The Hindu Business Line : Spectrum allocation — Disturbing the CDMA-GSM wavelength?

To realise the mobile subscriber base target of 200 million by 2007, the Telecom Regulatory Authority of India has suggested a sharp increase in the allocation of additional spectrum on a need-based basis for both CDMA and GSM operators, especially in the metros. The objections to TRAI's recommendations lie in the manner in which it has proposed allocation of additional spectrum in the existing frequency bands. Krishnan Thiagarajan looks at the problem areas.

THE Telecom Regulatory Authority of India (TRAI) is caught in a muddle over the allocation of frequency spectrum. Serious differences of opinion have already surfaced between the two warring mobile camps — one set of operators using CDMA (Code Division Multiple Access) and the other, GSM (Global System for Mobile) technology — over the measures recommended by the regulatorlast week.

It is laudable that the regulator has taken the cue from the government and worked out the spectrum allocation policy to realise the mobile subscriber base target of 200 million by 2007; in effect, the policy aims to double the monthly mobile subscriber addition from two million now. To achieve this objective, it has suggested a sharp increase in the allocation of additional spectrum on a need-based basis for both CDMA and GSM operators, especially in the metros (Mumbai and Delhi) for offering the existing 2G/2.5 services. No quarrels with this proposal so far.

The objections to TRAI's recommendations, however, lie in the manner in which it has proposed the allocation of additional spectrum in the existing frequency bands for the CDMA and GSM operators and new spectrum in the 2,000 MHz band (a 3G band) intended as an extension for 2G services. There are three problem areas in the proposals:

No level playing field: As the allocated spectrum for CDMA operators in their existing band is short of the total requirement, the Government should allocate additional spectrum (say, in the four metros of Delhi, Mumbai, Chennai and Kolkata) within one month of accepting these recommendations. Acknowledging that GSM operators were also facing a severe shortage of spectrum, especially in the metros, TRAI has recommended that additional spectrum be allocated to these players also. But since there could be problems in the Defence forces vacating the spectrum for immediate use, TRAI says the GSM operators will get additional spectrum in phases, through December 2006.

Implications and problems: The TRAI proposals have a two-fold implication on the competitive position in the mobile sector. One, the straightforward implication that if CDMA operators are getting the spectrum within a month and GSM operators in a staggered fashion till December 2006, the former get an edge in the same circle in which both offer services. Two, if CDMA operators get the spectrum ahead of GSM operators, they will be able to rollout 3G services at a minimal investment in technology (upgrade their existing CDMA-20001X system to CDMA-2000 EV-DO). This will give them a head-start over their GSM peers as the latter will be able to start 3G services only after they get spectrum in the 2GHz band.

TRAI brushes aside the argument of the advantage that CDMA operators get, simply by saying that it is not in the business of comparing and evaluating the efficiency of technologies. The implication is that market principles will decide how spectrum gets allocated between different operators.

But just a few months ago, while finalising the Unified Licensing Policy for all telecom services (including national and international long distance), TRAI had made an eloquent case for creating a "level playing field" among the different telecom segments and leaving no operator category in a "worse off" than before. This was a powerful argument that TRAI had used to justify an entry fee of Rs 107 crore for national long distance services for new operators; else, it said, the business case of the existing operators would be affected. Does a similar treatment of "no worse off" situation not apply to GSM operator's vis-à-vis CDMA players in the case of spectrum?

Technology neutrality: In the guise of encouraging `technology neutrality', TRAI has recommended that CDMA operators be allocated spectrum using the same subscriber addition criteria used for GSM operators thus far. In effect, this is likely to help CDMA operators get more spectrum on a comparable scale to GSM operators.

Implications and problems: The implications of a `technology neutral' policy in this case are quite serious. TRAI, and the Government if it accepts these recommendations in their current form, would be admitting that they were wrong in presuming that CDMA was spectrally more efficient that GSM. At the height of the limited mobility controversy in mid-2003, the Association of Basic Telephony Operators (ABTO) had stated in written submissions to the court that CDMA is 5.31 times as efficient as GSM and, in effect, 5MHz of CDMA spectrum is equal to 25 MHz of GSM. In retrospect, was the due diligence done while migrating the basic operators (offering CDMA technology) to the unified regime on a wrong premise?

