In cases where combined market share is okay, our regulators impose artificial limits on the spectrum that the combined entity can hold.

Here's a thought: how about devising an M&A policy that encourages mergers? One that understands that an operator that is being sold, is being done so for its customers, brand and spectrum.

Future Technology Roadmap: Time and time again Indian regulators have been found wanting in their knowledge of how telecom technology evolves, be it GSM vs CDMA, 3G vs. 4G or Wimax vs. LTE.

So the conditions imposed on 4G winners last year prohibit voice, even though LTE (the technology that has been chosen by all winners) can allow voice calls in addition to data.

The next version of LTE, called "LTE Advanced", will allow for use of non-contiguous spectrum, meaning isolated chunks combined together. Our regulators cannot even value or allot such spectrum currently.

But there are regulators who can. The US FCC recently announced public trials of "Super Wi-Fi", a new technology standard that allows for fast broadband transmission over unused "white space" frequency between TV channels.

A great example of how to do this is much smaller Singapore, which publishes extremely well researched and long term roadmap reports.

Encourage Diversity: Although India has the distinction of being the telecom market with the most number of competitors, it is a rather dubious one. Simply because the competition is quite homogenous, with most operators only varying by minor degrees in service levels or prices.

Instead, allow a newer set of players.

MVNOs are operators who lease spectrum and/or infrastructure from other operators to offer their own services. Though Indian regulators have never quite banned MVNOs, they haven't explicitly allowed them either. "MVNOs allow those operators with unused spectrum to derive a market price for it," says Shende.

The other side of MVNOs could be wholesale telecom providers. The best example of that (notwithstanding their current spectrum clash against GPS devices) is Lightsquared, a US company that is building a $7 billion nationwide 4G (LTE) and satellite network that it will offer only to other operators.

What prevents our regulators from allowing such competitors?

The thoughts and opinions shared here are of the author.