Spectrum auction failure in India, October 2016

700MHz spectrum auction
failure in India
October 2016
Stefan Zehle, CEO, Coleago Consulting Ltd
+44 7974 356 258
stefan.zehle@coleago.com
www.coleago.com

The October 2016 spectrum auction in India ended in failure as none
of the 700MHz spectrum was sold
 ICT development failure as none of the 700MHz
spectrum was sold:
– Negative consequences for mobile users
– A blow to ICT development in India
– Failure to deliver National Telecoms Policy
2012
 Massive failure to reach the revenue target from
the sale of spectrum:
– Based on advice from TRAI, the Government of
India planned to raise Rs 536,239 crores (US$
80 bn) but only raised Rs 65,789 crores (US$
10 bn).
© Copyright Coleago 2016 - www.coleago.com
1

Agenda
2
1 Mobile industry evolution to mobile broadband
2 ICT policy objectives in India
3 What determines the value of spectrum to operators?
4 Mobile services revenue and investment in spectrum in India
5 Setting reserve prices to deliver policy objectives
6 Critique of calculating the reserve price for 700MHz spectrum

Mobile industry investment now focuses
on mobile broadband and this drives the
need for spectrum
Mobile industry evolution to
mobile broadband
3

New technology enables operators to offer faster services and pass
more traffic through a given amount of spectrum
GSM
 Not well suited for modern data needs
 Download speed of up to 384 kbps
with EDGE technology
3G HSPA
 Spectral efficiency: 0.7 bits / Hz / cell
 Download speed of 42Mbps
LTE and LTE Advanced
 Spectral efficiency: 1.4 bits / Hz / cell
(possibly twice that for LTE-A)
 Download speed of 150Mbps (300 for
LTE advanced)
4
3G HSPA

How many Gbytes per month per user should operators plan for?
 How about 1 Gbyte per user per day?
 What if TV Anywhere Apps really take hold?
5
 How many hours does the average American watch
TV per day?
– Answer: 2.8 hours
 How much data volume does this represent per
month, assuming HDTV?
– Answer: 0.7 Terabyte (700 Gigabytes)
 If just 4-5% of viewing is via LTE, that’s 1 Gbyte /
user / day

How many Gbytes per month per user should operators plan for?
Samsung Galaxy S6
 Quad HD screen, i.e. twice normal HD
 4K will be next
6
YouTube
 4K (Ultra HD) video content is
available now

The battle between operators will be over the user experience in
urban environments with high traffic volumes per square kilometre
 The most demanding and high
spending users will migrate to the
operator which is least congested
and hence offers the best user
experience
 Spectrum is a key ingredient in
delivering the LTE capacity required
to keep data traffic moving in a high
traffic density environment
 This is one of the factors explaining
the high price paid in the US AWS-3
auction in February 2015 of
2.71 $/MHz/pop
7

Mobile broadband is a key ingredient for the development of the
digital economy …
 An increase of 10% in mobile adoption
boosts GDP growth by 0.8% (World
Bank, 2009)
 For a given level of total mobile
penetration, a 10% substitution from
2G to 3G increases GDP per capita
growth by 0.15 % points (Deloitte,
2012)
 Doubling broadband speeds for an
economy can add 0.3% to GDP growth
(Arthur D. Little, 2011)
8

… and there are tangible benefits to society which illustrate the
impact of mobile data
 A 12% increase in financial inclusion in
countries such as India and
Bangladesh
 Healthcare: up to 70% improved
compliance for TB
 10-15% increase in farmer income
 mEducation solutions can significantly
improve the affordability of education
by up to 65%
9

Existing and new spectrum is required for mobile broadband services
10
700 MHz
1800 MHz
2100 MHz
800/900 MHz
2300 MHz
2500 MHz
New spectrum for LTE, in some markets previously used
for TV, referred to as “digital dividend” band
Originally only used for GSM and CDMA, progressive
redeployment to 3G HSPA and recently to LTE
Originally only used for GSM, progressive redeployment
to LTE
Currently used for 3G, upgrading to dual carrier HSPA+
and LTE
Originally used for WiMax, now a standardised LTE band
for capacity
New capacity band for LTE

ICT policy objectives in the context of
spectrum assignment
National Telecoms Policy 2012
11

Vision of the National Telecom Policy 2012
12
“To provide secure, reliable, affordable and high
quality converged telecommunication services
anytime, anywhere, for an accelerated inclusive
socio-economic development.”

