The post-spectrum phase of Indian telecom

Before 2015, the Indian telecom industry was rife with players—nine in all. Then Reliance Jio happened, and as data tariffs plummeted, a wave of consolidation ensued. The latest example being the merger of Vodafone India and Idea Cellular to form Vodafone Idea which concluded on 31 August. Now, the Indian telecom industry has just three major players—Reliance Jio, Airtel, and Vodafone Idea. And as the dust of consolidation settles, a curious new reality has emerged. Spectrum, once the object of bidding wars, is no longer a rare commodity. In fact, thanks to consolidation, the remaining players have it in abundance.

“We have now reached a situation where there is a spectrum surplus for the next 24-36 months,” says P Balaji, chief regulatory & corporate affairs officer at Vodafone Idea. A senior source in the telecom industry says that the newly-merged entity is expected to generate annual savings of Rs 8,400 crore ($1.26 billion) on the capex and opex side over the next four years. Importantly, the company feels it doesn’t need to invest in more spectrum to run its operations.

The same goes for Airtel, which similarly has no appetite for more spectrum. After its acquisition of Telenor in May—a deal which gave it 43.4 MHz of paired spectrum in 1800 MHz band across seven circles—Airtel’s CEO Gopal Vittal told analysts that Airtel had no need to invest in radio waves. This notion will only strengthen once the approvals for Airtel’s acquisition of Tata Teleservices are cleared.

Jio, on the other hand, has acquired spectrum from Anil Ambani-led Reliance Communications, 122 units of MHz across the 850, 900, 1800 and 2100 MHz bands. All told, the source mentioned above estimates that Airtel holds over 1,600 MHz of spectrum, while Jio is in possession of over 1,400 MHz. Vodafone Idea, meanwhile, has 1,850 MHz.

While this surfeit bodes well for the telcos, it throws a wrench in TRAI’s plans. TRAI wants another spectrum auction, which will include airwaves for fifth-generation mobile technologies—more commonly known as 5G—which can offer up to data speeds of up to 100 Mbps. TRAI has even recommended base prices for the same. But according to executives and analysts The Ken spoke to, the spectrum up for grabs is unlikely to find takers. Telcos are unwilling to participate in the auction, not only due to their ample spectrum holdings but because of what they perceive to be exorbitant spectrum prices—industry body Cellular Operators Association of India (COAI) observed that South Korea’s 5G spectrum auction was considerably cheaper. This, coupled with the debt levels of telcos, make any additional spending for spectrum unwise.

This disinterest stands in stark contrast to the situation in 2014. At the time, telcos—stung by the Supreme Court’s 2012 decision to cancel 122 telecom licences issued in 2008—bid aggressively for spectrum, driving prices through the roof. The incentive was simple, the SC’s verdict meant that companies which had been building their businesses for years faced the possibility of shutting shop.

The auction was considered a success, but there was a catch. It caused a price distortion for future auctions. Taking the 2014 results as an indicator, subsequent auctions in 2015 and 2016 saw base prices increase. The 2016 auction was even considered a failure, as the entire 700 MHz band went unsold. But the proposed 2018 auction looks set for a far worse reception, almost a repeat of the 2013 auction, which was boycotted by all telcos barring one on account of the reserve price being too high.

In the absence of the usual scramble for spectrum, telcos have other priorities. They are wagering that these, rather than spectrum, are where the real opportunity lies. In a sense, it would be true to say that the telecom industry is entering a post-spectrum phase. One where the emphasis is on better utilising existing resources. For instance, telcos want to strengthen their backhaul. Backhaul is the link between the core network and cell towers and sub-networks. These links can be made wirelessly through microwaves or optic fibre cables.

This change in focus is unprecedented in the history of Indian telecom, where spectrum has always been a driving factor. So, what does this brave new telecom sector look like? To answer that, we first need to delve into the financial health of the sector.

Debt row

In a post made in August, Parag Kar, a vice president for government affairs at telecom gear manufacturer Qualcomm, painted a gloomy picture of the financial health of Indian telcos. He estimated that operators in India make around Rs 1,60,000 crore ($24.05 billion) and pay out around 24% of that for spectrum and licence fee costs in 2018.  Extrapolating to 2021, Kar estimates that the industry will make around Rs 1,85,000 crore ($27.8 billion), and will have to pay around 31% of the revenue for spectrum and licence fees. He goes on to argue that at the existing debt levels, the telecom industry simply cannot participate in the upcoming spectrum auctions.

