In today’s Finshots, we tell you why the ongoing telecom spectrum auction doesn’t have many takers.
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The Story
The Indian government just kicked off this year’s telecom spectrum auction yesterday. And if it manages to sell all of the airwaves that are up for grabs, it could make a whopping ₹96,000 crores!
But the government might only be able to rake in ₹12,500 crores this time. That’s just about 13% of what the whole thing is worth ― a stark contrast to the ₹1.5 lakh crores that it earned in 2022.
So, what’s going on, you ask?
Well, before we get there, let’s talk about how telecom spectrum auctions work in the first place.
Look, every communication device like a phone or a laptop, requires signals to connect across networks. These signals are transmitted through radio waves, which are sent at specific frequencies. To ensure smooth operation, these frequencies are organised into a spectrum. The spectrum is divided into various bands, each containing a range of frequencies dedicated to different types of communication services.
Now, this spectrum is a public asset that the central government owns. And it auctions it to folks like telecom companies (telcos) who have the necessary infrastructure to transport signals across different places.
So if telcos want to acquire more customers and accommodate all their communication, they simply participate in the auction and place their bids for the type of frequency bands they need. A higher bid gives them more potential to walk away with the licence to operate airwaves at higher frequency bands, which also means better service for their customers. And these licences usually last for 20 years, after which telcos have to renew them or bid for new ones.
But here’s the thing. These telecom spectrum auctions don’t happen like clockwork every year. The government only conducts an auction through the Department of Telecommunications (DoT) when it feels that there’s enough demand for this stuff. If not, it could skip over.
That’s exactly why India didn’t have a telecom spectrum auction between 2016 and 2021. Most telcos were strapped for cash and couldn’t afford to buy more spectrum. And this meant that the government had to just push the auctions to a later time until telcos were ready to spend again.
Something similar is panning out this time around. Telcos don’t need more spectrum because they bought most of what they needed during the last auction in 2022. In fact, they’ve still not utilised a significant portion of it and less than 10% of it requires renewal. So folks like Airtel or Vodafone Idea are being cautious about spending too much money on new spectrums since they have enough spectrum already and will need just a little more for areas where their licences are expiring.
After all, the high prices they agree upon, have to be paid in annual instalments over the next 20 years, which also means creating more debt entries in their balance sheets. And being judicious about this expense will only help them reduce their financial burden and improve cash flows.
But weak demand is not the only reason why the telecom spectrum auctions are a damp squib this year. The other culprit is 5G.
You see, when 5G took off in India, telcos jumped for joy. Airtel and Jio grabbed the opportunity because they felt that it was the next big thing. They even managed to make India the fastest country in the world to roll out 5G services by deploying over 4,00,000 5G stations within just 15 months of getting their hands on the licence.
Despite that, 5G hasn’t turned out to be a revenue generator for telcos for two big reasons.
5G networks operate on higher frequency bands, which offer greater bandwidth but have shorter range and are more easily obstructed by physical barriers like buildings and trees. This limitation often results in patchy network coverage, causing mobile devices to switch back to 4G networks during transit. As a result, users might not experience a significant improvement in speed with 5G compared to 4G.
The only way to solve this problem is to add more 5G stations across the country as the number of 5G stations in India are less than a fifth of the total number of 4G stations, right now.
But telcos just can’t add stations without more revenue. And 5G doesn’t generate significant revenue for them at the moment.
If you’ve noticed, you may not really be paying separately for a 5G plan. It probably just comes as a free add on with a 4G mobile internet plan.
This is because 5G has very few use cases in India in its current form.
And the demand is restricted to niche industries like gaming and streaming. Others can probably get their work done with 4G networks. So even if telcos start monetising 5G, which they soon will, they may not see a major uptick in revenues. And this may not justify the obscene amount of money that telcos have already shelled out for 5G spectrums in 2022.
So yeah, that’s why this year’s telecom spectrum auctions may turn out to be underwhelming.
Until then…
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