National Telecom Policy 2012
The primary objective of NTP-2012 is maximizing
public good by making available affordable, reliable
and secure telecommunication and broadband
services across the entire country.
The main thrust of the Policy is on the multiplier
effect and transformational impact of such services
on the overall economy.
It recognizes the role of such services in furthering
the national development agenda while enhancing
equity and inclusiveness. Availability of affordable
and effective communications for the citizens is at
the core of the vision and goal of the National
Telecom Policy – 2012.
13

NTP 2012 makes specific reference to spectrum in its
objectives
There are specific policy
objectives and for spectrum
and directives for spectrum
pricing
 Ensure adequate availability of spectrum and its
allocation in a transparent manner through
market related processes. Make available
additional 300 MHz spectrum for IMT services by
the year 2017 and another 200 MHz by 2020. *
 Promote efficient use of spectrum with provision
of regular audit of spectrum usage.
 Spectrum shall be made available at a price
determined through market related processes.
14
* Confusion often arises because documents issued by TRAI add up spectrum from different
regions into a total as if having more regions increases the supply of spectrum in India. The
300MHz and 200MHz are nation-wide and not adding up regional spectrum assignments.

How do mobile operators value
spectrum
15

Spectrum has no intrinsic value, investment is required to build
networks that extract producer and consumer value from spectrum
 Spectrum has no intrinsic value. Value
is only created through the use of
spectrum.
 Spectrum that lies fallow has no value.
 If operators invest and build networks
which are used, consumer value is
created.
 However, the investment only takes
place if producer value is created, i.e.
there has to be a return on investment.
 The return on investment needs to be
at least as high as that in an alternative
investment of similar risk.
16

Additional spectrum is valued by comparing the Enterprise Value of
an operator with vs. without the additional spectrum
 The value of spectrum is
calculated using Discounted Cash
Flow analysis which produces the
Net Present Value for two
separate business cases – one
where the business acquires
spectrum and another where the
business does not acquire
spectrum.
 The difference in the value of the
business with and without the
spectrum is the maximum that the
business would be prepared to
pay for the spectrum.
17
Net Present Value with
NPV without
Value
Business
value with the
spectrum
Business
value without
the spectrum
Value of the
spectrum

The value of spectrum to an operator is the net present value of
incremental cash flows that can be generated from the spectrum
Immediate negative cash flows, i.e. the
investment
 Amount paid for the acquisition of
spectrum
 Deployment of technology in the new
spectrum
Subsequent negative cash flows
 Annual spectrum licence fees
 Additional network operating costs
Subsequent positive cash flows
 Additional revenue
 Cost savings
18

19
Ok, we understand the additional costs, but to compensate for
the investment are there
a) Additional revenues
b) Cost savings

The notion that at an industry level additional investment generates
additional revenue is not true
 Global investment in mobile
broadband continues at a rapid
pace.
 However, in 2015, global mobile
services revenue declined.
– Declines were observed in most
developed markets and also for
the first time in emerging markets.
 Revenue growth in India is barely
above inflation. 2014 real growth
was only 3.6%.
 The notion that additional
investment generates additional
revenue is simply not true.
20
Indian mobile services revenue
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
INRbn
Revenue - 2005 real terms
Revenue - current prices

While today only 506 million people are connected and there is room
for growth, this will only generate little revenue growth
 Average Revenue per User (ARPU)
has declined dramatically.
 By 2020, there are likely to be 734
million unique mobile users in India.
However, future users have lower
incomes and their ARPU will be
below current ARPU.
 The growth in data usage by
existing customer will add little to
overall revenue.
21
Indian mobile ARPU
-
50
100
150
200
250
300
350
400
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
INR
ARPU - 2005 real terms
ARPU - current prices

The growth in data traffic far outpaces growth in revenue: There is
little incremental revenue from data
 In mobile markets world-wide, mobile
data growth is exponential. This
growth is likely continue and India is
no exception.
 However, revenue growth - if any - is
minimal compared to the growth in
data volume.
 The notion that investment in LTE
generates much additional revenue is
erroneous.
22
0
100
200
300
400
500
600
700
1 2 3 4 5 6 7
Revenue
Data traffic
Relationship between mobile revenue
and mobile data volume