The debt levels that Kar alluded to were touched on by an August report from financial services company Credit Suisse. The report, which looked at a number of financially stressed companies in India, featured both Airtel and Idea Cellular. Airtel, till recently India’s largest telecom operator, had an earnings before interest and taxes (EBIT) of Rs 1,580.6 crore($237.6 million)  in the June 2018 quarter but paid an interest of Rs 2,549.8 crore ($383.3 million) on its debt. Idea Cellular, which recently merged with Vodafone India to form Vodafone Idea, had a negative EBIT of Rs 1,433 crore ($215.4 million) and had interest payments of Rs 1,525.8 crore ($229.4). As for the larger picture? COAI claims that, as of March 2018, the total debt of all telecom operators is Rs 7,64,000 crore ($114.83 billion).

With this being the case, it comes as little surprise that the base price recommendations made by TRAI for the proposed 2018 spectrum auction are lower than the previous iteration.TRAI recommended reserve prices for 700, 800, 900,1800, 2100, 2300, 2500, 3,300-3400 and 3,400-3,600 MHz bands. The last two bands have been identified for 5G usage, while the 800, 1800, 2300 and 2500 bands are primarily used for 4G in India. The 900 and the 1800 MHz bands are used for 2G. Cumulatively, this auction will see 8,096.45 MHz of telecom frequencies up for sale with a reserve price of Rs 4,90,000 crore ($73.65 billion), a decrease of 15% from the October 2016 auction.

Learning from the 2016 debacle, TRAI has slashed the price of the 700 MHz band—considered one of the most effective bands for 4G due to its higher penetration in buildings and greater coverage—by 43%. From the earlier base price of Rs 11485 crore ($1.72 billion), the price for spectrum in this band will now be a comparatively meagre Rs 6,568 crore ($987.26 million) per MHz.

But while TRAI is hoping these lower prices will be enough to entice telcos, analysts The Ken spoke to said that even this cut would not yield any takers for airwaves.

The 700 MHz band also has a significant drawback—most mobile devices aren’t compatible with the frequency, save for some flagship models from Google, Apple and Samsung. With such a small pool of users, telcos simply don’t see the viability in the 700MHz band even at lower spectrum prices, explains a Mumbai-based analyst in a financial services firm.

Turbocharging existing bands

This isn’t to say that there is no interest in spectrum at all. Rajan Mathews, director general of COAI, says that some operators may look to pick up some 4G spectrum—the 2300 and 800 MHz bands. Other bands, he says, will find no takers.

Instead, operators will be looking to utilise their existing resources better. Airtel, for instance, wants to repurpose some of its 900 MHz spectrum, primarily used for 2G voice services, to 4G over the coming months. This, Airtel’s Vittal told analysts, will give the telco “increased capacities and better spectral utilisation” of their existing, expensive spectrum. In January, Airtel started to deploy Huawei’s cloud technology which allows it to utilise 8.8 MHz of spectrum in the 900MHz band to improve its 4G coverage.

Meanwhile, Idea Cellular’s management told analysts that it wants to refarm its 1800 MHz (also considered useful for 2G voice services) for VoLTE usage. VoLTE is the high-speed standard for wireless communication which is run over the Internet Protocol (IP). It allows users to make phone calls over the internet and uses fewer data packets. Excess 2G equipment from the merger with Vodafone India will be deployed to handle the surge in voice calls that resulted from the ongoing tariff war with Jio as well as the reduction of interconnect fees by TRAI.

Telcos are also moving to vastly increase the capacity of their existing networks. To this end, they have begun to deploy a wireless technology called Massive MIMO. It dramatically improves the performance of a wireless network by about 5-7X. With Massive MIMO, explains Vodafone Idea’s Balaji, is that 4G is essentially turbo-charged, making it almost equivalent to 5G. 4.9G, if you will.

Balaji says that Idea has implemented Massive MIMO on existing 4G spectrum in many metros, including Pune, Hyderabad, Jaipur, Kochi, Indore, and Meerut.

Airtel and Jio, on the other hand, have started to deploy Massive MIMO in cricket stadiums. Jio, for instance, deployed the technology at Mumbai’s Wankhede Stadium and Delhi’s Feroz Shah Kotla Stadium in April. Airtel said that it would deploy the technology at Indian Premier League match venues in Delhi, Mumbai, Hyderabad, Kolkata, Mohali, Indore, Jaipur, Bengaluru and Chennai.

Massive MIMO is being pegged as a pre-5G technology, and Balaji believes that, rather than diving headlong into 5G, it makes sense to lay the groundwork for it first. “You want to use the energy of the industry to build pilots and use cases for IoT (Internet of Things), roll out 4G fully, have Massive MIMO tested out in multiple cases, and make people ready for the 5G world,” he says.

