Satellite Spectrum — Overcoming Valuation & Underutilization Challenges
Recently it was reported that the DoT has made reference to the TRAI for recommending the modalities for auctioning satellite spectrum. These include airwaves in both Ka and Ku bands. The purpose of this note is to evaluate the valuation challenges that the TRAI will face while making its recommendations and what solutions it can propose to overcome them.
Satellite Revenues
In order to understand the valuation problems, we need to first lay out a model for predicting the cash flows emanating from the satellite services in India. One such model is reproduced in the figure below.
The above model calculates the Present Value (PV) of the cash flows of revenues of a prospective satellite provider in India. Note that the revenue in the year 10 is a terminal value calculated by assuming that the growth rate will stagnate from that year to a low value for perpetuity, let’s say 3%. The initial ARPU is assumed as Rs 7500/m, i.e $100 per month, and initial subscribers numbers as 15K. The growth rate in subs is taken as 10%, and APRU is assumed to decrease at the rate of 10% — mainly driven by competition. This leads to a PV of Rs 11,345 Cr for cash flows of revenues. Now assume that a typical satellite provider in India will need at least 1000 MHz of spectrum (both uplink and downlink for user terminals and assuming the spectrum for gateways will be given administratively). This will translate into an outflow of Rs 7000 Cr — calculated at the spectrum rate of Rs 7 Cr/MHz for the 26 GHz band which recently got sold. This auction outflow is an astounding 62% of the PV of the revenue cash flows. Now in case, the spectrum is given administratively, then at the rate of 1%, the PV of the SUC (spectrum usage charge) will be just Rs 113 Cr.
Hence, an operator has to pay 62 times for acquiring spectrum through auction compared to when assigned adminitratively — assuming spectrum is valued at the same rate as was done for the 26 GHz band.
Sensitivity Analysis
In order to check the robustness of our model, we need to run the numbers through a sensitivity analysis. The findings are captured in the following table.
This analysis assumes initial values of Subscribers and ARPU/month and then ramps these numbers up at various growth rates to calculate the cash flows of revenues. Note that the PV of the revenue cash flows maximizes at 11% subscribers growth rate and -5% ARPU growth rate. This means that the satellite services providers have to drive up the growth rate of their subscribers without letting the ARPUs fall to a significantly lower number — a big challenge when operating in a price-sensitive market like India.
This will result in a huge challenge for the operator to sustain a reasonable business case after having paid a huge amount of money for acquring airwaves in the auctions.
Other Challenges
The other challenge a satellite provider will face is explained in my earlier note titled— Satellite Spectrum — Auction or Not, and Why? In this note, I have explained how the fragmentation of airwaves is the biggest issue for satellite providers, which will drive down the throughput due to the underutilization of spectrum capacity. Hence, satellite providers will like to share spectrum with each other, even though it tantamounts to opening the door to their own competitors.
Possible Solutions
In case the government has decided to auction the satellite spectrum then the valuation challenges can be overcome by allowing mixed usage of the airwaves assigned through these auctions. In other words, the winner of the auction must be given full flexibility to harness his airwave’s leftover capacity by leasing it for deploying additional services like IMT or Fixed point-to-point links. This will be on the same lines, as the mobile operators, who have been allowed to sublease spectrum to set up private networks. Commercial bilateral contracts will also motivate them toward effective coordination, on the same lines when the same block of spectrum is being shared between multiple satellite operators. Also, the problem of fragmentation can be overcome by opening up the spectrum of each holder (acquired through auction) for expanded sharing by a well-defined bilateral contractual agreement.
Using the above-mentioned strategies the holder of the satellite spectrum not only can drive greater speeds but also monetize it towards unlocking a much greater value compared to just using it only for offering satellite services.
Conclusion
Typically the airwaves (especially at lower frequencies) for mobile networks are assigned through the auction for “exclusive use” and the mixed usage of such airwaves is an exception than a rule. This is quite contrary to the airwaves for offering satellite services. Why? In the case of mobile networks, the utilization of airwave’s capacity is much higher compared to that of the satellite spectrum. Hence, sharing and leasing of the mobile spectrum do not drive any meaningful value, but on the other hand, it increases the cost of coordination significantly. Whereas for the satellite spectrum it is just the opposite. Here sharing is a norm, otherwise, the spectrum will lie hugely underutilized. Hence, the satellite operators routinely coordinate spectrum usage among each other. This value can be increased significantly by expanding such coordination with terrestrial systems as well, thereby unlocking the value of the satellite spectrum acquired through the auction.
(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.
