commentary
Spectrum Auctioning and
Licensing in Telecom Industry
sivasankari S V, Mahim Sagar, D P Agrawal
With the growing mobile
subscriber base and the
introduction of newer
technologies like 3G, it is essential
to carefully regulate spectrum
amongst various telecom
operators. In India, where
the net worth of the telecom
industry is about $30 billion,
the revenue earned through
spectrum auctioning becomes
quite significant. This article
focuses on the issues involved in
the allocation and auctioning of
spectrum in existing scenario for
3G technology in India.
Sivasankari S V (sivasankari.sv@gmail.com)
and Mahim Sagar (mahimsagar@gmail.com)
are at the Indian Institute of Technology,
Delhi. D P Agrawal (prof _dpa@hotmail.com) is
at the Indian Institute of Information
Technology and Management, Gwalior.
Economic & Political Weekly  EPW   january 17, 2009
T
he operations and functions of the
Indian telecom industry were
monopolised by department of tel-
ecom (DoT) until 1994. The DoT set-up in
1984, acted as the policymaker, regulator
and operator for all those services that
existed in the industry then. The alloca-
tion of spectrum for different purposes
was and is managed by the Wireless Plan-
ning and Coordination (WPC) of ministry
of communications. Eventually, after
almost 10 years since the establishment of
the DoT, there arose a realisation that tel-
ecom services on demand at affordable
and reasonable prices combined with a
world class standard for their quality of
services must be provided as charted out
in National Telecom Policy 1994 (NTP-’94).
NTP 94 recognised that the required
resources for achieving these targets must
also come through private investments
and the involvement of the private sector
is mandatory to bridge the resource gap.
1  Spectrum Auction in India
In the year of 1995, spectral auctioning
began for global system for mobile (GSM)
cellular operations alone. According to the
National Frequency Allocation Plan (NFAP),
frequencies 890-915 MHz and 935-960
MHz were earmarked for GSM operations.
Similarly frequencies from 824-844 MHz
and 869-889 MHz were allocated for code
division multiple access (CDMA) opera-
tions by the WPC. As the first step towards
GSM spectral auctioning of 2G services,
India was divided into 21 circles – six
states forming six “A” circles, eight states
forming eight “B” circles and 12 states
forming seven “C” circles. The four metros
– Delhi, Mumbai, Chennai and Kolkata –
were considered as separate areas of opera-
tions. This stage of auctioning of 2G spec-
trum was called “direct auctioning” and
was conducted in two stages. Two quali-
fied bidders who quoted the highest prices
for the circle emerged as the winners in
the second stage. This stage of auctioning
had a few shortcomings: first, though
there was considerable privatisation of the
telecom industry, the service roll-out still
remained slow. This was apparently due
to the fact that the winners had shelled
out huge sums to win a circle and hence,
had financial crunches to provide faster
services. Second, various non-winners of
the bidding process had complained of a
lack of transparency in the auctioning
process, while the winners complained of
high inter-circle interconnection costs
fixed by the DoT. These were believed to
be the reasons for the slow service roll-outs.
In order to resolve the above issues and
to create a regulatory structure, the Tele-
com Regulatory Authority of India (TRAI)
was set-up in 1997 and the New Telecom
Policy ’99 (NTP99) was announced. The
focus of the NTP99 was telecommunication
for all and telecommunication within the
reach of all. It offered a new scheme to the
bidders called the “migration package”,
according to which the existing service
operators could make a one-time payment
called “entry fee” and subsequently pay a
licence fee, on a quarterly basis which is a
part of their adjusted gross revenue (AGR).
Initially after the bidding process, the
winners were allocated a spectrum band-
width, which was decided to be 4.4 MHz for
GSM operations (2x, i e, inclusive of uplink
and downlink) and 2.5 MHz (2x) for CDMA
operations. Today, GSM operators hold a
maximum spectral width of 11.2 MHz in the
metros, 9.2 MHz in circle A, 8.2 MHz in cir-
cle B and 6.2 MHz in circle C. The maximum
in any circle for a GSM operator is 15 MHz.
However, some GSM operators are demand-
ing spectral widths as large as 22.5 MHz for
their 2G network expansion besides their
separate spectral claims for 3G services.
