Controversy over spectrum distribution by auction still continues to plague some countries--more recently in India, where such issues have caused delays in the country's deployment of 3G and WiMax services.
Initially scheduled for December 2008, the auction for 3G spectrum was delayed because the India government was unable to resolve a bunch of issues, one of which centered on the reserve auction price. The country's Department of Telecom (DoT) wanted the base price set at US$406.6 million for 3G spectrum and US$203.3 million for WiMax. Its finance ministry, however, was keen to double both figures.
The DoT has since announced that its 3G license auction is scheduled for Dec. 7 this year, with WiMax to follow two days after the former process is closed.
The reserve price has finally been set at US$722 million (35 billion rupees) for a pan-India 3G license, almost double the DoT's proposed figure.
The Indian government hopes to secure at least US$5 billion from the auction, where the funds will reportedly help lessen the country's fiscal deficit, estimated at US$82.3 billion.
Affordable licenses, country benefits
Bill Rojas, director of communications research at IDC Asia-Pacific, declined to comment on what would make a suitable auction reserve price as IDC does not comment on political decisions. But, in a phone interview with ZDNet Asia, the analyst noted: "IDC's position is that the countries that have been most successful with 3G exacted the smallest, or no, fees at all because this allows carriers to invest the money into their network," he said.
The analyst pointed to Korea and Japan which gave out 3G licenses at no cost to operators five to six years ago, as well as China which also issued licenses end-2008 at no cost.
Hong Kong, Rojas added, gave out LTE licenses at US$50 million earlier this year.
"I think if governments really want [to generate] money, they could do some kind of revenue sharing or tax that's spread over a few years. But again, it's really a political decision and governments may want a chunk of money upfront," he said. "It's really a commercial negotiation between the operators and government."
According to Bhanu Chadha, research analyst at Springboard Research, 3G can prove rewarding for countries if it is made available at affordable prices.
In price-sensitive markets such as India, he noted that it is essential license allocation procedures are based on market structure, pricing and service development. "A convoluted procedure might not only affect the 3G services rollout, but could also prove to be an obstacle in the growth of allied sectors," he said.
A look back at auction history
3G auctions had generated much hoopla in Europe in the early 2000s, when operators in the region signed checks totaling billions of dollars to acquire their licenses.
Hutchinson's U.K. office, for instance, paid 4.4 billion pounds (US$7.3 billion) for its 3G license in 2000.
In contrast, Singapore awarded three 3G licenses in 2001 for a base auction fee of S$100 million. This figure was a revision from an initial target of S$150 million, after the Singapore government reevaluated market sentiments at the time and reduced the license fee. The licensees--SingTel, MobileOne and StarHub--were required to deploy 3G systems and services nationwide by Dec. 31, 2004, offering commercial services to at least 95 percent of public 3G coverage.
John Strand, CEO of Strand Consulting, does not believe 3G operators in Europe succeeded in recuperating the amount they spent acquiring their licenses in the early 2000s.
Strand, who is based in Denmark, said in a phone interview that some key factors impacted prices back then. First, 3G was hyped up. The average revenue per user (ARPU) for mobile subscribers in Europe was around 34 euros (US$50) and vendors such as Ericsson, Alcatel, Nortel Networks and Siemens were talking about the market opportunities and new services that 3G would bring to the table.
The expectation was that the 3G service would boost ARPU in Europe to 70 euros (US$102) in 2007, and operators believed this growth over seven years justified the big investment in acquiring licenses.
At the same time, the stock market was "very gentle" and getting money was "simple", he noted. In fact, it culminated to a point where if a company needed money, it was easy to get just by putting up more shares in the market, for example. Shareholders were also persuaded to approve funds needed to acquire the licenses when they were told of 3G's potential to boost growth and enable new services.
Strand added that regulators saw the potential revenue mobile operators could generate, and perceived it a good--and easy--way to tax the industry and use the funds for social development.
The result? Governments made a lot of money, but it was "a disaster" because it "almost killed" the entire mobile industry, he said.
"Instead of investing in 3G infrastructure, operators had paid so much for their licenses that they didn't have money to invest in infrastructure and R&D (research and development). So, a lot of these projects were delayed," he noted. "In addition, the promises in ARPU growth weren't fulfilled. ARPU in Europe today, compared with 2000, has been declining. It currently still stands at 30 euros (US$43.7), which is even lower than it was in 2000."
Some of these service providers such as Orange and Vodafone, also had operations in other parts of the world. As such, they had to reduce investments in their global operations.
Strand quipped: "We have a saying in Danish--it's like peeing in your pants to get some heat [during winter]. But this makes you warm for a short moment before you feel even colder than before, because now you're also wet."
Auctions not the best model
Rojas added that auctions are not necessarily always the most suitable method to distribute spectrum or generate revenue for governments.
"I think there are other ways to exact money from the mobile networks. I'm just not sure if the large licensing auction is the best way...I think auctions don't work," he said. "Here in Asia, it's never really been a successful model. Everyone knows which carriers are going to get the licenses because you kind of know already which operators have the money to build the necessary infrastructure."
Countries such as Malaysia and Taiwan, for instance, went out of the way not to issue licenses to the big players, choosing instead to go with smaller operators, he said. But, he noted that doing so can ultimately impact the deployment of infrastructure since these smaller carriers do not have deep pockets to invest in the networks.
"The result is that nothing gets built," Rojas said. "The number one priority should be about building the [country's] broadband infrastructure. So whether it's an auction or not, the buildout should be able to go out quickly. Any decision that gets in the way of that is not a good decision. So I've been quite critical about giving licenses only to smaller players and not to incumbents as well."
The analyst explained that household broadband penetration is a top priority for countries such as Malaysia and Thailand, and policies their governments make must be in line with that objective.