The acquisition of 700MHz spectrum and deployment of LTE
increases costs instead of reducing costs
 700MHz LTE radios would be
deployed on existing towers, at a
minimum on the 900MHz grid.
 A wider coverage roll-out obligation
may be attached to the 700MHz
spectrum.
 The 700MHz spectrum be used to
carry mobile broadband traffic.
 There is no capex benefit in the better
propagation characteristics in terms of
geographic coverage.
 This will result in additional capex and
opex.
 The spectrum is not used as a
substitute for other spectrum. There is
no cost reduction elsewhere.
23
The acquisition of 700MHz spectrum and deployment of
LTE increases costs instead of reducing costs

24
Ok, I understand that there are unlikely to be much additional
revenues whereas costs will increase.
Nevertheless operators around the world are investing in
spectrum and LTE deployment. Why would they do that?

Operators that deliver a relatively better mobile broadband
experience could attract high ARPU smartphone users
25
User experienced speed Probability of coverage
Consistency of speedGeographic coverage
Always best
connected value
proposition

The business case for investment in mobile broadband
 Innovation, such as investment in new
spectrum and deployment of LTE is
driven by competition.
 If an operator expects that a
competitor will move on to the next
technology investment cycle, they will
follow in order to stay competitive.
 The business case is not driven by
additional revenue generation but by
preventing the loss of revenue.
 Investment by all operators maintains
the competitive equilibrium, but does
not generate additional cash flows.
26

Some operators had indicated that at the proposed reserve price for
700MHz spectrum they will not bid for this spectrum
Competitive advantage gained may
not justify the reserve prices
 We have seen already multiple cases
of unsold spectrum in India,
indicating a flaw in the methodology
used to set reserve prices.
 If the NPV of the benefits gained
from competitive advantage resulting
from the acquisition of 700MHz
spectrum outweighs the NPV of the
reserve price and deployment costs,
operators will not bid.
27

Growth in investment in spectrum is
running ahead of revenue growth
Mobile services revenue and
investment in spectrum in India
28

Revenue growth has not kept up with the increase in the number of
users, minutes, SMS, and data traffic
29
Mobile services revenue in India
 Mobile services revenue
in India is still increasing
in nominal terms.
 However, the amount of
traffic (minutes, SMS,
Mbytes) per unit of
revenue increases much
faster.
 While consumers get an
ever better deal, operator
returns have suffered.
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
INRbillion
2003 real terms
Current prices

In order to sustain the growth, the mobile industry is using ever more
spectrum
30
Spectrum employed for mobile services in India
 The spectrum is the
average MHz licenced in
India.
 FDD spectrum is
counted as the sum of
the uplink and downlink
spectrum so that it can
be added to TDD
spectrum.
0
50
100
150
200
250
300
350
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
MHz

The evidence is there: In India mobile revenue per MHz of spectrum
employed declined sharply with the introduction of 3G
31
Revenue per MHz of spectrum licenced to industry
average MHz licenced
in India.
 FDD spectrum is
be added to TDD
spectrum.
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
INRbillion

32
Let’s assume all the spectrum proposed for auction is sold in
2016 and examine the relationship between revenue and
spectrum.

Depending on the region, on average 160MHz of spectrum is up for
auction in 2016
33
Spectrum employed for mobile services in India
 700MHz: 2x35MHz =
70MHz
 2100MHz: 2x15MHz =
30MHz
 2300MHz: 20MHz
 2500MHz: 40MHz
0
50
100
150
200
250
300
350
400
450
500
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
MHz

The pattern of 2010 would be repeated: The revenue per MHz of
spectrum will decline sharply
34
Revenue per MHz of spectrum licenced to industry
average MHz licenced
in India.
 FDD spectrum is
be added to TDD
spectrum.
 Assuming 5% revenue
growth in 2016.
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
INRbillion

Furthermore, the cost per MHz of spectrum would increase
dramatically if spectrum is sold at the recommended reserve prices
 The reserve prices recommended by TRAI:
– For the totality of spectrum to be
auctioned in 2016 amount to Rs 536,239
Crore - INR 5,362 billion.
– The 700MHz alone accounts for Rs
400,000 Crore – INR 4,000 billion.
 The annual mobile services revenue in India
in 2015 is estimated at INR 2,000 billion.
35Totalrecommendedreserve
prices
700MHzreserve
prices
Industry
revenue

