The Hindu Business Line : The spectrum equation

Qualcomm India spells out the details of TRAI's recommendations for release of frequency spectrum for 3G telecom services - and their implications for the CDMA and GSM camps.

Parag Kar

One look at his designation and we knew that he was one man who would have clarity on the recommendations that the Telecom Regulatory Authority of India (TRAI) had made for release of frequency spectrum for third generation (3G) telecom services.

Parag Kar, Director (Government Affairs), Qualcomm-India certainly has a role to play in shaping public and government opinion on the telecom front. eWorld talked to him shortly after TRAI's recommendations were made public. Here's his take on them.

Could you tell us the rationale behind the recommendations, as you see them?

First let us see where exactly spectrum has been allocated. The two existing bands are 800 MHz and 1900 MHz for CDMA; 900 and 1800 for GSM. It is now proposed to introduce 2.1 GHz for both CDMA and GSM and 450 MHz for CDMA.

For the GSM players, economies of scale exist in the bands they already exist in as well as in 2.1 GHz. For us (CDMA), it is in the 800Mhz and 1900 Mhz.

But, CDMA has not had any spectrum allotted in the 1900 Mhz. But CDMA needs spectrum in the 1900 Mhz, which is the natural evolution path for CDMA (CDMA does not have any evolution path in 1800 Mhz or 900 Mhz or in 2.1 Ghz).

It does not mean that the 1900 Mhz possibility is fully closed. For now, the Defence is using it. TRAI has articulated that IIT Delhi has done a simulation and stated that mixed band allocation is possible. There are issues in vacating that band. In essence, the technical feasibility is there. It's only the economic feasibility that has to be evaluated. In two months' clarity should emerge. So, it's not as if TRAI has said that it is not possible to give CDMA any spectrum in 1900 Mhz. No one knows what will happen.

Now, if 1900 Mhz is not allocated for CDMA, then let us see what the options are:

Today, CDMA technology does not have economies of scale in the 2.1 Ghz band. Though we do agree that equipment is available and deployed in Japan, economies of scale is a real big issue. Dual band handset is a real issue.

Given this, TRAI has allowed one carrier in the 800 Mhz band to give some respite to the CDMA players so that it could give them some respite to roll out EVDO technology. In other words, CDMA players get the time to figure it out with their vendors and equipment and service providers.

Are you happy with it?

We would like to move forward. We would have been very happy if 1900 MHz were allocated. If not, the world would not end. Let's all move forward as long as it is fair and technology neutral.

This sounds a different tack from what we have been hearing from you - we have seen numerous arguments going back and forth between the CDMA and GSM camps earlier... What has changed?

Nothing. We would still like to have the 1900 Mhz. It's not closed. We still have another two months. No visibility yet on that.

TRAI has given a fair chance to CDMA providers to roll out 3G service simultaneously with GSM through this carrier in the 800 Mhz band. We have to take the best solution that the industry has to move forward. In a business, everyone has to be forward looking as long as it is fair.

We see that equipment has been deployed on 2.1 Ghz in Japan. Is the dual mode option costly but affordable in Japan but not in India?

In 1995, GSM came into this country. Then, the price of these handsets was Rs 50,000. Now, you have scale so you get them cheaper. If you are able to add volume, prices would go down definitely. In 2.1 GHz there is no scale, but scale is available in the 1900 MHz band, similar to the scale available for WCDMA in the 2.1 GHz band.

Let's go back to the recommendations...

TRAI has principally accepted that in order for a forward looking and inclusive regime, technology neutrality would have to be there in the true sense. That is why we are - kind of - satisfied.

Technology neutral means that spectrum is equally available to all at an equal price. Every one has been given 5 Mhz except in the case of 450Mhz where it is 6.25. I will come back to the 450Mhz case.

All the technologies to be used for 3G are comparable. They are all IMT 2000 technologies. Smaller chunks for EVDO because they chose to do 1.25 Mhz and their erlang capacity will be lesser.

