India 700-MHz Spectrum Auction Faces Potential Buyer Strike

Minimum prices set for an auction of 700-MHz spectrum in India are so high (two to four times higher than prior auctions)  that many of the leading mobile companies will not bid. And, according to Fitch Ratings, the eventual spectrum winners might well regret having won. That “winner’s curse” has happened before, often with 3G spectrum auctions.

India's telecom regulator recommended a reserve price of INR115bn (US$1.7 billion) per MHz for nationwide 700MHz spectrum.

Fitch Ratings “believes that efficiency gains from deploying 4G services on 700MHz will be insufficient to offset the relatively high price.”

The reserve price is about twice the price set for 800-MHz spectrum, 3.4 times the reserve price for 900-MHz spectrum and four times the minimum prices set for 1.8 GHz spectrum.

Winning therefore “could exert further pressure on participating telcos' balance sheets and cash flow, and limit their ability to invest in capex over the medium term,” say Fitch Ratings analysts.

In fact, the top four telcos, including Bharti Airtel, Vodafone, Idea Cellular and Reliance Communications may hesitate to bid, as balance sheets already are “stretched,” while available cash is expected to become an issue once Reliance Jio enters the mobile market in the spring of 2016.

Instead, the leaders might choose to rely on spectrum they already have acquired. Bharti Airtel will use 900 MHz, 1.8 GHz and 2.3 GHz.

Reliance Jio, after having invested about US$15 billion on spectrum and networks, will use 800MHz and 850MHz spectrum.

In March 2015, the leading mobile operators had to spend of US$17.7 billion to retain use of spectrum they already were using.

“We believe that there are far fewer reasons for telcos to invest as much in the 700 MHz auction,” Fitch says. As always, there are other alternatives.

Companies can, to some degree, trade and share spectrum, for example.

They also can buy other firms, acquiring spectrum in the process.

During 2015, Reliance Communications merged with Sistema JSFC's MTS India. Reliance Communications also has further plans to merge its wireless unit with that of Maxis Berhard's Indian unit, Aircel Limited.

Fitch believes that smaller and weaker telcos will further seek to be acquired  or exit the industry.

Videocon India, one of the smaller firms which is struggling, has agreed to sell its 4G spectrum assets to the third-largest telco, Idea Cellular.

Fitch expects competition to intensify upon Jio's entry in the market

Blended monthly average revenue per user could fall by five percent to six percent to around INR160 (2015: INR170.

Earnings will suffer as prices drop and marketing spend increases.