Up to 2015, the Indian mobile industry invested INR Crore 286,706 in
spectrum
Year Band
Price INR
Crore
Cumulative INR
Crore
2010 2100 67,718 67,718
2010 2300 38,543 106,261
2012 1800 9,408 115,669
2013 800 0 115,669
2014 900 23,590 139,258
2014 1800 37,573 176,831
2015 800 17,159 193,990
2015 900 72,965 266,954
2015 1800 9,636 276,590
2015 2100 10,115 286,706
36

0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
2010 2012 2013 2014 2015 2016
INRCrore
Price INR Crore at Auction Cumulative Investment INR Crore
The recommended reserve prices proposed by TRAI far exceed the
total investment in spectrum to date
 Up to end 2015, the total
investment in spectrum stood
at INR Crore 286,786.
 The sum of all reserve prices
in the 2016 TRAI
recommendation amounts to
INR Crore 536,239.
 The figures clearly show how
disproportionate the reserve
prices recommended by TRAI
are.
37
Investment in spectrum by Indian operators

Investment in spectrum could pay off, if the annualised cost of
spectrum is proportionate to revenue
 In India spectrum licences have a 20
year term.
 Sufficient returns must be generated
over the period to justify the
investment.
 A sufficient return is a return equal to
the weighted average cost of capital
(WACC) of mobile operators which is
estimated at 15%.
 Next we will examine the annual cost
of spectrum in the context of revenue.
38

If all the spectrum on offer in 2016 is sold at the reserve, the
annualised cost of spectrum would increase to INR 1,327 billion
 Annualisation spreads the
cost of the spectrum
licence fee over the asset
life, taking account of the
cost of capital.
– Cost of capital
(WACC):15%,
– Asset life: 20 years
39
Annualised cost of spectrum licence fees
Annualised cost = cost of capital / (1 - (1 / (1+cost of capital)) ^ asset life)
-
200
400
600
800
1,000
1,200
1,400
2010 2012 2013 2014 2015 2016
INRbillion

At the proposed reserve prices, the cost of spectrum as a percentage
of revenue is unsustainable
 If the totality of spectrum
for auction in 2016 were
acquired at the reserve
price, the annualised cost
of spectrum would grow
to 67% of revenue.
 This figure does not make
any sense.
40
Cost of spectrum licence fees and revenue
0%
10%
20%
30%
40%
50%
60%
70%
80%
-
500
1,000
1,500
2,000
2,500
2010 2012 2013 2014 2015 2016
CostofSpectrum%ofRevenue
INRbillion
Annualised Cost of Spectrum Revenue
Spectrum cost % of revenue

Extracting high spectrum fees from the mobile industry is not
sustainable
41
Demand for Mobile
Broadband and
Spectrum Need
Up-Front Prices Paid
for Spectrum
Licences
LTE Deployment and
Backhaul Capex
Network and
Spectrum Capex
Revenue
EBITDA
Free Cash Flow
Impact on Operators
Balance Sheet
Cash Flow Return on
Investment - CFROI
Annual Spectrum
Fees
The consequence: The only
way to maintain returns is to
reduce investment
Other Opex
minus
minus
minus
equals

The proposed reserve prices are unrealistic in the light of the cash
generation of the Indian mobile Industry
42
Germany,
2015
USA,
2015
India,
2016
Million € US$ INR
Sales 17,894 181,798 2,138,681
EBITDA 6,529 78,763 534,670
EBITDA % 36% 43% 25%
Capex (3,510) (28,874) (296,746)
Operating Free Cash Flow (EBITDA - Capex) 3,019 49,889 237,924
(EBITDA - Capex) / Sales 17% 27% 11%
Total Spectrum auctioned (MHz) 270 65 160
Auction Proceeds 1,792 30,393 5,362,391

The proposed reserve prices are unrealistic in the light of the cash
generation of the Indian mobile Industry
43
Germany,
2015
USA,
2015
India,
2016
Million INR INR INR
Sales 1,317,260 12,295,144 2,138,681
EBITDA 480,630 5,326,805 534,670
EBITDA % 36% 43% 25%
Capex (258,387) (1,952,772) (296,746)
Operating Free Cash Flow (EBITDA - Capex) 222,242 3,374,033 237,924
(EBITDA - Capex) / Sales 17% 27% 11%
Total Spectrum auctioned (MHz) 270 65 160
Auction Proceeds 131,929 2,055,525 5,362,391
Auction Proceeds % of Operating Free Cash Flow 59% 61% 2254%
At INR 5,362 billion, the cost of spectrum as a percentage of operating free cash
flow would be 38 times higher compared to the recent expensive auctions in
Germany and the US. It is highly unlikely that all spectrum will be sold.

