5G Spectrum Price will not go down even in the next auction, unless…
Do you know that the 5G auction price will not get reduced in the next round of auction even if the operators choose to skip these bands (600, 700 & 3500 MHz) in the current round? But why? The issue is the TRAI’s current “Pricing Models” which have been used to value 5G bands. Normally, the perception is that when a spectrum band sees no bids then its price gets reduced substantially in the next round. But strangely this is not true for many bands, especially 3500, 700 & 600 MHz. Let me explain.
TRAI’s Pricing Principle
In order to value 5G bands, the TRAI uses the prices of the other 4G bands as references. In other words, the prices of 5G bands are not derived independently — ground up. This is also true for all existing 4G bands as well, except for the 1800 MHz band, whose pricing is done ground up using various valuation models. The prices of other bands get extracted from the value of the 1800 MHz and other bands with similar propagation characteristics. Hence, the prices of these bands (3500 & 700) will only drop significantly if the 1800 MHz & 800 MHz bands see no bids. To understand these further let's dive straight into the pricing models that TRAI used to value 3500 MHz & 700 MHz bands.
3500 MHz Valuation Model
The following is the snapshot of the valuation model used by TRAI to calculate the reserve price of 3500 MHz. In this model, I have plugged in the current auction data based on an estimated bidding strategy that I think the operators will follow — described in my note in the link embedded above. This I used to arrive at the reserve price of 3500 MHz for the next follow-up auction.
The model is actually very simple. The values of columns 5 to 9 have been picked up from TRAI’s current model (which they have used to estimate RP of 1800 MHz of the current auction), which is explained here. These values are static and don’t change in a short window of time. The values that changes are column 2, 3,4, and 10. These values are extracted from my earlier note here -a likely bidding Strategy that the Operators will follow in the current auction. The pricing model works as follows:-
A) Calculate the average value of prices that emanated from the different valuation models, including the indexed value of the auction price of the 1800 MHz band in the current auction for each circle. Then in order to arrive at the auction price of the 1800 MHz band, simply multiply the current RP by 1.1. Since we already know that all spectrum in the current auction will finally get sold at the RP. Then calculate the average and plug this value in column No 11.
B) Then mark those circles where all the 1800 MHz spectrum offered in the current auction got sold completely. Note there are only two of these circles, marked with color in column No 4 in figure 1.
D) Then apply the rules a & b, listed at the bottom left of the above figure to arrive at the RP of the 1800 MHz band. Plug this in column No 12.
E) The Reserve Price of 3500 MHz is = (value in Col 12) x 0.3 /2. List this in column No 14. The reason we divide by 2 is to make the price align with the TDD structure of the 3500 MHz, as the band (1800 MHz) from which the price is getting extracted is an FDD band.
Now if you compare the new reserve price of 3500 MHz with the current price, you will see a reduction of a mere 6% (Rs 298 Cr / MHz vs Rs 317 Cr /MHz).
700 MHz Valuation Model
The following is the snapshot of the valuation model used by TRAI to calculate the reserve price of 700 MHz. In this model, the TRAI has used two of the existing bands (1800 & 800) to arrive at the RP of the 700 MHz band.
This model is almost similar to the earlier model, except for the fact that it uses the valuation of 800 MHz as well. The model works as follows:-
A) Pick up the 1800 MHz valuation from column No 11 of the earlier figure 1 and plug it into column No 2 in figure 2 above.
B) Calculate the valuation of the 800 MHz in a similar manner as we did for the 1800 MHz band and plug it in column No 3 in the above figure. Note this value has been extracted from column No 9 of the valuation model of the 800 MHz is captured in figure 3 below.
C) Then calculate the average value of columns 2 & 3 in figure 2 and plug it in column No 4.
D) The New RP for 700 MHz = Column No 4 (Figure 2) x 0.7. Plug this value in Column No 5.
Now if you compare this number with the current number you will see the reduction will be just 7.54% (Rs 3630 vs Rs 3925 Cr.
TRAI’s Definition of “Market Price”
Please note that for both these models (3500 MHz & 700 MHz), the price is directly dependent on the 1800 MHz & 800 MHz band’s auction outcome. The more the number of circles where the spectrum is completely sold, the higher will be the price of the 5G bands (3500 & 700). Why? Because TRAI has changed the definition of what is called “Market Price”. Earlier the definition was even more drastic — that even if a small amount of spectrum is sold in a circle of a band, then the price was considered “Market Price”. Fortunately, not anymore. With this change, for the price to fall in that category (“Market Price”), there shouldn’t be any unsold spectrum left in that band.
This means that in those circles where the spectrum is completely sold, then the valuation model of 1800 & 800 MHz bands will throw up a higher price, and this will be just the indexed value of the current auction price. This will impact the price of 700 & 3500 MHz bands, which are directly linked to these valuations.
Note:- The sold & unsold numbers for 800 MHz which I picked up from my earlier note on the operator’s bidding strategy, might change drastically once the DOT releases more spectrum in the 800 MHz (from the current 15 carriers to 16 carriers). This will make most of the circles in the 800 MHz completely sold, thereby increasing the RP of the 700 MHz band — which might go even higher than what we see today.
Possible Solution
Hence, one can clearly see from the above analysis that skipping 5G bands (3500 & 700) will not necessarily result in a material reduction in the prices of these bands in a subsequent follow-up auction. Also, the outcome will also not change meaningfully, even by skipping the 1800 MHz band. Why? The reason:- The auction price of the 1800 MHz band (market-determined or not) is just one input of the many inputs used in the valuation model of the 1800 MHz band.
A) 3500 MHz
Hence, to drive the price of the 3500 MHz down, either we have to delink it from the 1800 MHz band, or use a much lower scaling factor (let's say 0.1 or less from the current 0.3 used now). The purpose of scaling factor is used to extract the price of 3500 MHz from that of the 1800 MHz RP.
B) 700 MHz
The solution of 700 MHz is similar to the above. Either we delink its valuation from the current 1800 & 800 MHz or use a lower scaling factor (let’s say 0.5 or less from the current 0.7 used now) to arrive at the price of 700 MHz. Now since the price of 600 MHz is aligned with the price of 700 MHz, both will get fixed.
This fact gets further corroborated by the TRAI’s resposne (9th May 2022) to DOT’s backreference. This is reproduced below for easy reference (Page 12)
“…..These parameters (assumptions used in valuation models) do not change much in a short time span”
Conclusion
From the above analysis, it is clear that non participating in the current auction will not drive down the prices of 5G bands (3500, 700 & 600 MHz). The outcome can only get driven if the operators work closely with the TRAI and explain to them the problem and clearly guide them with specific solutions for arriving at an optimal valuation for 5G. Till that time this problem will continue to persist.
(Views expressed are of my own and do not reflect that of my employer)
PS: Find the list of other relevant articles in the embedded link.
