Spectrum Trading is a Good Thing; Additional Taxes and Fees Probably are Not

You might argue it is nobody’s fault, but since the communications and content businesses now are ecosystems, it matters what actors do in each part of the ecosystem.

And, at times, it seems even government officials who formally desire far better Internet access take actions that place obstacles in the way of doing so.

Consider recent actions around spectrum trading. India now will allow mobile operators with licenses in the same frequency bands--and subject to limitations on the total amount of spectrum any single company can use in any single area--to share access using those licenses.

That is intended to allow more efficient use of available spectrum, and, in principle, can lower operating or capital costs. Some operators might be able to avoid acquiring additional spectrum, at least for a time, for example.

In other cases, mobile operators will be able to drive new revenue from the deals. Reliance Communications is one example, according to Fitch Ratings.

Also, ability to trade spectrum may curtail excessive bidding in future spectrum auctions.

In other cases, mobile operators with smaller market share, such as Tata Telecom, Videocon Telecom and Aircel Limited, could trade their spectrum assets with larger telcos in the loss-making areas to focus only on profitable geographies.

However, aggressive spectrum trading could be deterred in the short term by new taxes and fees, and by restrictive rules.

First, the rules prevent a telco from owning over 25 percent of available spectrum in any one circle.

Second, a telco may have to pay additional taxes on the revenue derived from traded spectrum over and above the existing spectrum charges.

Third, a seller will have to pay an additional one percent fee on the traded spectrum's market value. And that could wipe out any expected advantages.

The new rules are expected to include payment of higher license fees and usage charges. But the traded spectrum might also be subject to additional taxes.

"There is already the issue of double taxation (higher spectrum usage charge and the licence fee to be paid by both the parties), which we feel will discourage trade of spectrum," said Rajan Mathews, director general of the Cellular Operators Association of India (COAI). "If you are also going to be charged a service tax on a commodity, it will really take away most of the differential of lower-cost benefit which would have accrued through spectrum trading."

When the ecosystem is not aligned, progress stalls. Encouraging more rational spectrum use is a good thing. Attacking the business case with new taxes and fees cuts the other way.