You could have chosen any carrier - 2 or 3Mhz. EVDO has chosen 6.25, WCDMA has chosen 5. So the recommendation is that `I give you 5Mhz, whatever technology you want to use it with.' If you want one fourth of the spectrum, you pay one-fourth the price.

That's the way the whole thing happens in other countries.

The other important thing is that TRAI has gone for value-based spectrum pricing, because spectrum is a scarce commodity. You cannot give it free.

Earlier, when that happened and allocation was based on subscriber criteria, it created a huge digital divide. Why?

Spectrum was allocated on a circle basis. A circle would include cities, metros, towns and villages. You get subscriber numbers in the cities, not in the villages. In a network, you'd have it all concentrated in the urban areas.

Now, more subscribers numbers justifies more spectrum. Now, there is a race going on to grab more and more spectrum. If you don't get it, you'd fall back because there is no guarantee.

I am not saying that was wrong, maybe it was the only option then with limited spectrum. India has matured with the wireless revolution. So an ad hoc policy should not continue forever. Policy should result in an inclusive revolution.

If you force criteria, you have to see what those criteria are? Technical criteria? Then it would depend on factors such as technology and efficiency and hence on the type of services that you'd deploy. These things change dynamically. If you choose one criterion today, it'd change in two months.

Does that attitude continue still... based on efficiency of a technology?

That's what the subscriber criteria is - 2:1 ratio, 2 for GSM and 1 for CDMA. This 3G is on top of that. They continued with existing criteria. They have churned some spectrum out of this band and are giving it in a technology neutral manner.

TRAI actually had a legacy problem - can you resolve this in one day? No. Even if you want to, how do you do it? Today, there is not enough spectrum to give to CDMA - the natural evolution being the 1900 path. There is no spectrum available there. So how do you do it?

In other words, `let me live with the problem for now and allocate additional spectrum in a technology neutral manner.'

The other important point is that you allocate that spectrum so that the service provider can value that spectrum. You have to find a value - for the spectrum - that is market-based and proves the scarcity of the spectrum.

Then the service provider paying for the spectrum will immediately use it properly.

Why is the 450 Mhz band exclusive to CDMA?

In 2.1 GHz, five blocks are being looked at for both GSM and CDMA. It is technology neutral. For, CDMA providers, they have nowhere to go. So, it's 2.1 Ghz and TRAI has made it technology neutral.

Why is the 800 Mhz band exclusive for CDMA? This band has 20 Mhz of spectrum, TRAI has done an analysis of this. The trend analysis for two years, assuming three service providers, is that after you use up available carriers for voice, you would still be left with two carriers.

These could be allocated to 3G. This is because, CDMA has not been allocated spectrum in the 1900 Mhz band. CDMA does not have economies of scale in any other band. So they need to be given respite so that they can start 3G services with the same economies of scale...

Could you explain the rationale behind the one extra carrier in the 800 Mhz?

They say that if you assume the same rate of increase of voice subscribers as is currently, and look at carriers available in 800 Mhz, you will end up consuming all carriers in two years, except two carriers.

The issue of pricing is interesting. For the first time, TRAI has accepted that value-based pricing of spectrum is extremely important. I cannot comment on the quantum of pricing. It depends on the business case of the service provider. It is market-based, is valued accordingly and reflects scarcity.

Technical criteria for valuing spectrum cannot stand the test of time. You cannot visualise applications/services that are going to come up. If I do that, I can be a millionaire now. For instance, a Yankee Group report says that 85 per cent of value added services deployed fail. It's by trial and error. Every VAS consumes different quantum of spectrum.

Here's how the auction process works for the five blocks on the 2.1 Ghz band.

Now, let's say, there are only five players that would seek these spectra. There you don't need an auction. You have a base price and give it out on that basis. If you have six or seven bidders, multi-stage bidding comes in with a price discovery mechanism. It's not like the one followed in Europe. That was how 4th cellular licence in India was auctioned.