In this scenario, there arise questions
regarding the efficiency with which these
operators are utilising their allocated
frequency bands. GSM operators need to
use the spectrum they already have much
more efficiently, noting that they serve 3.9
million subscribers per MHz, compared to
China, where mobile carriers serve 8.5
million subscribers per MHz. There are
also criticism concerning GSM operators
for cartelising and hoarding spectrum. As
a learning outcome from 2G spectrum
auctioning, we believe for 3G spectrum
auctioning and licensing the following key
17
commentary
aspects have to be thoroughly debated and
detailed: (i) deciding the frequency band
for spectrum allocation; and (ii) the mini-
mum reserve price and auction design.
2  Spectrum Allocation for 3G
Before a country may start the licensing
for 3G services, it is important to identify
available spectrum. This requires ear-
marking newer frequency bands and the
migration of incumbent users to other
bands. According to India’s NFAP (2002),
bandwidths ranging from 1920 to 1980
MHz will be used for International Mobile
Telecommunication (IMT) 2000 services
(which include 3G) for uplink and 2110-
2170 MHz for downlink. In addition to this,
it will be required to allocate more bands
in the wake of newer technology and
services. In the recently held World Radio
Communication, under the aegis of Inter-
national Telecommunication Union (ITU),
more frequency bands were identified
for IMT applications, viz, 450-470 MHz,
698-806 MHz, 2.3-2.4 GHz and 3.4-3.6
GHz. However in India, the stakeholders
such as defence, Doordarshan and police
expressed their concern about the use of
the frequency bands 450-470 MHz, 698-
806 MHz and 3.4-3.6 GHz for IMT. TRAI
also recommended the use of 450 MHz for
3G operations as the band has excellent
propagation characteristics well suited for
coverage in rural areas. However, the DoT
has not approved of this idea yet and hence
the spectrum allocation for 3G services is
getting delayed in India. A similar scenario
existed in the US when the US commerce
department and US Congress had post-
poned their 3G spectrum auction by two
years – from September 2002 to S­eptember
2004. The delay occurred so that the
F­ederal Communications Commission (FCC)
could take the time it needed to identify
the available spectrum and arrange for the
incumbent users to migrate to other slots.
In a recent development on July 1, 2008,
the DoT has informed TRAI that due to
non-availability of spectrum in 450 MHz
and 800 MHz bands, it is proposed that
spectrum will be allocated only in the 2.1
GHz band. Blocks of 2 × 5 MHz in this band
will be auctioned. Each bidder shall be
allocated only one block in each telecom
service area. India must take care in allo-
cating spectrum. Perhaps India can take
18
its cue from Germany, which allocated Worldwide, the third generation licen­
spectrum in smaller blocks and subse- ces were awarded either through a beauty
quently, the companies can be asked to bid contest or other auctioning methods such as
again, depending on consumer response. sealed bidding, open bidding, simultaneous
This helped the industry to roll out the multiple round auctions and Vickrey
operation faster as companies have to a­uction. The beauty contest is an auction-
shed less amount for spectrum and it also ing procedure, which is not wholly
helped the government in terms of reve- dependent on the pricing. With much
nue collection and safeguarding against s­imilarities to an actual “beauty contest”,
monopoly. The lesson is that slow and here too, every contestant will have to
meticulous planning of spectrum alloca- convince the auctioneers of their ability to
tion is required, despite the pressure from provide services. Based on answers to
lobbies like Cellular Operator Association questions like – how wide the service area
of India (COAI) and Association of Unified will be, how fast and efficiently services
Telecom Service Providers of India (AUSPI) will be rolled out and what will be the cus-
tomer usage charges – a contestant will be
3  Auction Designs and Minimum selected as the winner of this “beauty
Reserve Price c­ontest” and will be provided the licence.
Spectral auction is one of the major sources
of revenue available to a government. With (i) Comparative International Scenario
a booming telecom sector and its net worth for 3G Auction: Some of the methods fol-
of approximately $ 30 billion, the contri- lowed by various countries and their profit­
bution of communication sector to Indian ability rating is shown in Table 1 (p 19).
