The Implications of the 2G Spectrum Scam and What It All Really Means For The Consumer

The media and the air-waves have been full of stories about the 2G Telecom Spectrum scam, till the mainstream media and some of its high profile personalities became part of the story themselves. Predictably, instead of admitting that some from among their fraternity had been skating on thin ice and had blurred the boundaries between investigative journalism and ethical and professional journalistic conduct, the mainstream media ganged up, tried to shut out the bad news about itself and then ran for cover when the news broke anyway.

This piece though isn't about the compromised media or the corrupt politicians or the big business interests. Enough has been said and written about those and I suppose will continue to be, in the days ahead [ Link ]. Rather, it is about aspects which I haven't seen mentioned or discussed generally till now. Let's get on to some of them then, understand the implications and reflect on the possibilities.

Spectrum till some years back had little value, notional or real, because its usage was very limited. Certain RF bandwidths were parcelled out to broadcasters or the armed forces for commercial or internal use. Till that is, mobile communications on a commercial basis was opened up in the country in the mid 90s and the value of this 'asset' went up because MSPs started clamouring for it.
 

The value of any 'notional' asset like RF spectrum rises & falls based on demands but is also a function of technology. As a simple example, when technology progresses to the point where it is able to compress & transmit considerably higher quantum of info through the same 'bandwidth pipe', the demand for additional RF spectrum would diminish as a result, simply because it is not needed to sustain a MSP's projected customer base and total network usage.
 

In a typical demand & supply situation, spectrum prices (i.e. for a certain bandwidth range) would rise when it is perceived that total available spectrum is becoming scarce. However it is not a commodity which will run out anytime in the future since technological advancements would continually enable service providers to use a given RF bandwidth range for packing in more and more data & information. Thus technology would actually devalue the notional cost of a given spectrum over the years.
 

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Given these factors among others, how does one price a given spectrum which is to be auctioned off to the highest bidder at a given point in time? And given that fixed costs for infrastructure & equipment for any service provider are mostly a constant for its defined territory and business model, who does a higher bid price for a spectrum affect eventually?
 

What is the role of TRAI (Telecom Regulatory Authority) in facilitating the introduction and spread of mobile technology in the country? Logically shouldn't the TRAI be enablers for the introduction of current technology as quickly as possible, at the lowest possible price to the end-customer? And if that is a given, how does one explain the fact that Indian service providers are just beginning to roll out 3G networks presently (the difference between 2G, 2.5G, 3G, 3.5G is essentially the speed of the network and the range of value-added services which can be offered)?
 

What seems to have happened in the 2G spectrum auction is that the concerned parties initially entered into a discussion and determined the 'price' that a given MSP was willing to offer for a given spectrum. They then deliberately 'underpriced' the value of the said spectrum and possibly received as a 'kickback' at least the difference between the market

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value and the 'official' value of the spectrum or even a higher value on account of having favoured a certain MSP over another. The MSP who won the license to use the given spectrum for a certain number of years then entered into a negotiation with another organization and got them to invest and possibly buy shares in their organization by dangling the spectrum that they already had under their belt. While everyone profited and benefited as a result of these set of transactions, who do you think was the eventual loser?

A given spectrum, over a period of time, would thus be a depreciating asset because, as technological developments enable service providers to pack in more and more information in a defined bandwidth range, spectrum should logically become less and less scarce and, following the classic demand-supply curve, the value of a given spectrum should be depreciating steadily over time [ CAG figure based on prices got from 3G auction ].

Lets now look into some realities about most mobile service providers in India.  I am afraid I don't quite have access to hard figures to substantiate some of the contentions I am going to make. Rather, I am relying on my knowledge of the Indian Telecom sector and informed feedback from a number of knowledgeable sources while making them. 

