Spectrum Pricing

TRAI Increases Base Price of Spectrum by 10 %

TRAI has recommended an overall 10% increase in the base price for spectrum in the 1800 megahertz (MHz) band, basing its valuation on the price discovered in the last auction of airwaves.

It sought some recommendations which allow more spectrum’s available for commercial use along with making it as efficient as possible.

The recommendations are:

Minimum Price for Spectrum in 1800 MHz/ 1 MHz be set at Rs 2,138 crore and for Spectrum in 900 MHz/1 MHz be set at Rs.3,004 crore.
• Government should allow, telecom operators using popular GSM technology to use 800 MHz band.
• While bidding for both 900MHz and 1800MHz bands will continue to be in 200KHz blocks, operators will have to bid for a minimum of 3.6MHz in 900MHz band in circles where there is more than 10MHz available and 2.4MHz in circles with less than 10MHz in that band. For 1800MHz, bidders would have to bid for a minimum of 0.6MHz.
• It suggested that there would be no auction for Maharashtra and West Bengal and a 30% discount on the reserve price for the Rajasthan because of the partial availability of 1800 MHz spectrum.
• Auction should be carried out only after a clear road map is available for vacating spectrum in 2100 MHz band from Defense and in 900 MHz band from BSNL.
Armed Forces should vacate unused spectrum that they are holding. If that is not possible, the government should reserve 20MHz in the 1800MHz band for the Armed Forces in circles where they already hold spectrum and 5MHz in the same band in circles where they don’t.

Highlights

2MHz spectrum in the 900MHz band should be taken back from Bharat Sanchar Nigam Ltd (BSNL) from all the circles where permits expire in 2015-16 except in Punjab. In lieu, BSNL should be assigned 1.2MHz in the 1800MHz band in circles where its spectrum holding in that band is less than 3.8MHz such as in Gujarat, Rajasthan and West Bengal.
• Allowing telcos to barter spectrum among themselves to make it contiguous and more efficient.

TRAI’s Approach on Calculation of Reserve Price of Spectrum

TRAI adopts a functional approach in valuing spectrum –

(V) is a function of available Market Information (I); Technological Factors (T); Macro and Micro Economic Variables (E). In other words it uses a Formula V= f (I, T, E)

In deriving the formula it uses following parameters:

(i) Market Data Analysis: Estimation of value of spectrum using a) single variable correlation and b) multiple regression analysis.
(ii) Opportunity Cost Analysis: Estimation of value of spectrum using a) producer surplus; b) production function; and c) economic efficiency.
(iii) Discounted Cash Flow: This method was used in TRAI‟s report on the “2010 Value of Spectrum in the 1800 MHz band” dated 8th February 2011.

Approach of Other Jurisdictions on Reserve Pricing of Spectrum

OFCOM

• Its bases its spectrum price on market price by analyzing prices paid by buyers in other jurisdictions for specific value of spectrum.
• Value is based on willingness of the operator to pay.
• Data from spectrum awards in other jurisdictions and “Business Model” is used to value spectrum.
• Business Model Approach uses market conditions and bidder specific factors to estimate spectrum value.
• The reserve price so calculated are based on ‘per lot’ spectrum.

FCC

• It applies the following formula to calculate reserve price:

Price per MHz Population Multiple = Sales Price /(MHz of license x population covered)
• While calculating it uses two approaches ; “Market Approach” and “Income Approach

Market Approach

o The value of an asset is calculated based on the prices of actual transactions for similar assets.
o These observations make it possible to determine the value of assets that have no active market.
o Auction Results from Primary Market are used due to their easy availability, large number of participating operators and use of adequate amount of spectrum.
o In case of broadcasting licenses, data form secondary market is obtained as need of comparable data is fulfilled.

Income Approach

o Adopted in order to obtain comparable and recent market data.
o Application of the approach requires isolation of value of the FCC license excluding any going concern value from the existing business or any other asset.
o A modern form of “Income Approach” called “Greenfield Approach “is also applied. It mirrors that of a traditional income approach with respect to the discounted cash flow model (“DCF”), with a few notable exceptions.

Other Factors considered while valuing reserve price:

Regulatory Use: Spectrum bands with less regulatory restrictions and more flexibility in use typically have greater value.
Spectrum Band Location: A license’s location on the spectrum band can materially impact the value of the spectrum license- A very high frequency spectrum is considered to be more valuable than ultra high frequency spectrum.
Geographic Location: The population coverage of the license is one of the largest value drivers. Larger the market, the higher the value.
Size of Spectrum Band: The amount of spectrum in any given market is largely a factor of the use of the spectrum. Larger bandwidth licenses generally have greater value.

Spectrum Management Authority – Jamaica (Situated east of USA)

The Jamaican Government operated through Spectrum Management Authority to regulate spectrum and while calculating reserve prices it considers following factors:

• The radio frequency spectrum is a scarce resource.
• The 700MHz spectrum is a valuable commodity.
• The price should be low enough in order to encourage multiple players in the market.
• The price should be sufficiently high in order to ensure a “reasonable” payment for the license.

Competition Concerns – Possible Anti Competitive Concerns involved in Spectrum Auction

Competitive situation is driven by the local market dynamics. Some concerns harming competition are –

Barriers to Entry

If the local market dynamics has a large number of operators, it may be challenging for a new operator to enter the market and gain enough market share to be competitive. From a financial reporting perspective, the competitive situation in the market may also impact the pool of market participants. For example, in the valuation of a PCS license, if all of the existing operators in the market have significant spectrum holdings and are all offering service with similar technology (i.e., CDMA), it may change the pool of market participants willing to acquire the license. The competitive situation may positively or negatively impact the value of the license.

Collusion

When bidders indulge in colluding agreements towards spectrum auction.

Bidders may be required to submit a declaration certifying that it has not entered and will not enter into any agreements or arrangements of any kind with any competitor regarding the amount to be bid, the amount of spectrum being bid for, or bidding strategies.
Bidders who engage in this behavior will risk exclusion from the post-qualification process, or revocation of Spectrum License, if this has already been granted.

Anti Competitive Behavior

Bidders restricting or adversely influencing the ability of other Bidders to plan, build or operate their networks under the Spectrum License.

The Competition authorities may look into the market dynamics of this sector for competition concerns. The authority may review such agreements / arrangements. Therefore, the bidders should be encouraged to file declaration before auction that they would not indulge in such practices. However, such declarations cannot be used as a defense on evidence of anti-competitive behavior found.


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