2015 Spectrum Auction Implications – Entry Cost Rises, Tariffs Look Up

Spectrum Auction ImplicationsThe mega 2015 spectrum auctions finally concluded after 19 days and 115 rounds of aggressive bidding. The Clearing Prices are as shown in this chart.

Entry Cost for Wireless Operators Rise Significantly in India
Even as most of the challengers (barring RCOM) did not face spectrum renewals in these auctions, their medium-term prospects of survival in the Indian wireless market just got bleaker, in our view. High spectrum prices are now a reality, for all operators, irrespective of their revenue market share. Spectrum pricing has now hit a level where even the most efficient operators will struggle to recover cost of capital for the next few years. The same level of spectrum pricing would pose serious survival challenges to the weaker players in our view as and when their spectrum comes up for renewal. At the cost of sounding repetitive, survival math just got substantially tougher for the weaker players; this is an unqualified medium-term positive for the incumbents.

Tariffs Must Rise for Industry to Survive & Grow
Cumulative aggregate spectrum payouts for the industry, post these auctions, are now roughly US$48 bn. TTM revenues and EBITDA for the industry – US$28 bn and US$6-6.5 bn; not even enough to cover the interest and amortization costs on spectrum, forget network capex. In this backdrop, the Revenue Per Minute Must Rise at least 10% for the Operators to sustain and then grow.

Incumbents may have opened the possibility of using a 5 MHz block of now-liberalized 900 MHz spectrum for 3G in a few circles. We expect to see improvement in the depth and breadth of the incumbents’ 3G footprint in the final detailed auction results print. Higher spectrum price levels, in a way, is the price incumbents are paying right now for making the industry structure better in the years to come, in our view.

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