The reserve prices for 700MHz proposed by TRAI are out of
proportion to the cash generated by the Indian mobile industry
The reserve prices for spectrum
recommended by TRAI are unrealistic
 INR 5,362 billion is equivalent to:
– Over twice the annual industry
revenue
– 22 years' worth of operating free cash
flow
44
ReservePrices
Industry
Revenue
Where will the cash come from?
Mobile industry pre-tax operating free
cash flow (EBITDA minus capex)

Avoiding the risk of auction failure
Setting reserve prices to deliver
policy objectives
45

Implicitly, auctions focus on maximising revenue from whatever is
sold
46

Encouraging participation in the auction is necessary to generate the
excess demand required for an efficient outcome
Encouraging participation
 Credible and predictable regulatory
environment
 Well defined spectrum rights
 Reasonable coverage and other
licence requirements
 Clear and unambiguous award
process
 Material but low reserve prices
 Multiple lots
 Potential use of spectrum caps
47

There must be substantial doubt that all mobile operators will be
prepared to bid for 700MHz spectrum in India
 Three operators have stated that at the proposed
prices there is no business and they will not bid.
 Other operators may come to the same
conclusion because of the risk of paying more
than their rivals.
– If only one or two operators bid and obtain one
block each at the reserve, the remaining blocks
will either remain unused for many years or be
auctioned at a lower price later.
– Competitors could acquire the spectrum at the
lower price and hence gain competitive
advantage because their cost base will be
lower.
48

High reserve prices are prone to distort auction outcomes and harm
the public interest in a number of ways.
 Spectrum may be left unsold and
hence unutilised. This represents a
productivity loss to society and
reduced auction receipts.
 National imbalances in spectrum
holdings may be exacerbated.
 An unnecessarily high cost burden
may be imposed on the industry,
leading to adverse downstream
consequences in terms of roll-out,
competition and consumer choice.
49
Potential impact of auction design Examples
Spectrum remains unsold and hence economic
value is lost to the country
India 850MHz (2012, 2013)
Australia 700MHz (2013)
Higher costs are imposed on operators than
necessary and deployment slows down
Australia 700MHz (2013)
Belgium 800MHz (2013)

Driven by the desire to plug a hole in the budget, Australia set
extremely high reserve prices for 700MHz
50
700/800MHz Digital Dividend Spectrum Reserve Prices Compared
0.00
0.09
0.13
0.25
0.30
0.30
0.32
0.42
0.49
0.47
0.56
0.60
0.80
1.35
-
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.40
Germany - 5/2010
Netherlands - 12/2012
Denmark - 6/2012
Sweden - 3/2011
UK - 2/2013
Switzerland - 2/2012
Finland - Q4/2013
New Zealand - 10/2013
Spain - 7/2011
Canada - Q4/2013
Portugal - 12/2011
France - 12/2011
Italy - 9/2011
Australia - 5/2013
US$ / MHz / Pop

The Australian APT 700MHz auction resulted in a loss to society and
is an example of policy failure
 Potential socio-economic gain for
Australia?
 Is the spectrum actually used?
 Can operators deploy the 700MHz
band as cost effectively?
 Is there competition to drive down
prices?
 Between AU$ 7bn and AU$10bn
 2x15MHz of 2x45MHz unsold
hence not all of the potential socio-
economic gain is realised
 Only Telstra obtained 2x20MHz,
can deploy at lowest cost; Optus
obtained only 2x10MHz
 One operator, Vodafone, did not
obtain any spectrum and the
leading operator Telstra increased
its competitive advantage, thus
reducing competition
51

There are now multiple cases of auction failure due to high reserve
prices
 Auction failures due to high reserve prices are
multiplying:
– Australia, 2013
– Mozambique, 2015
– Ghana, 2015
– Brazil, 2015
– Senegal, 2016
 High reserve prices were driven by Government
budget targets but failed on two accounts:
– Because not all or none of the spectrum was
sold, there was a significant budget shortfall.
– The aim of the auction was to sell all of the
spectrum and this was not achieved.
52

