V. Sridhar

THE debate over the licensing of 3G spectrum continues. The Telecom Regulatory Authority of India recommended allocation of 3G spectrum in IMT 2000 band without any upfront license fee for the existing mobile service providers and allocation to the new players at the fourth cellular operator's entry fee equivalent to about Rs 1,600 crore for all India coverage.

Subsequently, Ratan Tata's offer to pay Rs 1,500 crore as entry fee for 3G spectrum licence is being seriously considered by the Department of Telecommunications.

Recently, the Cellular Operators Association of India (COAI) came up with the magic figure of Rs 300 crore as possible entry fee payable by the cellular mobile service providers for 3G spectrum licence.

Proponents of "open access" to spectrum argue that technology developments use spectrum efficiently and hence will correct the notion that spectrum is a scarce resource and hence needs to be priced high.

On the other hand, there is general agreement among most researchers and policy-makers that some form of spectrum pricing would increase the efficiency of usage and hence reduce the idle "white spectrum".

Licence fee determined through auction is traditionally seen as the efficient mechanism for putting an economic value on spectrum and allocating it to the firm that uses it most efficiently.

However, the 3G spectrum auction in Europe and that for 2G spectrum in 1995 in India demonstrated that given the highly uncertain long-term environment in the mobile telecom market, the entry fee could become impracticably large.

High licence fees could either force the exit of some firms as happened in some cases in India or signal post-entry collusion. If firms exit, competition reduces and prices may increase.

Economists argue that upfront licence fee becomes a sunk cost and is irrelevant to pricing as the firms will make subsequent decisions solely on incremental costs and revenues.

However, if firms collude, prices may be hiked to recover the upfront licence fees. Both are undesirable from the customer's point of view.

On the other hand, lower licence fees lead to a larger number of viable operators with no collusive behaviour. This will lead to lower prices and higher market growth.

High licence fees can also affect the speed of infrastructure development. Most European 3G operators who bid high did not have enough resources to build applications and services.

Another important factor is the number of operators providing services. Though we have an upper limit of four for the GSM-based cellular mobile services, the migration of any number of basic service operators to unified access service providers theoretically places no upper limit on the CDMA operators.

The number of operators and the spectrum to be allotted for each depends on each other. If the number of operators is not fixed exogenously by the government, as is the case currently in India, it will soon be set endogenously by the market.

With good competition from up to seven mobile operators, the need for inviting new operators to participate in 3G services is not warranted.

Hence, the Government should consider 3G licensing to be an extension of the service offerings of the existing operators as recommended by the TRAI. This will also ensure that only those with experience, expertise and infrastructure compete in the 3G arena.

Mr Ratan Tata's and the COAI's idea of paying upfront license fees indicate that the opportunity cost of 3G spectrum to the stakeholders is not zero.

Properly determined licence fees, ideally reflecting the opportunity cost of spectrum, designed either as one-time upfront licence fee or recurring lease payment or a combination is a step in the right direction.

Fees will also prevent hoarding of spectrum by operators and hence will lead to its efficient use.

A sustainable low price should be fixed as the upfront licence fee, complemented by low annual revenue sharing payment as suggested by TRAI. Increasing the annual license fees will eat in to the revenue of the operators and hence will force them to raise prices.

One way is for the government to fix a fee administratively, may be in the band between Rs 300 crore, as was indicated by COAI, and Rs 1,600 crore (the fourth cellular operator fee) for all-India licensing. Another option is to try out second price Vickrey auction.

Vickrey auction eliminates "winners' curse" problem experienced in traditional highest bid auctions, and also reflects the true valuation of the bidders. Vickrey auction also allows multiple bands of spectrum to be sold to multiple operators at the second price.

However, the auction mechanism is complicated and hence needs to be understood and tailored as per the spectrum availability.

Be that as it may, the government has to set its priority: Maximise revenues from the sale of a public resource such as spectrum or foster competition to the greatest extent possible. This will decide the destiny of the future of mobile services in India.

(The author is Professor at the Management Development Institute, Gurgaon.)

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