No entry fee for 3G services: To neutralise the impact of these changes on the GSM operators, TRAI has recommended that 2,000 Mhz (or 2GHz) spectrum be opened up for 3G services to the extent that these can help reach the mobile subscriber base target by 2007. Using this, according to TRAI, GSM operators, primarily will be able to move some high-end 2G subscribers to the 3G band and take on some marginal subscribers for 2G services. To top it all, the regulator has prescribed that spectrum in the new band be given free of entry fee, but with a higher revenue share component. The reason for zero entry fee is to ensure that user tariffs do not shoot up, especially in a price sensitive market like India.

Implications and problems: It is quite well-established that 3G is a distinct class of service, with its own licensing terms and conditions before spectrum is released for use. Since 3G can offer high bandwidth, multimedia-rich applications, such as video streaming of news or movies, the usage of this service is completely different. As a premium priced service, the spectrum bands for 3G have also been delinked from 2G services by bodies such as the ITU (International Telecommunications Union) interacting with policy-makers worldwide.

TRAI's contention that 3G is being offered in India as an extension to 2G services, on account of paucity of spectrum in the existing 2G bands is a rather hollow argument. Moreover, there is no justification for offering 3G spectrum at zero entry fee and charge just a fixed revenue share, without any bidding process, for three key reasons. One, by offering it free of entry fee, TRAI will be setting a precedent. Beyond 2007, even if the regulator chooses to apply a different bidding principle, it will not be acceptable and equitable for all players. The same problems that have dogged 2G services will haunt 3G services also.

Two, TRAI has steered clear of entry fee and spectrum auction because that could raise the tariffs for consumers at a time when mobile telephony growth is of paramount importance. The government levies, in any case, account for over 20 per cent of the adjusted gross revenues for the telecom services sector; and by charging a fixed revenue share, the Government will be able to recover its share of revenues in line with the growth of 3G services. But each one of these arguments is contestable.

The rise in 3G tariffs can be brought in line by TRAI if it imposes a price cap on these services till such time the market forces are strong enough to take over. The Government levies may be high now, but this amount that TRAI can raise through 3G-entry fee or offering 3G spectrum to the highest bidder can be used meaningfully.

If one goes by Mr Ratan Tata's view of charging Rs 1,500 crore as entry fee for an operator on an all-India basis, the Government can raise Rs 9,000 crore from six top operators. This amount can be used, for instance, to finance the Defence establishment to vacate the much-needed spectrum in the 2G band as early as possible. Finally, apart from the entry fee, 3G spectrum should also be auctioned only to the highest bidder, since spectrum is a scarce commodity and there should be a disincentive for its inefficient use or hoarding by certain operators.

Since release of 3G spectrum to one operator can give a competitive edge in terms of type of services offered, TRAI's has recommended that whenever 3G spectrum is allocated, it should be to all the operators who need it. But this will only encourage hoarding of spectrum by players, notwithstanding the rollout obligations prescribed by TRAI.

Besides this, the fears expressed by representatives of the Cellular Operators Association of India (COAI) that an entry fee or spectrum auctions will automatically lead to a delay in launch and make it expensive for consumers are totally unfounded. It is important to keep in mind the fact that at the height of the limited mobility controversy, in October 2003, the COAI had dashed off a letter to the Group of Ministers (GoM) on Telecom that if basic service providers were allowed a unified licence (for basic and mobile), it would lead to gifting a free 3G licence to them.

According to a COAI analysis of the value of 3G licences auctioned internationally (across Europe, North America and the Asia-Pacific), the average value of the 3G licence worked out to over Rs 30,000 crore. The Government cannot lose sight of this element. TRAI has also indicated, in its recommendations, that 3G spectrum auctions were a failure in Europe and something that can be avoided in India.

But it must be remembered that in India the entry fee for the fourth cellular operator licence in 2001 was decided through a multi-layer bidding process, which went through without a hitch. And based on the experience and understanding of the auction model in the last few years (especially after the failure in Europe), several pitfalls in auction design and pricing can be avoided.

These three problem areas will have to be addressed by the Government before the spectrum policy recommendations are accepted and come into force. Otherwise, each one of these aspects can be a ground for dispute among operators that may be resolved only in the courts.

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