GDP has increased from about 1.59 per cent The advantage of a beauty contest, when
in 2000 to 3.97 per cent in 2006. It compared to open auctions, is that the
becomes imperative for India to choose a operators will be able to work on 3G side-
proper auction design to maximise govern- by-side, even as they keep on focusing on
ment revenue comparable to other coun- the provision of mobile services to those
tries like the US, UK, Germany, Switzerland, who are still unconnected and remain a pri-
etc. At the same time, emphasis must be ority. Also, financial problems due to direct
given to safeguard the interests of telecom auctions (where bidders quote extremely
operators and ensure the future growth of high prices) and major delays in rollout
the telecom sector and not just keep in after 3G auctions, a scenario that occurred
mind the profits from auctions. in Europe after 3G auctions, can be
INDIAN INSTITUTE OF MANAGEMENT AHMEDABAD (Coordinator)
REQUIRES THE FOLLOWING PERSONS FOR NAIP PROJECT
(Assessment of impact of climate change on water-energy nexus
in agriculture under canal irrigation system)
Research Associates and Senior Research Fellows:
Qualification: Master/PhD (or equivalent) in Hydrology, Economics, Engineering,
Science or equivalent. Relevant experience preferred.
Tenure: Minimum one year, extendable based on annual performance
review.
Age Limit: Senior Research Fellow: 35 years for men, 40 years for women
Research Associate: 40 years for men, 45 years for women
(Relaxation of 05 years for SC/ST and 03 years for OBC candidates)
Salary: Linked with the positions as laid down in the NAIP rules/
guidelines.
Apply to: NAIP Project, Wing-12A, Indian Institute of Management, Vastrapur,
Ahmedabad - 380 015, latest by 31st January 2009.
Office Assistant:
Qualification: B.Com, other conditions as above.
Please see http://www.iimahd.ernet.in/RA_ADVT_2jan09.pdf for details.
january 17, 2009  EPW   Economic & Political Weekly
 commentary
Table 1: Spectral Auctioning Design (Various Countries) c­ollusion problems. The organisers of most
Country Method of Licence Distribution Key Aspects Year S&P* Profitability Rating
of the auctions after the UK’s auctions failed
Finland Beauty contest First country to award 3G licences.
to give enough attention to attracting entry
It was not price based. Four operators 1999 Average
Japan Beauty contest Three operators 2000 Excellent
and magnified their problems by permit-
France Beauty contest + auction $ 4.5 billion per licence for the first two ting joint-bidding agreements prior to the
licences and later auctioning for auctions. The German and Austrian auc-
remaining two licences 2001 Very good
UK Auction Five licences – four for established
tions demonstrated the vulnerability of
operators and only one for a new operator 2000 Very good ascending auctions to collusive behaviour
US Simultaneous multiple during the auctions and there were also
round auction Reserve price set to $ 10 billion 2004 Good
* Standard and Poor’s (S&P) is a division of McGraw-Hill that publishes financial research and analysis.
rumours of collusion in the ascending auc-
tions in Italy, the Netherlands and Switzer-
deterred. To develop a spectrum auctioning for example, four firms could win large land. All these problems were aggravated
plan for 3G we should refer to the countries three-block licences or six firms could win by the auctioneer’s failure to use the infor-
who have already auctioned 3G spectrum. smaller two-block licences. This contrasted mation from the UK auction to set sensible
For example, the UK ran the world’s first 3G with the previously discussed auctions in reserve prices. The auction design is not
auction in March 2000 for four licences. which all the licences were of a pre-­ something that is ready-made for all.
The problem faced was that there were also determined (though not always identical) The ascending design that worked very
exactly four incumbent 2G mobile phone size. As always, firms could win at most one well for the UK worked very badly in the
operators who had the advantages over any licence each. The 12 blocks were sold by a Netherlands, Italy and Switzerland. The
other bidders of existing 2G brand names simultaneous ascending auction, much like experience of the various countries in auc-
and customer bases to exploit and lower the previously discussed auctions. The tion provides valuable insight into the chal-
costs of building 3G networks as they point of the design was to let the number of lenges faced by regulatory agencies as auc-
already had a 2G infrastructure, which they winners be determined by the bidders who tioneers. Moreover, the auction serves as an
could back on. Therefore, the auctioneers might have information unavailable to the excellent example of why an allocation
were concerned that an ascending auction government about, for example, the engi- mechanism such as an auction needs to be
might deter other firms from entering and neering advantages of large versus small evaluated by more than a single outcome if
bidding strongly. So the government licences. But such an auction’s outcome is it is to be used for subsequent resource allo-
planned to run a hybrid of the ascending driven by bidder’s profits, not by consumers cations in the future. Thus, the experiences
(English) and sealed-bid (Dutch) auctions or social welfare. Since the bidding in the of these countries should be studied with
and called it an “Anglo-Dutch” auction. The British auction had already revealed a lot utmost interest by government and regula-
intention behind this was that the sealed- about bidder’s relative valuations of differ- tory agencies in India.
