Flawed logic

The Telecom Regulatory Authority of India’s proposal to fix spectrum usage charge based on revenue potential of the operator not only further complicates the already messy issue of spectrum pricing but is also based on flawed assumptions. Revenue generated by an operator using a specific frequency band is dependent on a number of factors including network quality, marketing prowess and tariff offers. Otherwise, revenue earned by all operators offering telecom services using a particular frequency band would have been identical, which is clearly not the case. TRAI is also wrong in trying to equate the final bid price of spectrum in an auction to the revenue potential of the frequency band. This assumes that all operators value all spectrum bands equally. Though most frequency bands can now be technically used for offering 4G services, the value of airwaves depends on a number of factors such as the operators’ existing network configuration, fitment with their overall spectrum holding and the capital expenditure required for offering services. For example, operators who already have networks based on the 800 MHz band will find it more valuable to acquire more of the same compared to another operator using the 1800 MHz band.

Fixing spectrum usage charge has always been a complex exercise. Since 2010, when the Centre started allocating spectrum through auction, TRAI and the department of telecommunications (DoT) have gone through multiple consultation processes in an effort to ensure a steady income for the exchequer. Taking the revenue potential or final bid price in an auction to calculate spectrum usage charge would only make it more complicated as these numbers change every year. Instead of proposing a new formula, TRAI should have simply stuck to its earlier stand of moving towards a flat fee, irrespective of the quantum and type of spectrum held by the operators. Imposing a flat fee has multiple advantages. First, it will bring all operators to a level playing field. Technological advancements now enable operators to offer voice, data and video services by seamlessly integrating all frequency bands. In this context, continuing with the differential usage charge presents operators with huge arbitrage opportunities that would be hard to detect. Second, legal issues around changing the terms of licence for telecom companies that won airwaves in 2010 will be taken care of as there will not be any change for them in spectrum charge, unlike the weighted average formula proposed by the DoT.

The regulator has done well to point out the flaws in the weighted average formula proposed by the DoT but has muddied the waters by proposing another formula which is equally flawed. In the long term, a spectrum fee regime perceived to be fair and transparent will encourage operators to bid more aggressively, which in turn will lead to higher income for the exchequer. On the other hand, linking the auction price to spectrum levy could dampen the bidding by operators and lead to overall loss of revenue for the Centre.

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