Spectrum Pricing

Report
Spectrum Pricing
30th April 2013
Sudhir Gupta
Principal Advisor
Telecom Regulatory Authority of India
Disclaimer
The views expressed in this
presentation are purely of the
presenter and they do not reflect
the position of TRAI
AGENDA
• Spectrum:
i.What is it?
ii.Factors affecting its value
• Spectrum Pricing
• Objectives of Spectrum Pricing
• Factors affecting Spectrum Valuation
• Various Approaches of Spectrum Pricing


Administrative pricing: i.e.
pricing /Opportunity Costs
Market based methods
• International Trends
• India Story
Cost
Oriented/Incentive
SPECTRUM
•
Radio Spectrum is a finite, non exhaustible common access
resource
•
Extends between Frequencies 3KHz to 3000GHz
•
Like Land, Spectrum can be put to many public and private uses
•
Use of spectrum is traditionally determined through international
coordination
DEMAND FOR SPECTRUM
•
In recent years, marked increase in use of and demand for radio
based services
•
Popularity of Mobile telephony and Wireless Broadband
•
Development of new Technologies
•
Exponential Increase in the availability of high speed data
applications
•
Increase penetration of Smartphones
RELATIVE VALUE OF SPECTRUM BANDS
•
Propagation Characteristics of the spectrum band
•
Scarcity in a frequency band
•
Whether internationally harmonized
•
Usage conditions imposed by the Administration:
 Whether spectrum rights are flexibly defined
 Whether sharing and/or leasing of spectrum is permitted?
 Whether Trading of spectrum is permitted?
 The pricing will be lower if there are ‘use it or lose it’ conditions
attached
 Licence duration
ROLE OF THE STATE
• Use of Spectrum is closely managed by Govt Agencies world
over
• Management by Governments is predicated on
Protecting Property Rights
Promoting benefits associated with coordinating use
National Security
• Most countries use Licensing to manage spectrum- i.e. users
require a License from the Govt to access radio spectrum
(assignment of Spectrum)
SPECTRUM PRICING
•
Refers to a range of Spectrum Management activities and tools
•
Involves alignment with Governments’ and Regulators’ Revenue
goals and objectives
•
Spectrum Users pay for 
Spectrum Use
 Covering Management Costs
 Spectrum efficiency
 Achieving economic and social development goals
GOALS AND OBJECTIVES OF SPECTRUM PRICING
•
For any resource including Radio Spectrum, the primary economic
objective is to maximize the net benefits to society such that there is
efficient distribution of the resource resulting in maximum benefits
to society.
•
Broad Goals of Spectrum Pricing include:
• Optimum utilization of Spectrum
• To promote competition and adoption of innovative Services
• To balance requirements of Commercial and non commercial
users
• Public Interest
• Maximization of economic and social benefits
• To cover costs of spectrum management borne by the
concerned Authority
• Revenue for the Government
MARKETS AND EFFICIENCY
•
In all cases, Prices should be set in a manner that creates incentives
for the licensee providing high value services to provide them at the
least cost
•
When markets set the price this happens automatically – providing
participants with the right incentives to behave efficiently and to
keep their costs low , making it good for society as a whole i.e. using
resources efficiently leaving resources to be used for other societal
purposes.
•
When a Regulator sets the price, it should mimic the efficiency and
incentive effects of market based pricing as far as possible
METHODS FOR VALUING SPECTRUM
•
Spectrum can be valued using prices in market transactionsAuctions, Spectrum trading or Leasing.
•
This allows users to estimate the commercial value of spectrum
based on their own as well as the markets’ expectations around the
benefits to be derived from its usage
•
Administrative Methods for assignment of Spectrum could simply
result in a recovery of cost of management of spectrum plus targeted
revenue
•
Administrative Pricing could also use modeling and analytical tools
to reflect the underlying value of spectrum
VARIOUS APPROACHES OF SPECTRUM PRICING
Spectrum is either valued using prices in market transactions
(auctions, spectrum trading or leasing) or by administrative
means.
Common practices are:
a) Administrative Methods :
 Cost Orientation,