bid stage would induce some uncertainty ent licences, it would have been wiser to fix
about which four of the five finalists would the number of licences in advance. The auc- (ii)  3G Spectrum Auctioning Design for
win and entrants would be attracted by the tion also proved vulnerable to collusion India: The auctioning of 3G spectrum as
knowledge that they had a chance to make and entry problems: only seven bidders proposed by the DoT recently, called “con-
it to the final stage. So the sealed-bid stage participated. The entry of weaker bidders trolled ascending e-auctioning”, which
would attract entry and so also raise reve- was perhaps discouraged by the ascending emulates the 3G auctioning followed by
nue, while the ascending stage would mean design, as in other auctions after the UK’s. FCC in the US. In this method of auction-
less loss of efficiency than that might result Discussion on spectrum auctions can ing, the base price is fixed prior to the auc-
from a pure sealed-bid auction. never be complete without discussing the tion, depending on the metro and the cir-
The sealed-bid stage would also make Nigerian model (though it is 2G auction- cle. Based on the experience of successful
collusion harder. The UK auction team ing). The reason is that the Nigerian GSM 3G auctions in certain countries, the DoT
made a deliberate strategy of being the auction, by virtually all reports, was con- has proposed that the reserve price for a
first to auction and the fact that planning sidered to be a success. The final licence block of 2 × 5 MHz in the 2.1 GHz band
continued for three years before the actual price of $ 285 million per licence was sub- should be 0.5 per cent of GDP, which in the
year of auctioning, served as add-on time stantially more than the government had case of India, would come to $ 0.5 billion
for a sustained marketing campaign to expected to raise. The Nigerian GSM auc- or about Rs 2,100 crore, which is twice that
attract entrants. The version of an ascend- tion surpassed virtually everyone’s reve- recommended by TRAI. Thus, the reserve
ing auction that was used was widely nue expectations and raised more revenue price will be as seen in Table 2 (p 20).
judged a success; nine new entrants bid per capita than the 3G auctions in the The DoT has proposed that when the
strongly against the incumbents, creating Netherlands and Italy. number of bidders left is equal to the
intense competition and record-breaking A key determinant of the success of the number of blocks of spectrum being auc-
revenues of 39 billion euros. European telecom auctions was how well tioned, in any service area, the auction will
Whereas Germany auctioned 12 blocks their designs attracted entry and discour- end. All the bidders will have to match the
of spectrum from which bidders could cre- aged collusion. The sequencing of the bid of the highest bidder. In case they do
ate licences of either two or three blocks, a­uctions exacerbated the entry and not match, then that block would be
Economic & Political Weekly  EPW   january 17, 2009 19
commentary
Table 2: Proposed Reserve Price for 3G Auctions in India
Circle Reserve Price (Rs Crore)
Mumbai, Delhi and Category ‘A’ 160
Chennai, Kolkata and Category ‘B’ 80
Category ‘C’ 30
offered to the next highest bidder at the
highest bid price. If any block is left
vacant, then the block would be reauc-
tioned. This would ensure that all success-
ful bidders pay the same amount for the
same 3G spectrum blocks.
A comparison of the proposed Indian 3G
auction design with that of other countries
is essential to help us frame better designs
for auction. The proposed framework for
3G auctions in India projects a minimum
0.5 as the ratio of revenue from spectrum
allocation to GDP. Also, with 260 million
mobile phones and a mobile teledensity of
over 80 per cent, if US could generate $ 10
billion, India, with over 230 million mobile
phones and mobile teledensity of 22 per
cent and a scope of exponential growth for
a decade, clearly argues a higher spectrum
pricing. The Indian ministry of finance,
which is expected to take a share from the
revenue earned through 3G auctions,
hence, wants higher fees for spectrum.
Thus, it is highly vital that the auction
design, for 3G services in India, must be
reviewed with at most care.
