5G in India — Is this the case of Too Little, Too Late?
As Indian telecom operators prepare to bid for the spectrum in this year’s auction, which is touted primarily as the 5G spectrum auction, it is pertinent to review at this point of time the good, the bad, and the ugly side of this 5G story in India.
Ever since the announcement of spectrum auctions for 5G licenses this year, there has been a lot of hype about commercial possibilities and business applications for end users. 5G is a lot more than just higher internet speeds for end users, it is about the intelligence at the bit level and low latency which will make it the foundational tech for multiple new use cases, including self-driven cars, AR & VR, telemedicine, robotic surgery, powering future smart cities, IoT, m2m, AI and manufacturing. Industry was anticipating some radical changes and policy reforms to cover the lost ground and time due to delayed 5G launch against the rest of the world.
While there are quite many changes announced by TRAI like reduction in reserved price and few other applicable rules for the upcoming spectrum auctions, the response from various echelon of the industry has been a mixed bag though. Are the proposed changes good enough for India to cover the lost ground in this 5G tech leadership race? Is it too late now as China has already crossed 900 million 5G subscriptions? Well, only time will tell how we fare from here but if last 15 years is anything to go by, we have a lot to learn how China emerged as global leader in 4G technology and how we suffered from policy paralysis and bureaucratic blockade in India.
Before I start evaluating the latest policy changes and its implications in much more detail, let us also take a quick look at the journey Indian Telecom has had so far and then a brief overview of the progress that 5G has already made across the globe.
Indian Telecom: The Old Warhorse and Lifeline of Economy
Indian telecom sector, once the sunrise industry and flag bearer of India’s economic growth story, has also been marred by controversies ever since it opened up to private participation. Be it the entry of erstwhile Reliance Infocom with pan India CDMA licenses, or bombardment of private players in the market with 2G license and subsequent scams, or more recently re-entry of Reliance Jio with free 4G service for almost 2 years resulting in annihilation of almost every other player, and many more such cases in between.
In spite of all the challenges and burgeoning industry debt, there is no denying the fact that telecom is among THE MOST important sectors for economic development and overall growth of the country. A study by ICRIER (Indian Council for Research on International Economic Relations) shared following interesting data points:
Every 10% increase in mobile penetration leads to 1.9% increase in GDP per capita.
Every 10% increase in internet users leads to a whopping 3.2% increase in GDP per capita.
A 10% increase in investment in telecom sector will increase India’s GDP by 3.3%.
The critical nature and importance of telecom sector was further accentuated during COVID-19 pandemic when the entire economy came to a near standstill due to countrywide lockdown from March 2020 and social distance compliance. The true depth and spread of telecom networks were tested during this time and it provided the much-needed support to keep those vital communication channels open, thus helping economy to recover faster from recession.
Hence, it is in the public interest that government should encourage and support growth of this vital sector through its policies while ensuring fair play and healthy rivalry at the same time. Considering the vast geographical spread of a country like India and glaring urban-rural divide, ensuring reach of basic broadband across length and breadth should definitely be the primary consideration and for few other reasons as cited above. Speaking in the same breath, we cannot at all ignore the super urban India, where the potential market of even top 10 cities is probably bigger than many developed countries put together. This urban market is hungry for low latency and high bandwidth provided by 5G and all its innovative applications across industry verticals as we discuss in detail.
So, the big question is why we still don’t have the commercial 5G service in India?
But before we discuss that in detail, first, let’s look at the basic building blocks of the telecom ecosystem.
Ecosystem Building Blocks
At a broader level, we can say there are three basic components of the telecom ecosystem or the layers of the stack for a mobile service like 4G or 5G.
- Infrastructure: This involves a mobile service provider with a license to provide specific service and allocated spectrum for the same; core infrastructure; and a well laid out radio network.
- Devices: End user devices compatible with the technology with various native features and functionalities.
- Applications: Third party content, applications and services to cater to various use cases.
