Are Spectrum Reserve Prices too high?

Are Spectrum Reserve Prices too high?

By V. Sridhar, Professor; at IIIT Bangalore; currently visiting the University of Southern California, USA. (The authors acknowledge DotEcon for sharing the spectrum database for academic purposes.)

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There has been again controversy over TRAI’s recently recommended spectrum reserve prices for the forthcoming auction. While the telecom industry claims that the reserve prices are still much higher, TRAI claims that it is on par with the global levels.

First, we analyze the reserve prices recommended for the 700 MHz spectrum. This spectrum band went unsold in both 2016 as well as 2021 auctions, with bidders citing too high reserve prices. The TRAI has slashed the reserve price on the average by more than 50 percent from what was fixed in the Feb 2021 auction. However, price per MHz per population (which is the metric used for comparison of prices across countries) of this band is still high at about $1 (in International Dollars adjusted for Purchasing Power Parity) in metros which is even more than the average winning bid price (of about $0.54) witnessed in the recent auctions held in most countries. Even for category A circles, the reserve price recommended is about $0.17, much higher than the global average of $0.04. This sub-GHz radio spectrum is normally considered as the “golden band” as it has superior propagation characteristics, with good penetration inside buildings; and hence suitable for both rural and urban coverage. However, the higher reserve prices in metros and category A circles will dissuade the telcos from actively bidding for this spectrum. However, it is likely that the category B and C circles, might see some action for this band as the reserve price is lower at $0.08-$0.11 in these areas. Though 600 MHz is likely to be opened up for auction, based on coordination of this band with the Ministry of Information Broadcasting, it is pegged at a reserve price almost at the same level as 700 MHz and is likely to see less bidding action.

Second, the reserve price for the mid band (3.3-3.6 GHz) that is set at about $0.08 for metros and $0.014 in category A circles, is closer to the global average price of about $0.02.  The average winning bid price witnessed in recent 5G auctions for this band is about $0.11. However, this band is expected to see bidding action especially in metros and category A circles since it complements the high frequency unpaired bands such as 2300 and 2500 MHz, the mobile operators already have from previous auctions.

Third, the millimeter wave band of 26-28 GHz which can meet the requirements of both backhaul as well as super high bandwidth microcellular access.  The average reserve price recommended for this band is about $0.0004 which is about the world average. It is expected that this band, after appropriate clearance, is likely to witness action in the metros for its dual use cases.

In our research, though we have found that there is a strong positive correlation between reserve price and winning bid price, lower reserve prices do not necessarily guarantee lower winning prices. For example, in the 2011 auction conducted in the U.S., the average winning bid price was 10 times more than the reserve price. Even Germany witnessed more than two times the reserve price as the winning price in the auction held in 2015. However, in Finland that conducted the auction for 700 MHz in 2016 witnessed only marginal increase in winning price. Hence, it depends on how the bidders value the spectrum in each band, given their financial viability, existing spectrum holding and their roll-out plans.

In our research, we have also found that the amount of spectrum put on auction has a negative correlation with winning bid prices; meaning thereby that if more spectrum is put on auction, the winning bid prices tend to drop. Though TRAI recommendation does not indicate the quantum of spectrum to be put on auction, by opening up newer bands in 600 MHz, 3300 MHz and 26 GHz, it is likely that the quantum of spectrum in this auction is going to multiple times that any of the previous auctions. Hence it is very likely that winning bid prices in most of the lots is expected to hover around the reserve prices.  

Moreover, by opening up larger quantities of spectrum for commercial mobile services, certain frequencies can be reserved or allotted for captive enterprise use as recommended by TRAI. This enables the industry to adopt to 5G including deployment of Industry 4.0, remote healthcare, online education to name a few.

Apart from spectrum reserve prices, TRAI’s recommendations on defining a spectrum road map for the next 5 years is a very welcome step indeed. Visibility of spectrum reduces information asymmetry between the auctioneer and the bidders, thereby enabling bidders to bid judiciously at their valuation.

Since 1994, when the Nobel Laureates - Milgrom and Wilson along with McAfee proposed to the Federal Communications Commission the conduct of the first ever Simultaneous Multiple Round Ascending (SMRA) auction as the mechanism design for allocating radio spectrum for commercial mobile services in the U.S., it has been used successfully worldwide, including in India (since 2010). Let us hope that it will work in the forthcoming auction also well enough to bring out the true valuation of the spectrum from the bidders.

(This article first appeared in Business Line: 26 April 2022)