Decision a step in right direction, but not enough: Experts

After the telecom auction failed, government has now decided to cut the spectrum reserve price by 30 percent in four circles including Mumbai, Delhi, Karnataka and Rajasthan. The Empowered Group of Ministers (EGoM) met today to lay out the auction roadmap, informed telecom minister Kapil Sibal.

Also read: 30% reserve price cut won't create much interest: COAI
Telecom analyst Kunal Bajaj is of the opinion that a reduction of 30 percent is not enough. He clarifies that the notion of a reserve price seems to be very fictitious as it is not the price that the auction is believed to close at. Rather, the reserve price is supposed to be an offer price where the auction is supposed to start and if that is lowered, more participants may come in and that will in turn result in the discovery of a real price, he added.
Bajaj also believes that the decision is also not likely to excite telecom companies to a large extent because to retain the 900 MHz chunk they still have to pay a high price.
Overall, "There is a lot more that needs to be addressed to look at the overall spectrum roadmap going forward," opined Bajaj.
Mahesh Uppal, another telecom analyst feels though, the decision is a step in the right direction it is just not enough. "I do not think this is something that is going to spur telecom operators to go and start bidding aggressively," explained Uppal.
As far as the tariff hikes are concerned, he feels it should not be considered as a direct consequence of auctions only. The overall cost of the telecom sector has gone up and that may have pushed tariffs upwards to a certain extent. Uppal believes it is not likely to go up dramatically. Here is the edited transcript of the interview on CNBC-TV18. Q: We have been hearing what your thoughts are as far as that reserve price goes. Today, sources telling us that we could see it being lowered by 30 percent in the four circles where spectrum was not sold, where there were no bidders. Do you think that’s a good move? Are you happy with a 30 percent reduction? Bajaj: I am not sure that 30 percent is enough, particularly in the four circles we are talking about and this is something that a lot of us have been saying for months now. So the whole notion of the reserve price is very fictitious and it sets a very bad precedent because the reserve price is not the price that you anticipate the auction to close at.
It is the offer price that you want the auction to start at and if you set a lower reserve price it is actually more likely to draw in a lot more participants into the auction process. And with more participants, more competition and players seeing their competitors bidding and winning circles, they are much more likely to discover a real price.
And for all we know that the real price may end up even being higher than what the new reserve price has been. So, the precedent has been set around speaking with the reserve price as the key point of discussion and trying to fit it with 10-40 percent here and there. I don’t think it is really going to accomplish all that much for the industry.
 
The other thing is, I think we were hoping that today's discussion was going to yield a lot more than just a discussion on the reserve price for those four circles. There is a lot more that needs to be addressed to look at the overall spectrum roadmap going forward. Q: You are not at all satisfied or at all impress by the reduction of the reserve price by 30 percent. You said that’s just not good enough. But let us also talk a little bit about the 900 MHz band. Sources saying, it is still going to be two times that of 1800 MHz. So, what does all this really mean for telcos and their business plans? Bajaj: I don't think the telcos are going to be very excited by what has happened today, as we were saying earlier. Clearly, 30 percent is a step in that direction and therefore, it is definitely a positive from that regard.
But, looking at the situation where 900 MHz is going to be still priced at twice the reserve price of 1800 MHz means that you are not going to see a lot of activity in the 900 MHz, even though it is a much better spectrum in terms of its propagation characteristics. However, the cash flow that is expected of the telcos to be able to retain the entire 900 MHz chunk that they hold today is still going to be too high in terms of what they can afford.
The flip side of that is because the incumbents who are already operating in 900 MHz are basically going to try and do whatever they possibly can to hold on to whatever spectrum they have, to avoid going through a process of junking old equipments that can’t be upgraded and re-finding the entire network and things like that, the telecom companies will probably see that they participate at the minimal level that’s required for their network. If they do this, they don’t have to be completely transformed.
_PAGEBREAK_ Q: What are your thoughts on what the EGoM has decided today? Telcos are highly leveraged. Their balance sheets still overstretched after the 3G auction and also if I could get an understanding from you on what this could mean for telecom tariffs going forward? Uppal: There is no question that this 30 percent is a step in the right direction, but clearly it is not enough. Whatever little indications are available, I do not think this is something that is going to spur telecom operators to go and start bidding aggressively. I guess the reason why the government has still not gone low enough is simply because they do not want to appear to have given away spectrum very cheaply because those are the kind of accusations they are facing.
 
I can understand where they are coming from. But, I think from the point of view of the auction, this reduction is just not good enough and as many other people have talked about, there are too many other uncertainties and other litigation in the courts currently that will also deter operators from taking too big an exposure. I think we are yet to see the kind of resolution of the mess that we see the sector in currently and there is still time to go for that.
The second point you raised was the issue of tariffs. I think as we have seen recently, tariffs are going slowly upwards which is not a direct consequence of the auctions passed or the ones that are coming. But yes, the costs of this sector are going up and people would want to try and raise the prices. Given that this is an issue facing most operators, when a particular operator tries to raise prices it seems the others too follow instead of trying to undercut that operator.
I think the tariffs will begin to go up, but in not too dramatic a fashion. I do not believe that dramatically higher tariffs are sustainable. This is not happening in the near future. If I am a consumer, I would not worry too much about this.