Each layer is mutually dependent on the growth of others and thus the overall growth of the whole ecosystem, but it’s the infrastructure layer which sets the ball rolling and acts as primary catalysts for the entire ecosystem. As the adoption of the new service increases and a critical mass builds up, market forces take over to further propel growth of the ecosystem with entry of more players and competition within devices and applications layer (especially at local level). This brings new devices with more features at lower prices along with new innovative applications which have localized content and in local languages. This in turn attracts more users and thus the upward growth spiral in the market take place.
Few key points to note here about the infrastructure layer:
- the role infrastructure plays in incubating and nurturing the entire ecosystem in the beginning;
- more importantly it’s the only layer which is strictly controlled in terms of number of players and other regulatory conditions by the government;
- and lastly, infrastructure layer is region or country specific. Although network equipment have global supply chains but the spectrum and license for this infrastructure is always location specific.
As we are now one-big global economy, innovations and developments across the world influences everyone, and progress made anywhere in the world gets replicated and adopted fast in other parts of the world as well. So, before we get down to deliberating on the challenges for 5G in India, let’s have a quick glimpse at the vast progress already taking place in various parts of the world across all three layers of 5G ecosystem.
Global Race to 5G in Full Swing
At the infrastructure layer, whose importance we already discussed and how it propels growth of other layers, deployment of 5G networks across the globe is already happening in full swing. Many countries have already declared having achieved 100% 5G coverage while many others are in different stages from auction to license allocation to network rollout to commercial launch. Here are some quick numbers on 5G network status worldwide.
According to Ookla 5G Map as on 30th June 2022:
- There are over 104,000 sites with commercial 5G availability.
- 43 locations with limited availability where devices are limited to select customers.
- 215 locations with pre-release status where network is in testing phase and not yet available to customers.
As per GSMA report of May 2021:
- 159 operators had launched 5G services across 60 countries as of end of Q1 2021.
- Another 133 operators have received 5G spectrum.
- 224 individual operators have conducted successful 5G trials.
China which launched its commercial 5G services in November 2019, had reached almost 900 million 5G customers by the end of May 2022 as they added 30 million more customers in that month.
On the devices front, as reported in the Ericsson Mobility Report 2022, the number of 5G devices in the global smartphone market crossed 650, accounting for 50% of all 5G devices by the form factor. Overall, more than 615 million 5G devices were shipped in 2021 which is almost double of 2020 numbers. Moreover, now every new mid-to-high level commercial handset getting released is 5G compatible.
Global 5G Spectrum Assignment Best Practices
As we saw the rapid progress across 5G landscape globally, let’s also have a quick glance at some of the latest global best practices on new spectrum assignment models:
- France conducted its 5G spectrum auction where a core chunk of 3.5 GHz is awarded for fixed price and rest on auction basis. Operators had a mix of mandatory and optional obligations to comply.
- Austrian auction of 5G spectrum emphasized on coverage and offered discounts against time-based coverage commitment.
- UAE and Qatar offered spectrum with NO upfront fee in return of coverage commitment indicating government is considering wider economic goals over short term monetary gains.
- China used the administrative route to allocate fixed spectrum to each of the telecom operators at almost FREE of COST and even supporting with network deployment.
- Singapore adopted a beauty contest approach for the award of 26 GHz mmWave 5G spectrum with just 15% weightage to the upfront price.
- There is also a growing trend of localized spectrum license to encourage customized industry vertical solutions and innovation. Australia and Germany are the latest addition to this list where Hong Kong and Japan are other notable examples.
5G in India: Opportunities Abound
Now, coming back to India, there are some clear tangible and intangible benefits 5G can provide to the Indian economy.
Here are some insights from a recent report from GSMA Intelligence on how 5G can boost Indian Economy:
- 5G is expected to deliver significant social and economic benefits to the Indian market and has the potential to transform the industrial sectors.
- Over the period 2023–2040, 5G technology is expected to make an overall contribution of approximately $450 billion to the Indian economy.
- Manufacturing sector is set to benefit the most from 5G application accounting for 20% of total benefit, followed by retail at 12% and ICT at 11%.