Chandha added that the high cost of licenses translates to high tariffs, low market growth and limited rollout of networks, among others.
The Springboard analyst noted that India had already experienced a similar situation, which led to the advent of its National Telecom Policy in 1999.
"Due to high fixed costs of licenses, cellular and fixed-line operators defaulted on rollout obligations and were on the verge of bankruptcy," he explained. "To avoid such a catastrophic situation from happening again, the Indian government should learn from the international experience of 3G auctions held in Europe, which exemplifies how a convoluted 3G policy could adversely impact the business case."
Not just about selling 3G services
However, Amit Gupta, principal analyst at Ovum, noted that the business case for India's 3G spectrum is not based solely on 3G services.
The country sees over 10 million new mobile subscribers per month, he said in an e-mail interview, observing that the networks of local incumbents are strained to support the growth.
Gupta noted that India has a high number of 2G licensees so available spectrum is already fragmented, leaving incumbents few options to address their capacity problems.
"It costs more to operate such capacity constrained networks," he explained. "In addition, [the network strains result in] dropped calls, blocked calls and customer churn, leading to revenue leak."
So 3G spectrum will likely be used to fix these problems, he said. Hence, the business case for acquiring a license must incorporate a reduction in revenue leaks and costs as operators can use the additional spectrum to relieve network capacity constraints.
In fact, he believes the promise of 3G spectrum to address capacity problems in the short to medium term is much stronger than the incremental revenue that high-end 3G services are expected to generate.
Gupta noted that while it can be argued that cheaper spectrum prices will lead to cheaper services, this should take "local realities" into perspective. "The tariff level for much of urban India is already very low, [so] affordability is not a problem," he said.
"As far as 3G services are concerned, initially, these will be targeted at high-end customers for whom price is not as big a consideration. Lowering the tariff further can help people in rural India and those at the bottom of the pyramid, but those are not the areas where [network] capacity is a problem or where 3G services will be launched," he explained. "So, I doubt if lowering the 3G spectrum price will help those customers much."
Open auction that pays back
Strand, however, believes governments can tweak their spectrum distribution exercises to benefit users in rural areas.
He suggests that an open spectrum auction--where bids can be viewed publicly--is the "easiest and fairest way" to distribute spectrum. Governments should consider introducing conditions along with the license, which would offer operators an opportunity to recover some of the money if they did something for the local community, he said.
"If you look at what they've done in Brazil, for instance, the government tagged two conditions when they handed out the licenses. The first looked at requirements related to timelines for infrastructure rollout, coverage and so on that operators had to fulfill.
"In the second condition, the government returned some of the auction money back to operators to build better network coverage in remote areas in the country or implement services that benefited the society," he said.
Strand added that this "stick-and-carrot" approach bodes well for countries because it benefits governments and operators, and at the same time, ensures the necessary infrastructure is built and reaches a wider part of the population.
For example, he added, governments can also offer opportunities for mobile operators to recover some of their auction money back if they can improve the environment by focusing their infrastructure on rural areas, hence, reducing the traffic going into the city.
Strand said: "It's important that as a government, you should look at [the experiences of] other countries and ask how you can tweak a model that's best for your society. You also need to have intimate dialog with the telecom industry and have them suggest ways to improve the local society to get the benefits back.
"We need to have infrastructure, we need more people accessing mobile broadband, and we need to put people back into the rural."
Gupta noted that the Indian government should learn from its own experience with previous spectrum allocations.
"Many new 2G licensees that got spectrum last year are of dubious credentials when it comes to operating a telecom business, [and] it remains to be seen how many of those will successfully launch services," he said.
In addition, the government's rule that the 2G licensee must have at least one local partner, with no less than a 24 percent share in the company, prompted local speculators to sell their stake to international investors at a premium.
"Such policy leads to fragmentation and inefficient use of a very scarce resource--spectrum," he said. "Therefore, in addition to setting deadlines to services rollout, the government should outline [the bidder's] eligibility criteria clearly and scrutinize applicants' qualifications carefully."
He added that the Telecom Regulatory Authority of India (TRAI) already seems to be thinking along these lines.
Evaluate, adjust to market conditions
When Singapore prepped its own 3G license auction in 2001, the government had to reassess market sentiments, which had changed drastically following the backlash from Europe's auction blizzard.
A spokesperson from Singapore's ICT regulator, the Infocomm Development Authority (IDA), told ZDNet Asia the reserve price for the island-state was decided after consultation with industry players. The government had also reviewed pricing trends in international 3G spectrum auctions, as well as overall market conditions at that time, he explained in an e-mail.
Funds collected from the auction have since gone toward promoting and developing the local infocomm landscape, in particular, the development of the wireless industry.
"Since the launch of such services, sales of 3G phones and subscriptions have been on the rise," he said. "When the IDA first started tracking 3G subscriptions in May 2005, the figure stood at 21,600. As of June 2009, there are 2.74 million 3G subscribers."
The IDA spokesperson said: "The use of auction for frequency assignment remains the most objective, efficient and transparent mechanism for allocating frequency spectrum, which is a scarce resource."
Analysts, however, said Singapore serves as a unique case study because of its market size, compared with other Asian markets, and its "disciplined" government.
On the IDA's declaration that funds from its 3G auction have been poured back into the local infocomm industry, IDC's Rojas said not every government shares the same vision.
The analyst added that some governments plan for such funds to be used by other ministries, and may not want to commit to reinvesting the money into the ICT industry. He added that funds collected from such auctions are channeled directly to the country's finance ministry, not the ICT office.
Strand also noted that Singapore has a small market size and high ARPU compared with its Asian neighbors such as India, Indonesia and Vietnam.
At press time, the DoT did not respond to ZDNet Asia's queries.