Making sense of spectrum

Wondering why there is so much controversy and heated political exchanges just for thin air? Or perhaps, just why the stocks of Bharti Airtel, Idea Cellular and Reliance Communications are taking a battering? Well, the answer lies in the now-(in)famous issue of ‘spectrum allocation'. Read on to get clarity on what spectrum is, why it's scarce and needs to be priced at market-determined levels.

Regulated airwaves

Spectrum, for our context, in simple terms refers to air waves in a particular range of frequencies through which mobile communication is possible. Yes, sound waves exist in different frequencies and specific ‘bands' allow for easier two way communication. Of course, there are different bands for broadcasting, satellite communication, and radio broadcast and such.

In India, the 450 MHz, 800 MHz, 900 MHz and 1,800 MHz bands are used for mobile communication, some of it is for GSM players (Vodafone, Bharti etc) and some for CDMA operators (Tata Teleservices, RCom etc).

Around the world, spectrum is ‘owned' by the respective governments and is distributed to different entities in small quantum for a specified license fee. In India, the Department of Telecom (DoT) is the agency that takes care of the rationing of air waves. More specifically, it allocates spectrum to mobile operators.

Why is it scarce?

Actually, the portion of spectrum that is allocable to mobile operators is scarce. This is because large portions of airwaves are used by the armed forces for their communication purposes. These are vacated by them periodically and handed over to DoT for civilian usage. When armed forces ‘vacate' spectrum, they do so with the assurance that an alternate network would be built for them so that there is no interruption as these are issues of national security.

The making of an alternate network however is an extremely costly affair and is done by the DoT, usually through BSNL. Because of cost considerations (and possibly due to lack of coordination between ministries), the vacation and building of alternate network has been taking considerable time. This has meant that the chunk of spectrum, in specific bands, that can be given away to operators is in short supply.

Even recently, when the 3G spectrum auction was done, operators got spectrum only months after the auction was over, as the armed forces needed time to vacate.

Pricing premium

Over the past decade, spectrum was given as part of the license that mobile operators obtained. This means that, if they paid around Rs 1,650 crore for a pan-India operation, they would get up to 6.2 MHz of spectrum as a part of the agreement. All subsequent allocations were however subject to mobile operators adding a specified number of subscribers. All operators would (and continue to) pay a proportion of revenues annually as spectrum usage fees.

The problem arose when services became affordable and created a spectacular boom with subscribers adding millions of subscribers every month. So the likes of Bharti, Idea, Vodafone and BSNL added subscribers and came back asking for more spectrum. This created a problem as one, the spectrum was scarce and two, the spectrum usage fees had not been revised upwards for years. Amidst all this, in a bizarre move aimed apparently at ‘bringing in more competition', it was decided by the telecom ministry in 2007, to issue new licenses that came packaged with spectrum, that too at prices that were decided in 2001!

As many 6-8 new operators won 2G licences, some with no telecom background. That is when it was alleged that processes had been subverted, licenses were supposedly given to a favoured few and in the process scarce spectrum had been given away for a song, resulting in a huge loss to the exchequer.

With added competition came pressure on revenues and margins for the likes of Bharti, Idea and RCom among others, leading to their stock prices to nosedive. Adding to the woes, is the recent recommendation of the telecom regulator that operators sitting on excess spectrum (Idea, Vodafone, Bharti and BSNL among others) pay a one-time fee that could collectively entail an outflow of over Rs 16,000 crore.

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