4  Conclusions
From the regulatory and policy perspective,
spectrum auctions ensure efficient usage by
allocating it to those entities that value it
the most, while also generating revenues
for governments. However, auctions may
lead to unexpected outcomes as, for exam-
ple, when regulatory agencies have inade-
quate market information, there may be a
mismatch between expected and actual
bidder behaviour or auctions may be poorly
designed. The key challenge before regula-
tory agencies is to design auctions in such a
way as to meet the objective of fostering
competition while, at the same time, ensur-
ing that bidders can effectively use the
spectrum for their business. The pressure
lobbies like COAI and AUSPI will try to pres-
sure the DoT and TRAI on spectrum alloca-
tion as well as reserve price but the DoT
must do extensive analysis before actually
detailing key aspects of auction design, it is
also vital to realise that the telecom indus-
try can be a growth driver for the country,
provided its growth is monitored and r­egu­
lated in a systemically designed regulatory
environment. Auctioning of spectrum is
one element of the telecom ecosystem; the
actual aspects will be the   deve­lopment of
the infrastructure and support system for
the roll-out of the 3G services.
The 3G spectrum auctions to be held in
India will have a great impact in the coun-
try’s booming telecom industry. Though a
best auction design would lead to maxim-
ise the revenue earned by the government,
it is important that the auction design safe-
guards interests of all the stakeholders. The
main factors of concern are the telecom
industry, its subscriber growth, average
r­evenue per user, tele-density and the cus-
tomer. On the issue of new and foreign
operators, entry is an apprehension that
operators, especially those who missed out
on the latest round of 2G licences, will drive
up the bidding price in their eagerness to
get into the market. This will result in
(a) high tariffs for the 3G services, and
(b) deprive the existing operators from pro-
viding the 3G services. Thus, while design-
ing the 3G auctions for India, the DoT and
TRAI must keep in mind the interest and the
future of telecom industry and hence must
sketch an optimum framework for auction
design which need not be the best.

Visiting Scholars Program 2009

Overview: The Visiting Scholars Programme (VSP) has been instituted in IGIDR as part of its outreach activities with the objective of supporting high quality research
being conducted by Ph.D scholars and Junior Faculty Members of colleges and universities in India and abroad. The scholarship will enable up to five selected scholars
to spend three months at a stretch at IGIDR anytime during April 1, 2009 - March 31, 2010, to work on a concrete research proposal that can be satisfactorily completed
during the three-month period.
Eligibility: At the time of application, applicants should possess a Masters degree in any field and be registered for Ph.D. on a topic broadly involving any area of
economics including energy and environmental policy. Applicants are required to submit a curriculum vitae (CV), a research proposal and two letters of recommendation.
One of the letters of recommendation should be from the concerned Ph.D supervisor in the case of a Ph.D student, and the principal of the College/University in the
case of a Junior faculty member. Recommendation letters should clearly give the contact details of the recommenders. Candidates should clearly mention in the application
the preferred three-month period of stay at IGIDR.
Research Proposal: The proposal should involve economic issues including those related to energy and environment. It should be strictly within 1,500 words, and its
scope should be such that the project can be completed in three months. Proposals in both theoretical and empirical issues will be considered. The research proposal
should be accompanied by a signed certification by the applicant as well as by the concerned thesis supervisor/principal, stating that the research proposal is original
work of the applicant.
Selection will be based on a joint evaluation of the CV, letters of recommendation and the quality of the research proposal submitted at the time of application. Proposals
will be evaluated on the basis of a double-blind refereeing process.
Emoluments: Selected scholars will be paid Rs. 9000/- a month towards scholarship, reimbursed to and fro three-tier AC train fare, and provided free accommodation
on campus for a stretch of three months. Foreign scholars residing outside India, however, will have to bear the transportation expenses on their own.
Requirements: Selected scholars will be required to submit a progress report of the research project at the end of six weeks and a complete research report along with
a seminar presentation of the research findings at the end of the three-month stay. Failure to submit a progress report on time may lead to the termination of the
scholarship programme. Once the research project is completed and published, the scholar should acknowledge IGIDR in an appropriate way.
Application Deadline & Notifications: Applications can be sent electronically or by post to reach IGIDR by January 31, 2009. Letters of recommendation should
be sent by the concerned persons directly to IGIDR via email/post. The subject head for email and top of the envelope for post should indicate APPLICATION FOR
VISITING SCHOLARS PROGRAM 2009. Selected applicants will be notified via email/post by February 15, 2009. Those selected will have to accept the offer latest
by February 28, 2009.
Address for Communication: Visiting Scholars Program 2009,
Indira Gandhi Institute of Development Research (IGIDR)
General A. K. Vaidya Marg, Goregaon (E), MUMBAI 400 065, INDIA
Email: vscp@igidr.ac.in ; Telephone: +91-22-28416200

20 january 17, 2009  EPW   Economic & Political Weekly