There are now multiple cases of auction failure due to high reserve
prices
 An auction with unsold spectrum is not only an
embarrassment for the government but also
causes real harm to society.
– Spectrum, which could have been used to
bring broadband for all, lies fallow.
– Ordinary people and the economy lose out.
 Even if the spectrum is auctioned later at a
lower price, a delay in deploying LTE in the
700MHz spectrum causes damage to India.
– “… Indian GDP … would have been higher
by an estimated $26.3 billion (at PPP). ..
were spectrum, for 3G licenses or others,
made more readily available” Thomas W.
Hazlett, Broadband for all, May 2011.
53

The reserve prices for 700MHz proposed by TRAI are out of
proportion to the cash generated by the Indian mobile industry
The reserve prices for spectrum
recommended by TRAI are unrealistic
 INR 5,362 billion is equivalent to:
– Over twice the annual industry
revenue
– 22 years' worth of operating free cash
flow
54
ReservePrices
Industry
Revenue
Where will the cash come from?
operating free cash flow
(EBITDA minus capex)

The reserve prices for 700MHz proposed by TRAI carry a high risk of
a failed auction
The prices for spectrum recommended by
TRAI are unrealistic
 Over twice the annual industry revenue
 22 years' worth of operating free cash flow
The risk of auction failure is high
 Failure to sell all the spectrum
 Failure to raise the cash
 Failure to deliver the National Telecoms Policy
 Not getting the 700MHz deployed would be a
failure to take account of the needs of the
unconnected, i.e. the very people who could
benefit the most
55

0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
1,000
2,000
3,000
4,000
5,000
6,000
2254% 1803% 1352% 902% 451% 225% 113%
RiskofAuctionFailure
ReservePricesINRbn
Total reserve prices Risk of auction failure
Reserve prices that are more than 200% of industry operating free
cash flow carry a very high risk of auction failure
56
Reserve prices and risk of auction failure
zone of
success
 The mobile industry in
India simply does not
generate sufficient cash
to pay anywhere near
the recommended total
reserve price.

Setting reserve prices for 700MHz spectrum consistent with policy
objectives will guarantee success and generate immediate revenue
Setting reserve prices at a level that guarantees
success is highly likely to deliver higher
budgetary receipts
 There are 7 blocks of 2x5MHz on offer. There
are around 8 potential bidders per circle.
 The economics of LTE mean that each bidder
would like at least two blocks, i.e. aggregate
demand will be at least for 16 blocks.
 Demand for 16 blocks is much higher than the
supply of 7 blocks. Prices will tick up in the
auction until a true market value is found.
 The auction would be a success for the users of
mobile broadband, policy makers and operators.
57

Setting a realistic price is likely to increase immediate auction
receipts and deliver multiplier gains
A potential scenario: Reserve price at 10% of
the TRAI recommended figure
 All seven blocks are sold 50% above the reserve
price, the auction receipts amount to INR 649
billion.
 There would be multiplier gains well in excess of
the immediate auction receipts.
– Increase in GPD and associated tax receipts.
– Increased competition because more
operators will have acquired spectrum which
is likely to result in consumer surplus due to
lower retail prices.
– Rural India would get access to mobile
broadband faster, thus enabling Digital India.
58

Selling just one or two blocks of 700MHz spectrum at the proposed
reserve prices is highly unlikely
 Deploying LTE is just one block is
highly inefficient, operators would
want two blocks.
 At the recommended reserve price
two 700MHz blocks nation-wide
would cost INR 1,143 billion.
 India’s biggest operator, Bharti Airtel,
has a revenue of around 600 billion,
the licence would be almost 2 times
annual revenue and 10 years’ worth
of operating free cash flow.
 Looking at the other end of the scale,
the state owned operators generate a
revenue from mobile of around INR
132 billion. The licence would
represent over 8 times their annual
revenue.
 All of the 700MHz is likely to remain
unsold, generating zero revenue for
the government.
59

60
How can we do things differently?

The reserve price for the 700MHz auction in Chile in 2014 was set to
deliver rural development policy objectives
The 700MHz spectrum award process
focussed on connectivity and
competition policy objectives …
 connect 1,281 rural towns and 500
schools
 obligation to build fibre
 mandated MVNO access and roaming
… rather than extracting money from
the mobile industry.
 The reserve price was small.
 Auction proceeds amounted to only
0.017 $/MHz/pop.
61
Note: Per capita GDP in Chile: US$ 15,700