Let's assume that the first bidder quoted Rs 100 crore, the second quoted Rs 80 crore, with the others coming in at Rs 60 crore, Rs 50 crore, Rs 40 crore, Rs 30 crore and Rs 28 crore. If the base price was Rs 20 crore, now, that becomes Rs 30 crore while the last bidder at Rs 28 crore is put in the waiting list. Now comes the second auction. Information on the first and second bids is made available to the public. Assume it's Rs 50 crore, Rs 60 crore, Rs 50 crore, Rs 40 crore, Rs 45 crore and Rs 35 crore. Now, the last bid is out, five players are in and the spectrum is made available to them at the price they quoted and not at the level of highest bidder.

The implication here is that no one will overbid. For instance, you cannot have one company bidding Rs 100 crore and another bidding only Rs 40 crore. The former would appear a fool.

Even assuming that the auction is going to be in one stage, we see that it would be a revenue share of 5-6 per cent now and 1 per cent later. What if the auction itself were in two separate stages? First the Defence vacates the band followed by pricing for that band. Later on, hold an auction and put in a revenue sharing mechanism.

The meaning of auction is that you distribute the asset that you have, not what you assume you will have. You make the best of what is right there in front of you.

This recommended auction methodology would be different. No one is asked to match prices.

It's a very intelligent way of doing things. The other important thing is the way pricing is done for 800 Mhz and 450 Mhz . In the 800 Mhz, (you get blocks of) 1.25 Mhz, not 5 Mhz. There would only be 2-3 bidders. Price would go down compared to the method described earlier for 2.1 Ghz. So, if you have left.

It is obvious that pricing would be lesser here. No other service provider has use for this band. So, TRAI has said that you have to pay one-fourth the price of second highest bidder of 2.1 Ghz.

From a price point of view, it is not favourable to CDMA. You are allowing competitors to determine your price. But this is an intelligent way of pricing. This is fair x what they have done is one-fourth of second highest bid. They could have indicated third highest bid, though. They have given correction to someone who has overbid.

The ideal thing would have been another auction for this band. But TRAI says that prices would go down and that CDMA would be terribly disadvantaged.

As you go from CDMA 2000 1X to EVDO, you can do it quicker and faster. Doesn't that mean that CDMA operators are favourably positioned?

I would say that both technologies have their own merits. WCDMA would be able to use the same band, and is not required to change bands. They have 5 Mhz chunks in a co-terminous manner x hence it is more scaleable there.

Let's assume CDMA has more advantage (as a technology). But, you have to change bands!

We always say that there is no need to compare technology. It has to be technology neutral. If that happens, market forces would help decide what to do. Everything balances out. In the business case, your capex is amortised over time here.

From that point of view, TRAI has taken the 2nd highest bid from 2.1 Ghz auction to price 800 Mhz.

Your comments on the 450 Mhz band?

It is very interesting. Nobody asked for it. Neither GSM nor CDMA. TRAI says you will be given 450 Mhz. The context here is that there is equipment available for that band, not scale.

GSM and CDMA did not ask for it. This is lying free - 5Mhz and therefore should be utilised. No one wants to use it, but from a national resource point of view, it has significant advantage. If TRAI can motivate usage here, then it's good.

TRAI has given it to CDMA, because GSM WCDMA does not exist here. Also, GSM has already been given 20 Mhz of spectrum in 1800, and 25 Mhz (plus 20 Mhz) later in 2.1 Ghz. GSM's economies of scale have been met. CDMA's must also be met. But 450 Mhz is not favourable for CDMA.

For, CDMA, EVDO equipment is there here but not dual band equipment. There isn't even chip set support. But still, I would like someone to use it. So, incentivise by giving it at half the price.

What does that mean? 2 carriers left over in 800 Mhz... plus 450 Mhz.

What would it mean to a subscriber like me?

To a subscriber it means that you are getting what the service provider is able to do. It's a holistic environment.

What I am saying is that currently it is not available, TRAI has given one carrier in 800 Mhz band so that they can start the service and sustain it over time. Then, if the service providers feel that 450 Mhz would be viable then they could use it and then ask vendors to prepare equipment for it.

