Split Circles, cut the Knot

Split Circles, cut the Knot

By Prof. Rohit Prasad, MDI Gurgaon & Prof. V Sridhar, IIIT Bangalore

There is a palpable sense of excitement with regard to 5G in India. Policy makers, telcos, and industries, eagerly await the windfall gains from 5G capable networks providing massive Machine Type Communication (mMTC), enhanced Mobile Broadband (eMBB), and Ultra Reliable Low Latency Communication (URLLC). Simultaneously policy makers are perplexed by the thorny riddles posed by the new technology: the setting of reserve prices for spectrum in the wake of failed auctions, demands by industrial entities to be made licensees, the call for the use of indigenous technology. In this piece we present a simple policy solution to cut the Gordian knot- a significant increase in the number of telecom circles. 

India is a large and heterogeneous market with varying income, education, employment, and finally communication needs. While telecom has been a great equalizer, with mobile penetration at 84 percent, and internet penetration at 60 percent, each of the 22 designated telecom License Service Areas (LSAs) continues to be quite heterogeneous in terms of the willingness and ability to pay across the range of digital services from voice telephony to gaming. This has made it difficult for licensees to come up with customized solutions for different market niches, a problem exacerbated by the three firm structure (four including a rather vapid government operator). 

The 5G technology offers an opportunity for a closer alignment between market characteristics and technology capabilities. With support for diverse range of services such as Internet of Things, Machine to Machine communication, gaming and augmented reality, the heterogeneity of the market is only likely to increase.  Simultaneously, by using high range frequencies, 5G enables short range, data intensive communications. This makes it feasible to carve out 'microcells' catering to areas characterized by high intensity usage. This means that technology can now mimic the heterogeneities of the market.

In general, when carving out market geographies, policy makers need to consider profit potential, and the provision of universal service, besides logistical constraints such as administrative boundaries. The carving of the 22 LSAs in 1995 and the categorization of the same as metros, categories A, B and C were based on the revenue earning potential and extant state boundaries. It is time to move to a finer granulation of the market as the minimum viable area, the smallest area compatible with profitable operations, has shrunk significantly. A finer division will optimize the balance between economies of scale which flows from homogeneity and inclusivity which flows from the trickle-down effect of the growth of the market.

Splitting circles will reduce barriers to entry and promote competition and innovation. New entrants such as cable service providers, Internet Service Providers, Wi-F access providers, and even Virtual Mobile Network Operators will develop niche offerings. It will make bidding easier as markets will be homogenous. Today, with a huge bank guarantee submission at the beginning of the auction, the bidders are staring at bidding for large LSAs that include very few million+ cities such as Patna in the Bihar LSA along with large semi-urban and rural areas. Left with no choice and to meet the high reserve price requirements, the operator ends up bidding at higher than true valuation or not bid at all. With smaller LSAs, the demand prediction become more accurate and hence the business decision to bid can be more rationale. Accordingly, the methodology for fixing reserve prices can be also be robust and realistic.  It will lead to faster adoption and higher government revenues.

While most of the countries are too small to have many LSAs, the U.S. pioneered this effect by creating five types of Market Areas for the allocation of spectrum licensing in the U.S. They are Cellular Market Areas (CMAs), Basic Trading Areas (BTAs), Basic Economic Areas (BEAs), Major Trading Areas (MTAs), and Regional Economic Area Groupings (REAs). A typical CMA covers only three to four counties and a BEA roughly 15 counties, while an REA can cover hundreds of counties and span several states. The country is divided into 734CMAs, 176 BEAs, or 12 REAs. The FCC carefully balances geographic coverage associated with a license and its allotted bandwidth to avoid market power concentration and to induce entry into high-cost, sparsely populated rural areas.

However, a number of initiatives have to go hand-in-hand with the proposed re-designation including: process of migration of the existing licenses to the new LSAs; the licensing terms and conditions such as roll out and service delivery obligations; flexible sharing and leasing arrangements for effective use of spectrum and so on.

One of the drawbacks of the proposed model is that administrative overhead in spectrum allocation and management, auditing roll-outs, and measuring quality of service across the LSAs is likely to increase. But not trying it out would limit 5G to incremental gains and chain its transformative potential.

*** This article first appeared in Economic Times on 16 June 2022