Policy objectives for the allocation of mobile spectrum are wider than
maximising auction proceeds
Delivering policy objective vs. immediate revenue generation by
maximising auction proceeds
62

A simple valuation problem
What would you rather have?
 US$ 10,000 today
or
 US$ 100,000 in three years
63

The auction objective in Chile focussed on maximising the net
present value of the spectrum and NPT-2012 sets the same objective
NPT-2012 recognises that
maximising the NPV of spectrum is
the key objective
“The primary objective of NTP-2012 is
maximizing public good by making
available affordable, reliable and secure
telecommunication and broadband
services across the entire country.
The main thrust of the Policy is on the
multiplier effect and transformational
impact of such services on the overall
economy.”
64

Setting high prices for spectrum is problematic and in the case of
India is inconsistent with policy objectives
Hazlett and Munoz, “What Really Matters in
Spectrum Allocation Design”, 2010
“[T]he ratio of social gains [is of] the order
of 240-to-1 in favour of services over
licence revenues…Delicate adjustments
that seek to juice auction receipts but
which also alter competitive forces in
wireless operating markets are inherently
risky. A policy that has an enormous
impact in increasing licence revenues
need impose only tiny proportional costs
in output markets to undermine its social
utility.
In short, to maximise consumer welfare,
spectrum allocation should avoid being
distracted by side issues like government
licence revenues.”
65

Recommendations for setting reserve prices for spectrum
 In a spectrum auction, reserve prices should be set
to deliver policy objectives, namely the
maximisation of net present value (NPV) for India.
– The NPV of spectrum for India consists of the
immediate auction receipts, and the much larger
multiplier effect.
 A successful auction encourages participation to
ensure that demand for spectrum exceeds supply.
This means operators will bid up the price to a
level where supply equals demand. This is the
market value of spectrum.
 Setting prices above the industry free operating
cash flow carries a high risk of auction failure.
66

The reserve price proposed by TRAI are
unlikely to maximise auction receipts
Critique of calculating the reserve
price for 700MHz spectrum
67

The value of spectrum to a mobile operator
 The value of spectrum to an operator
is the net present value (NPV) of
incremental cash flows that can be
generated for acquiring that spectrum.
 The value depends on the business
case which includes many variables.
The propagation characteristics of a
particular band are only one aspect of
the business case.
 The price paid in a previous auction
was based on the business case at
that time. It is no indication of the value
of spectrum under different
circumstances.
68

You are in a desert and about to die of thirst; what is the value of a
bottle of water to you?
 You are in a desert and about to die
of thirst.
 Someone is offering to sell you a
bottle of water for $1,000 and you
happen to have $1,000 on you.
 Would you pay?
 If yes, the value of the bottle of water
to you under these circumstances
would be $1,000.
 Does that represent the market value
of a bottle of water?
69

TRAI calculates the reserve price for 700MHz based on prices paid for
1800MHz spectrum
“The Authority recommends that
reserve price of 700 MHz band should
be equal to four times reserve price of
1800 MHz.”
However, from an operator perspective
there is no linkage between prices paid
for 1800MHz in the past with the value
operators may attach to 700MHz
spectrum.
 At the time of the 1800MHz auctions,
operators had no choice but to buy
the spectrum. Without the spectrum
they could not have continued
operations.
 Therefore the value of the spectrum
to operators at that time was the
value of the entire business in that
circle.
 The business case for acquiring
700MHz spectrum is very different
and hence the value of 700MHz
spectrum to operators is different.
70

The notion that low band spectrum is more valuable that high band
spectrum does not meet the reality test
 The 2015 multi-band auction in Germany resulted in higher prices for 1800MHz
compared to 700 and 900Mhz spectrum.
71
0
50
100
150
200
250
300
1 9 17 25 33 41 49 57 65 73 81 89 97 105113121129137145153161169177
€Million
Round #
700MHz 900MHz
1800MHz 1500MHz
Average per block prices 2015 auction Germany
€/MHz/pop
700MHz 0.21
900MHz 0.24
1800MHz 0.30
1500MHz 0.10