I am giving you some time, is what they are saying.. You are not disadvantaged.

If someone has taken this band in India, then there is clear commitment. It's not been taken free. The provider means real business. He will be able to convince with some time, with a breather - such as the one carrier in 800 Mhz.

Is it the same argument for 2.1Ghz?

Yes. In 2.1 Ghz, they have given 3.75 Mhz. In 450 Mhz, there is 5 Mhz. They cannot further break it, for it's of no use to anybody. It's like land. Fragments of a section would dilute that value.

In 2.1Ghz, plenty of spectrum is available and it could be used. That is the rationale.

No one has been favoured. TRAI has been as fair to everyone as possible, given the practical consideration. Though, huge legacy problems are there.

Even now, if you do not remove this legacy problem in time to come, the service provider in the 2.1 Ghz space may have 15 Mhz of spectrum, and someone using a different technology may have only 7.5 Mhz of spectrum.

All the bands are possible with 3G. In 900 also you can provide 3G services, as you can in 1800. The issue is of availability of equipment and of economies of scale.

You cannot continue with using improving technology forever. You have to use spectrum more efficiently and effectively.

The whole thing seems targeted at existing players. Is it a cause of concern for you that there are no new players?

We are neutral. In order to figure out how many players there would be in the market, one has to do a due diligence. One has to work with the government as to how much spectrum they are going to release in future. If that is done, then you can figure out how many players. One thing is clear: with a limited resource you cannot have endless players.

Are you saying that that due diligence is sort of being done and that you agree that existing players should remain.?

Existing players are in a better position. Today, existing players have already deployed technology and that equipment can be leveraged. They are in a better position than a new player who has to do a pan-India show now. Existing players can enable roaming, do pocket deployments.. They can roam between networks. New players cannot have a pan-India network from day one.

Qualcomm is neutral in this because we really do not have the visibility to figure out what Government is thinking on the spectrum issue. We only know that if you have more resources, then more players may be allowed. Otherwise there would be fragmentation and no one would be able to make the best of the resource.

What's your view on current rollout obligations? For NLD and ILD, these obligations were ignored because no one followed the rules. These obligations help prevent hoarding but is there an alternative to this so that you do not impose it on players?

In the case of ILD and NLD licences, what was the penalty being imposed? LD x or the liquidity damage condition. Service providers had a business case. They would ask themselves if it is easier to give an LD or actually roll out? It's a question of business (priority). If they find that LD is good, then they went on paying out the LD.

This is different. Here, the rollout conditions are kind of linked to 5Mhz of spectrum. These are not licensed rollout conditions. The penalty is on the spectrum. They are saying that if you do not meet rollout conditions, they would watch you for a year, quarter-by-quarter, and impose penalty. At the year-end, they would take the spectrum back if the conditions have not been met. So, who would not roll out? There are quarterly penalties. But that's not eternal.

Here, I am not commenting on the value of roll out conditions x whether 25 per cent is right or not.. I am only explaining the rationale on this. Earlier, rollout conditions were not successful probably because it was linked to licence.

Globally, WiMax and Wi-Fi are under unlicensed spectrum. How is it panning out in India?

It is not Wi-Fi/Wimax per se. There is an ITU terminology called BWA. TRAI has termed it BWA. In the recommendations, you will see that there is no reference to Wi-Fi or WiMax. It is all grouped under broadband wireless access technologies.

When you talk about spectrum allocation for BWA, you have to understand that these are new technologies. For deployment of any such technology on a worldwide scale, ITU deliberations become foremost before technologies are allocated spectrum because they need to have global economies of scale of spectrum harmonisation.

Today the 3G spectrum we talk about were identified in 1990-92. It might not take as much time for BWA.

There is a deliberation happening in ITU based on which recommendations will come out that would be followed by standards for roaming, spectrum harmonisation and economies of scale for pricing.

Anyone who jumps the gun and allocates spectrum for these technologies might be caught on the wrong foot. The spectrum band recommendations may be different.

bharatk@thehindu.co.in

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