1. While the TRAI is supposed to be regulating and monitoring various aspects of licensed service providers in the country, it is in reality, a highly bureaucratic and inefficient body which has frequently missed the woods for the trees in the past. Also, under Ministers like Andimuthu Raja, it became mainly a vehicle for wheeling and dealing with service providers rather than carrying out the tasks for which it was constituted originally. It has therefore, at best turned a blind eye to or at worst, connived with some of the MSPs about some of these realities.
2. The range of value-added services that can be provided over 2G networks is severely limited and hence the clamour for more and more spectrum is more an artificial rather than a real need.
3. The claims about the number of subscribers added every month and every quarter by the MSPs are unaudited figures and quite likely to be substantially inflated for a variety of reasons which can be easily guessed. To cite just one example, if one were to pick up a prepaid SIM from a MSP, valid initially for a month unless it is topped up (recharged as per the jargon prevalent in India), this would be counted in their compiled statistics as a new subscriber for a long time at least, at times possibly eternally, even if no top-up is done and the SIM becomes inoperative and unusable a month later.
4. The lack of spectrum would become a constraining factor only when network usage patterns peak.  In reality, given the inflated figures for the total number of subscribers, the relative lack of value-added services and the low usage patterns evident across large sections of the subscriber base, most networks of Indian MSPs are quite underutilized most of the time.
5. Given that most of the present usage is concentrated around full-duplex and half-duplex communications, including voice and text messages, the MSPs have not really done anything much to boost network usage by increasing coverage, even within greater city limits. The complaints about 'blind spots' and 'no network' are more frequently heard in India than in many other countries which have extensive wireless telecom networks. For example, it is unthinkable that even today, certain subterranean areas like basements of commercial or residential buildings located in the heart of cities should have poor receptions or mostly 'no network available' status. This situation has arisen on account of the reluctance of virtually all MSPs to invest in improving network quality and coverage.

Let us revisit some of the points made above through an example.  If an operator has constructed a stretch of expressway on a build-operate-own basis (to be accurate though, spectrum usage is leased for a certain number of years and not sold in perpetuity) and if traffic on the expressway is nowhere near what it is normally expected to be, would the operator not do whatever is needed to be done by way of pricing and services available en-route to increase the usage of the expressway? Having incurred the fixed costs for building the expressway and the ongoing running costs for maintaining it in good and serviceable condition, what is the opportunity cost of not having the expressway used at least optimally by targeted users?

It is time to draw certain conclusions from the facts and the contentions above. Some of these would be:

• The 2G Spectrum license sale issue would never ever be resolved because, aside from the political and business-interest ramifications, the issue is an exceedingly complex one. Any operator or service provider could logically argue for example that the value of a certain spectrum licensed for a certain value say two years back has actually depreciated today and will continue to depreciate in the coming months and years.
• The cumulative costs of the various back-to-back transactions including the kickbacks along the way, would eventually get passed on to the consumers, resulting in higher prices for various services. If the govt. of India and TRAI was serious about making a range of telecom services available to the subscriber at really affordable rates, it should have limited the price for which it sold spectrum to service providers, put restrictions on the service providers ability to sell the spectrum through the back-door as it were and after looking into the commercial viability and projected profitability of MSPs (one of these would have been to consolidate the number of MSPs operating across the country and not fragment the sector further by doling out spectrum to numerous licensees ). Clearly, the govt. of India and TRAI have failed to protect the interest of subscribers, given the manner in which they have gone about auctioning spectrum licenses.
• Given the way it has gone about the whole business of dealing with, regulating and monitoring the telecom sector, the govt. of India has directly caused the sector to lag behind that of many other countries. While many countries have rolled out 3.5G networks quite sometime back and are planning to introduce 4G networks sometime during 2011, India is still struggling with rolling out 3G networks at the end of 2010.
• The telecom sector's development in India is a good example of how the licence-permit raj hasn't quite ended in India, as the govt. of India would have people believe. Given the way it has gone about developing the telecom sector, MSPs often have been indulging in dubious and backdoor deals for the sake of profiteering and haven't quite been able to ensure the quality of services and the prices that the Indian customer should have rightfully expected, given the enormous potential of the market, if true globalization and competition in this sector had been competently managed and encouraged by TRAI and the govt. of India.