CDN advantage

Telcos aren’t just looking to improve their spectrum capabilities, they are also intent on pushing customers to use the spectrum more. Consume more data. And since video has been driving data consumption in the country, telcos are increasingly looking to leverage video content to their benefit.

As The Ken had reported earlier, telcos are building content partnerships with many video streaming applications. Not only do these drive data consumption, but they also help telecom companies retain customers and drive up the average revenue per user (ARPU).

But according to a report by brokerage firm Edelweiss, a new opportunity is afoot. TRAI granting content delivery networks (CDNs) an exemption from net neutrality rules on differential pricing has opened up new possibilities for telecom companies with large app ecosystems.

“While rise in content cost is likely to sustain, TRAI expects data cost to remain low. This could benefit telecom companies if they create platforms to monetise the same and invest in the network. We believe, CDN exemption could significantly benefit telcos with large internet ecosystems given its potential to alter customer preference,” reads the Edelweiss report.

Let’s take the example of one of Jio’s streaming services, Jio Cinema. Jio Cinema doesn’t work for customers on non-Jio networks. This basically means that Jio’s apps work on a private network, exempting them from TRAI’s net neutrality rules. Potentially, Jio could offer content to customers this way while bypassing data limits. “This will incentivise customers to use the RJIO (Reliance Jio) apps, especially for apps consuming high bandwidth, such as video, cloud storage, etc.” says the report. The report notes that this differentiator may lead customers to choose mobile operator apps instead of others.

Airtel and Idea Cellular also have their own app ecosystems for music, video and games to drive data usage among their own customers. Airtel’s video streaming application, however, is not locked to its network and allows customers from other networks to use them as well. This means that they still have to abide by net neutrality norms.

Building a backbone for 5G now

But what of the mythical 5G? In truth, India is still years away from an actual 5G ecosystem. Telcos say that the environment to roll out 5G services in India simply doesn’t exist. To properly implement 5G, the government will have to intervene significantly on the policy front. The government, for its part, set up an inter-ministerial task force with various subcommittees which released a report on 23 August about how to deploy 5G. The task force will take into account issues on spectrum pricing and allocation, and oversee trials.

While China and the United States government have been working closely with telecom operators to deploy 5G, India will, in all likelihood, follow their lead. “5G is a collection of applications and technologies whose timeline for maturity and business viability is still hazy. I think China and US should set the pace, and we can learn from them,” says Arogyaswami Paulraj, a professor at Stanford University, who chaired the government’s steering committee on 5G. Paulraj was also instrumental in developing Massive MIMO technology.

Further dissuading the telecom industry from investing in 5G spectrum is the fact that, as with the 700MHz band, 5G lacks a device ecosystem.

However, while this means telcos will not readily tie up capital in purchasing unnecessary 5G spectrum at the moment, efforts—both from the government and private players—are on to pave the way for 5G in India.

Importantly, 5G will require optic fibre backhaul, as optic fibre allows for speeds of up to 1 Gbps. However, the situation on this front is less than ideal. The Department of Telecom’s (DoT) National Digital Communications Policy 2018 says that India has only about 1.5 million kilometres of optic fibre, and less than one-fourth of telephone towers are fibre-connected.

As we reported in an earlier story, companies still find it difficult to obtain right of way permissions to lay down optic fibre cables as they require multiple approvals from local municipalities. This only serves to delay the process of gearing up for a 5G offering. At present, when it comes to optic fibre cable networks, Jio is well ahead of the competition with around 300,000 route kilometres, while that Airtel says it has 245,847 route kilometres of optical fibre as of the end of the June 2018 quarter. Idea Cellular had 158,100 route kilometres at the end of the June quarter.

Meanwhile, telcos and the government are at loggerheads over the government’s initiatives to promote wireless backhaul instead. While telcos agree this is important, allowing them to reach towers in areas where laying down optic fibre cables isn’t possible, they disagree with the government’s plans.

DoT’s Digital Communications Policy of 2018 wants to promote wireless backhaul through E-band and V-band spectrum bands. These bands have frequencies of 60 GHz to 90 Ghz. The government task force has recommended that 57 GHz to 71 GHz be released as unlicensed spectrum for use in backhaul. This would aid the government in its aims to promote public WiFi spots, which also use E and V-band frequencies. However, operators do not want the E-band and V-band to become unlicensed, arguing that private unlicensed players will set up their WiFi networks and interfere with their backhaul.

Clearly, there’s a lot to sort out. And it has to do with more than just 5G. Telecom companies have a lot to keep them occupied, even without the expensive circus of spectrum auctions. For now, it seems, telecom operators have realised it’s not just about how much spectrum you have, it’s what you do with it.  

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