The 900MHz and 1800MHz spectrum were renewals and the 700Mhz
and 1500MHz was new spectrum
72
€/MHz/pop
Reserve
Price
Price
Paid
900MHz 0.093 0.24
1800MHz 0.044 0.30
700MHz 0.093 0.21
1500MHz 0.046 0.10
Renewal of existing
licences, required for
business continuity
New spectrum,
auctioned for the first
time

Comparing the 2010 and 2015 auctions provides a good illustration
that prices for spectrum are driven by the value operators attach to it
 A comparison of the 800MHz (2010)
and 700MHz (2015) spectrum
auctions in Germany provides a good
example.
– 2010: 2x30 MHz of 800MHz
spectrum on offer alongside other
spectrum
– 2015: 2x30MHz of 700MHz
spectrum on offer alongside other
spectrum
 800MHz and 700MHz spectrum have
similar propagation characteristics.
 From a technical perspective there is
little difference between the two
bands.
 Did operators pay similar prices for
the spectrum?
73

Prices paid in the past are no indication of the value of spectrum to
operators in future auctions
 Many sources of value which were
present in the 800MHz auction were
not present in the 700MHz auction
and there were some other
situational differences.
 Consequently the price paid for
– 800MHz spectrum in 2010 was
€0.73/MHz/pop
– 700MHz in 2015 was only
€0.21/MHz/pop.
 This example illustrates that it would
be wrong to use the 800MHz prices
paid to set the reserve price for
700MHz spectrum.
 The same holds true in general:
Prices paid in the past are no
indication of the value of spectrum to
operators in future auctions.
 Therefore benchmarking is not a
suitable methodology to establish
reserve prices.
74

As long as demand exceeds supply, low reserve prices do not lead to
low auction proceeds
 Despite a reserve price
of less than 1 cent per
MHz / pop, the 2010
auction produced very
high price for 800MHz
spectrum.
 There was demand for 8
blocks but only 6 blocks
were available.
75
0.004
0.103
0.91
0.21
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
800MHz 2010 700MHz 2015
US$/MHz/Pop
Reserve Price Price Paid
2010 and 2015 auctions in Germany, reserve
prices and prices paid compared

Conclusions
 The value of spectrum does not depend solely
on propagation characteristics, other factors are
larger.
 Prices paid in the past are no indication of the
value of spectrum to operators in future
auctions.
 When demand exceeds supply, prices paid for
spectrum will be high even if reserve prices are
low.
76

A specialist telecoms management
consulting firm
About Coleago Consulting
77

Since 2001, Coleago has offered a wide range of advisory services to
the telecom industry
78
Strategy & Business Planning
 Strategy Development, Marketing Strategy
 MVNO and Multi-Brand Wholesale Strategy
 Business Planning and Business Modelling
Telecoms Regulation & Interconnect
 Accounting Separation, Regulatory Price
Control
 Interconnect Cost Modelling, RIO
 Regulatory Consultations
Business Transformation & Cost
Reduction
 Cost Reduction
 Mobile Network Sharing
 Restructuring and Turnaround
Transaction Services
 Commercial Due Diligence
 Tower Due Diligence
 Preparation of Information Memorandum
Spectrum Valuations and Auctions
 Spectrum Strategy
 Spectrum Valuation for Auctions
 Spectrum Auction Bid Strategy and Execution
 Beauty Contest Bid Books
Mobile Network Sharing
 Mobile Network Sharing
 Managed Services and Outsourcing
 Tower Due Diligence
 Network Audit

Coleago has carried out over 70 spectrum consultation, valuation,
auction and beauty contest licence projects
Completed in 2015-16
 South Africa – 800, 2600MHz
 Ghana – 800MHz
 Russia – 1800MHz
 UK - 3.4, 3.5, 3.9GHz
 Ukraine – 2100MHz
 Argentina – 900, 1800, 700MHz,
AWS
 Canada - AWS-3 and 2.5GHz
 Bangladesh – 700, 1800, 2100MHz
 Guatemala – 3.5GHz
Completed in 2013-14
 Canada – 700MHz
 Paraguay - multi-band
 Oman - 800MHz & 2.6GHz
 Belgium - 800MHz
 New Zealand - 700MHz
 Myanmar - greenfield
 Australia - 700MHz & 2.6GHz
 UK - 800MHz & 2.6GHz
 Sri-Lanka - 1800MHz
79© Copyright Coleago 2016 - www.coleago.com

Spectrum auction failure in India, October 2016

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Spectrum auction failure in India, October 2016