Incentive Pricing,
 Opportunity Costs /Administrative Incentive pricing and
b) Market mechanisms like auctions.
COST ORIENTED APPROACH
•
In cost oriented approach, the method employed simply results in a
recovery of spectrum management costs.
•
Costs associated with the management and administration of all
related processes are considered.
•
The related processes are application and assignment of frequencies,
national and international co-ordination, as well as interference
management.
•
This is a very simple approach. However, a major disadvantage of
this simple approach is that fees designed to recover administrative
costs are not tied to the value of the spectrum used, and therefore
may not stimulate spectrum efficiency.
INCENTIVE PRICING
•
Incentive Price is determined keeping in mind certain predetermined goals such as promoting efficient spectrum use. There
can be socio-economic policy goals also such as revenue generation
and universal and affordable telecom services.
•
Incentive price is linked with many parameters. Some of them are:
 Amount of spectrum
geographical area)
used
(bandwidth
and
permissible
 Population covered (population density in the area covered) and
location of use: Higher values for urban areas.
 Frequency band: higher values in bands that are internationally
harmonised, bands with better propagation characteristics
 Type of service: higher fee for public mobile as compared with
other services.
 Level of exclusivity.
OPPORTUNITY COSTS /ADMINISTRATIVE INCENTIVE PRICING
•
The opportunity cost is a calculated value that tries to simulate the
market value of the spectrum. Calculation of opportunity cost requires
complicated financial analysis, estimation of demand etc. Various
models can be prepared to access the opportunity price.
•
In the least cost alternative approach, spectrum cost estimates can
be derived from valuing the cost savings from access to additional
spectrum. These costs can be estimated by calculating the impact of a
hypothetical marginal change in spectrum on cost of an average firm in
the sector assuming the level of output and service quality were kept
constant.
•
In the models based on the additional revenues, the value of
spectrum can be based on the net revenues that additional spectrum
may generate by its increased capacity or better quality of services. It
accounts for the expected net present value (NPV) of the future returns
from using the spectrum taking into account all other inputs (including
capital) at their market price.
OPPORTUNITY COSTS /ADMINISTRATIVE INCENTIVE PRICING
•
Market benchmarks can also be used to derive opportunity cost
estimates. However, these are relatively of lesser use because there
are relatively few comparators; and national markets and timing of
auctions differ considerably.
prices
based
on
early
The volatility in market renders the
values
opportunity cost at a later date.
unreliable
for
indicating
the
MARKET BASED METHODS
•
Administrative methods for spectrum management including its pricing
are suitable when the demand for the spectrum is comparatively less.
Otherwise, these methods may fail to price the spectrum in a
transparent manner.
•
Although the opportunity cost method also relies on estimating market
prices, only auctions are considered as full market approach for
determining the economic value of spectrum.
•
In an auction, spectrum is allocated by bidding among competing
spectrum applicants.
•
There are certain fundamental advantages of auction process such as it
is a transparent, fair and objective process. It ensures allocation of
resources to the players who will value it most and generates maximum
revenue to the Government.
MARKET BASED METHODS
•
Positive outcome in an auction is possible only when the demand for
spectrum exceeds the available supply i.e. there are sufficient viable
bidders.
•
Auctions may raise competitive concerns. For example incumbents may
be willing or able to bid more than new entrants to strengthen their
monopoly or oligopoly (limited number of competitors) positions.
Therefore, in order to promote competition, it may be necessary to
impose additional safeguards such as “Bidding credits” (discounts) and
instalment payments to new players and limits on how much spectrum
an entity may purchase.
•
Avoidance of collusion between participants, encouraging sufficient
number of bidders particularly new market entrants, setting of
appropriate reserve prices etc are key to successful auction.
AUCTION FORMATS
•
First-price sealed bid auction: In this auction, each bidder is
asked to submit a bid. The highest bidder wins the auction but pays
