Will Upcoming India Spectrum Auction Bankrupt Some Mobile Firms?

A massive Indian spectrum auction in 2016 might prove problematic, for traditional and new reasons.

On one hand, the auction will release up to 2,000 MHz of spectrum, across a wide range of frequencies useful for communications purposes. The problem is that some observers believe the service providers cannot possibly afford to buy all that spectrum, at suggested prices.

Some speculate that sold spectrum--assuming virtually everything is purchased--will amount to about US$83 billion, increasing mobile service provider debt loads as much as 185 percent.

At such levels, the auctions would represent more than 25 percent of the country's national budget for the financial year 2016-17, and more than double the combined revenues generated (around $38 billion) by all telecom companies during the financial year 2014-15.

In fact, of the projected $85 billion in potential revenues, the sale of 700 MHz spectrum alone is estimated to represent around $64 billion. It would not be unheard of for some spectrum to remain unsold whenever an auction is held.

It is possible the proposed spectrum auction in India might result in quite a lot of the spectrum, even desirable spectrum, remaining unsold.

Spectrum deemed useful both for coverage (700 MHz, 800 MHz, 900 MHz) and capacity (1,800 MHz, 2,100 MHz, 2,300 MHz and 2,500 MHz) now are scheduled for sale.

To the extent that spectrum constraints contribute to call drop problems, the new capacity will help. But observers now warn that minimum prices are set at high levels, implying high prices for purchased spectrum.

In fact, some mobile service providers have called for postponing at least some parts of the auction, altogether.

Excessive prices been a problem in the mobile industry before. Overpayments for 3G spectrum nearly bankrupted a number of tier-one service providers in Europe, for example.

Also, high reserve prices mean huge debt loads for firms that win spectrum, hampering their ability to spend money on other infrastructure, services or even customer service.

And though it has not had any appreciable impact on government thinking, some would argue that at least some spectrum should be released for unlicensed use. That sacrifices some government revenue, but has proven to be an effective way of stimulating supply of access services.

There appears to be no support for that concept, at the moment, in the design of the auction and the setting of prices.