an amount equal to his bid amount. The bid amount of a bidder
depends on what he believes other bidders are bidding. The firstprice sealed-bid auction has the merit of being extremely simple.
•
Second-price sealed bid auction (Vickrey auction): The secondprice sealed-bid auction also asks buyers to place a bid on the
object. The highest bidder wins the object but pays an amount equal
to the second highest bid.
•
Dutch auction (descending price auction): The auctioneer sets a
high price on the object initially and lowers it continuously. A bidder
who expresses his willingness to buy the object first wins the
auction at the current price. Theoretically, this auction is equivalent
to the first-price sealed-bid auction.
AUCTION FORMATS
•
English auction (ascending price auction): The seller starts the
auction at a very low price (possibly zero). The bidder who wants to win
the object increases the price. The auction ends when there is no price
increase. The last bidder to bid wins the object and pays his bid
amount. Notice that a bidder can be silent for most of the auction and
bid at the end.
•
Japanese auction (ascending price auction/clock auction): The
seller starts the auction at a low price (possibly zero). Bidders express
their willingness to buy the object at every price. If the number of
bidders who want to buy the object at the current price is more than
one, then the seller increases the price by a pre-determined amount,
called the bid increment. The auction stops when there is exactly one
bidder who wants to buy the object. Usually, there are activity rules
which require each bidder to express his willingness to buy the object
at every price in the auction, and once a bidder says no to buy the
object at a price, he is no longer allowed to participate in the auction.
AUCTION FORMATS
•
Simultaneous multi-round ascending auctions
In this type of auction, all lots are simultaneously on offer over multiple
rounds of bidding. Bidders may bid on any lot or combination of lots in
each bidding round. At the end of each round high bids are disclosed and
all bidders can bid again in the next round to become the high bidder. In
general, after a round with no more bids, the bidders holding the high
bids in the previous round win the lots. SMRA auctions were developed
for use when there are spectrum lots that are complementary or
substitutable for the buyers’ business purpose, as they allow flexibility in
bidding
•
Combinatorial clock auction
The Combinatorial clock auction (CCA) is a price clock-based auction
format used to sell multiple lots for different categories in a single
process. It provides bidders with the flexibility to bid on different
combinations of lots. The CCA format also creates incentives for bidders
to bid their full value for the lots.
INTERNATIONAL TRENDS OF SPECTRUM PRICING
•
Internationally, there is a trend of relying more strongly on market
forces in spectrum management.
•
There are many markets which permits flexible use of spectrum.
There are some markets for spectrum such as Australia, New
Zealand, UK and USA; those have introduced some form of change
of ownership via secondary markets.
•
For calculating the Administrative prices, there is no clear
international methodology and no harmonized approach (e.g.
formulas), although pricing of spectrum is according to the amount
of bandwidth used.
INDIA STORY– 2G LICENCES
In March, 1992 the DoT invited tenders for grant of GSM based
cellular mobile telephone service license in four Metropolitan cities
of India and eight (8) CMTS licenses in the four Metros were
awarded to private companies in November 1994 on beauty contest
principle. DoT adopted a process of competitive selection by
awarding licence to user/s who score highest against a group of preset criteria (such as rural coverage or fulfilment of rollout
obligation), whereas licence fee was pre-determined as given in the
table below.
(Rs. in Crore)
Service 1st year
area
3
2
1.5
1
2nd
year
3rd
year
6
4
3
2
12
8
6
4
4th to 6th
7th year
Total of
year*
onwards* 10 years
(each year) (each year)
18
12
9
6
24
16
12
8
171
114
85.5
57
*4th year onwards @ Rs. 5 Lakh per 100 subscribers or part thereof;
subject to the minimum shown in table above
INDIA STORY – 2G LICENCES
In year 1995, after following competitive bidding process, 34
Cellular Mobile Telephone Service (CMTS) licences were awarded in
18 state service areas. The licensee was required to pay licensee fees
annually. No bids were received for Jammu & Kashmir and
Andaman & Nicobar Islands Circles. Licence fee was fixed based on
the bidding, as given in the table below:
(Rs. in Crore)
Service
Area
AP
Assam
Bihar
Gujrat
Haryana
HP
Karnataka
Kerala
MP
Licence Fee
to be paid
during 10
years
1001.00
1.32
136.53
1794.10
240.00
14.96
1393.00
517.00
51.00
Service Area
MH
NE
Orissa
Punjab
Rajasthan
TN
UP (East)
UP (West)
West Bengal
Licence Fee to
be paid during
10 years
1657.70
1.90
89.22
1266.00
382.00
836.00
210.89
406.21
42.00
INDIA STORY – 2G LICENCES
•
Privatization of Mobile sector did not yield intended results. Most of
the operators were facing financial problems as the initial growth
was below the projections. The Government viewed this with
concern as it adversely affected the further development of the
Telecommunication Sector and recognized the need to take a fresh
look at the policy framework for Telecom sector.
•
Government announced its National Telecom Policy 1999 to
provide the required impetus for further growth in the sector; which
allowed these licensees to migrate from fixed licence fee to revenue
sharing arrangement.
•
PSUs (MTNL/BSNL) were given CMTS licence in 1997 for Delhi and
Mumbai and in 2000 for the rest of the country
•
The fourth cellular operator was chosen through a multi-stage
bidding in the year 2001 and licences were issued in 2001/2002.
INDIA STORY – 2G LICENCES
•
UAS Licences were given in 2003, 2004, 2006, 2007 and 2008
following the principle of First Come First Served (FCFS).
•
The Entry Fee discovered in the 2001 auction was applied for
all the UAS licences.
Sl.No
Service area
Entry fee
Sl.No
(Rs. In crore)
Service area
Entry fee
(Rs. In
crore)
No bid
12
Punjab
2
3
Andaman &
Nicobar
Andhra Pradesh
Bihar
103.01
No bid
13
14
4
Gujrat
109.01
15
Rajasthan
Tamilnadu
Uttar Pradesh
(West)
5
Haryana
21.46
16
Uttar Pradesh
(East)
6
Himachal Pradesh
1.1
17
West Bengal
No bid
206.83
40.54
17.4501
189
No bid
18
19
20
21
Delhi
Kolkata
Mumbai
Chennai
170.7
78.01
203.66
154.0
1
7
8
9
10
11
Karnataka
Kerala
Madhya Pradesh
Maharashtra
Orissa
151.75
32.25
79
30.55
45.25
OTHER SPECTRUM LEVIES IN INDIA
SPECTRUM USAGE CHARGES (SUC)
Spectrum slab
GSM
CDMA
Upto 4.4 MHz
Upto 5 MHz
Upto 6.2 MHz
Upto 6.25 MHz
Upto 8.2 MHz
Upto 7.5 MHz
Upto 10.2 MHz
Upto 10 MHz
Upto 12.2 MHz
Upto 12.5 MHz
Upto 15.2 MHz
Upto 15 MHz
Annual spectrum charges (as
a percentage of AGR)
Before Feb
2010
2
3
4
4
5
6
After Feb
2010
3
4
5
6
7
8
INDIA STORY – 2G LICENCES
•
There was no separate fee for the assignment for the spectrum,
which was bundled with the spectrum. Initially, 2x4.4 MHz of
900/1800 spectrum for GSM or 2x2.5 MHz of 800 MHz for CDMA
service providers was allotted and subsequently additional spectrum
was assigned based on the subscriber linked allocation criteria
administratively.
•
Vide its order dated 2nd February 2012, the Hon’ble Supreme Court
declared the process of allocating 2G licenses through FCFS as
“wholly arbitrary and unconstitutional action” and cancelled all the
licenses and the spectrum, which were awarded in the year 2008.
•
The court later allowed the companies affected by the order to
continue providing services until 18th Jan. 2013 and asked the
government to complete the auction and allotment of bandwidth
before that.
HOW INDIAN CASE OF 2G SPECTRUM ASSIGNMENT IS
DIFFERENT FROM OTHER COUNTRIES
•
•
•
•
The methodology followed by most of the countries for 2G spectrum
assignment was ‘beauty contest’.
In these countries, the assignment of 2G spectrum was done mostly
prior to 2000, when there was not much demand for the spectrum.
Therefore, there were no disputes.
In India, the 2G spectrum was made available in trenches.
Therefore, its assignment continued as late as 2010. Till that time,
auctions became the preferred methodology of assignment of
spectrum rights. In India also, the award of 3G /BWA spectrum
was done through Auctions only.
The continuance of administrative assignment (using FCFS) of 2G
spectrum in India, even when there is scarcity of spectrum vis-a-vis
its demand, created the question of its legitimacy.
3G AUCTION IN 2010
Circle
3G Reserve
price (for
2x5 MHz)
(INR crore)
3G Price
(2x5MHz)
(INR crore)
Reserve Price as
a % of Final Price
760
7108
10.7
Cat ' A' Circles
1600
6752
23.7
Cat 'B' Circles
960
2439
39.4
Cat 'C' Circles
180
452
39.8
3500
16751
20.9
Metros
Total
BWA AUCTION IN 2010
Circle
BWA Reserve
Price (For 20
MHz) (crore
INR)
BWA Price
20MHz
(crore INR)
Metros
380
5057
Cat ' A' Circles
800
6201
Cat 'B' Circles
480
1330
Cat 'C' Circles
90
259
1750
12848
Total
Reserve Price
as a % of
Final Price
7.5
12.9
36.1
34.7
13.6
AUCTIONS HELD IN NOV 2012 OF SPECTRUM IN 1800MHZ
AND 800 MHz BANDS
OBJECTIVES OF THE AUCTIONS

Obtain a market determined price of Spectrum in 1800MHz and 800MHz
bands through a transparent process;

Ensure efficient use of spectrum and avoid hoarding;

Stimulate competition in the sector;

Promote rollout of the respective services;

Maximise revenue proceeds from the Auctions within the set parameters
LIBERALISED SPECTRUM
There were no restrictions on the technology to be adopted for
providing services within the scope of the service license using
spectrum blocks allotted through this auction.
RESERVE PRICE
Rs. 14000 crore (US$ 2800 mn) for 2x5 MHz for spectrum in1800
MHz band.
Rs. 18200 crore (US$ 3640 mn) for 2x5 MHz for spectrum in 800 MHz
band (ie 1.3 times that of spectrum in 1800 MHz band).
RESULTS OF THE AUCTION
800 MHz Auction:
•
Two companies, initially filed applications. Later on, both of them
withdrew. So, there was no bidder.
1800 MHz Auction:
•
There were total 5 bidders.
•
Auctions were conducted on 12.11.2012 and were concluded on
14.11.2012 after 14 rounds.
•
Total 102 blocks (each of 2x1.25 MHz) were sold in 18 service areas.
•
There was no bid for 4 service areas (Delhi, Mumbai, Karnataka &
Rajasthan)
•
Total Amount = Rs. 9407 crore (ie US$ 1880 mn).
RESULTS OF THE 1800 MHz AUCTION
Circle
Reserve
Price
No. of
(2x1.25 Spectrum
%
success% of
Wireless Wireless
MHz) (Rs offered for Spectrum Spectrum
ful
Reserve Subs (in
Telecrore)
sale (MHz) sold (MHz)
sold
bidders
Price
mn)
density
1485
33.75
5
14.8
1
42.4
101
172
1411
68.75
26.25
38.2
6
40.3
322
85
510
94
110
50
45.5
14
14.6
359
65
82.5
46.25
56.1
14
2.7
124
53
295
127.5
43.2
35
100
907
74
Metros
Cat ' A'
Circles
Cat 'B'
Circles
Cat 'C'
Circles
3500
Total
More spectrum was sold in the circles where the reserve price was
comparatively less and where there is greater growth potential, such as in
Cat ‘C’ Circles.
ANOTHER ROUND OF AUCTION IN 800/900/1800 MHZ
BANDS
•
In March 2013, there was another round of auction. This time following
spectrum was put to auction:
•

800 MHz Band: All Circles after reducing the reserve price by 50%.

1800 MHz Band: In 4 circles, where there was no bidder in the
Nov’12 auction.

900 MHz Band: In 3 Circles, where renewal of licences is due in
2014.
There was no bidder for 900 MHz and 1800 MHz band and only one
bidder for 800 MHz band. The bidder was one of the licensees whose
licences were quashed by the Hon’ble Supreme Court in 2012. It won
2x3.75 MHz spectrum in 8 circles.
KEY TAKEAWAY
•
While Auctions do reveal the intrinsic value of a Spectrum Band , the
winning bid in a past auction reflects a lot more than just the pure
value of spectrum
•
A Winning Bid reflects the value of a specific Spectrum Band in a
particular time and space
•
Value bidders were willing to pay at the time of the Auction maybe
different from the value today.
•
Value of Spectrum depends on various factors : pent up demand for
spectrum at the time of the Auction, number of bidders, interest rates,
general state of the economy, cellular revenues at the time of the
auction, regulations imposed on the winner (which can vary between
bands), extent to which the band has been cleared and cost of clearing
it, availability of the band internationally, use of adjacent spectrum
bands at the time of the Auction.
KEY TAKEAWAY
•
Reserve Price should not be set very low otherwise it will be irrelevant
and it may lead to collusion amongst bidders.
•
If the reserve price is very high, it may lead to a situation of no bidders.
•
The reserve price of a spectrum band depends on various factors such
as
 Technical parameters of the spectrum,
 Scarcity in a frequency band and
 International harmonization of the spectrum band.
•
Therefore, linking of reserve price of two spectrum bands based on only
one of the above parameters (say technical parameters) may not be
appropriate.
Thank You

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