- $100 billion planned to be invested to enhance India’s digital infrastructure as part of NDCP’s (National Digital Communication Policy) vision of reaching $1 trillion digital economy.
The Curious Case of Indian Telcos — Facing a double Whammy
While we looked at how fast the world is moving towards a 5G era and also the economic benefits that 5G can bring to Indian economy, the big question here then is why hasn’t 5G seen the light of the day in India so far and especially when all three private Telcos have already completed their 5G network trials? Well, we have to recognize the fact that each market is different and has its own unique challenges.
The problem with India’s Telecom Industry is two pronged where on one side they are constrained with lowest ARPUs and on the other they have to pay highest spectrum cost.
Let us also briefly talk about current state of Indian market and challenges faced by Telcos in India.
- India is among the world’s cheapest mobile markets. While this means inexpensive connectivity for customers, it also means lower ARPU (Average Revenue Per User) and less profitability for Telcos.
- Indian Telcos have the lowest EBITDA margins among its peers in the region due to super competitive nature of the market.
- With continued high level of network investment and cost of recent market consolidation has significantly increased the debt levels among Telcos. Net debt — EBITDA ratio of Indian Telcos is worst among their comparable peers (see charts above).
- On top of all these, then there are other kind of legal and regulatory obligations like deferred spectrum liabilities and old litigations.
- And the biggest factor being the high reserve price of 5G spectrum set by TRAI.
Now, with Telcos reeling under all those factors listed above, it actually inhibits the financial capability of a Telco to plan for faster network expansion or invest in next generation of technologies. The priority for them obviously is to manage their existing operations first and address current challenges. This is exactly what Mr. Gopal Vittal, CEO airtel, said in October 2020 “Given that the reserve price of 5G is as high as it is, we will not buy it because we won’t be able to afford it.” This he said despite the fact that airtel was involved in 5G testing with various vendors and later in January 2021, became the first Indian Telco to showcase a live 5G service over a commercial network.
Some Startling Facts About 5G Spectrum Pricing
Of course TRAI recommends the reserve price for all spectrum bands after all the due diligence and study of historic auction rates, band specific efficiency and global trends; but it must also appreciate the market dynamics which keep changing and wider social and indirect economic benefits linked to introducing new technologies rather than historic approach to profit maximization.
While we saw economic condition comparison of Indian Telcos with their peers, here is what a single MHz of 5G spectrum (at reserve price) will cost to Indian Telcos as compared to other comparable Telcos. And mind you here we are not even talking about China here who gave 5G spectrum to it’s Telcos for almost FREE.
Another important point to note is that this reserve price of 5G spectrum is after 36% drop from what was recommended by TRAI in 2018 (although Telcos requested for a 90% cut). All the Telcos vehemently refused to participate in auction at this price in 2021 and that is why it was never put across for auction.
The situation is even worse in case of 700 MHz band which is much more efficient and can be used for both voice and standalone 5G. The spectrum in this band was put up for auction twice (2016 and 2021) but went unsold even after 43% reduction in the reserve price in 2021. Further a 40% reduction is proposed now in reserve price for this band in the current auction of 2022.
Spectrum is like that scarce yet perishable commodity which if remains unused is a pure waste.
This is not just the loss of revenue to the national exchequer (even if it’s much less than reserve price) but also hinderance in national progress. China, India’s biggest competitor in many cases, gave FREE 5G spectrum to all national Telcos in December 2018 and now has almost 900 million 5G subscribers.
Apart from commercial sustainability of a telecom operator, even from the social and economic development perspective of a country, spectrum pricing is a major consideration and has wider ramifications on consumer outcomes as well.
Spectrum Pricing ↔ Economic Impact
Here are some excerpts from a comprehensive study conducted by GSMA Intelligence on impact of spectrum prices on consumer outcomes for the period of 2010–2017.
- In developing countries, where spectrum prices were on average almost three times more expensive than in developed countries in relation to expected revenues, led to slower rollout of both 3G and 4G networks and drove long-term reductions in overall network quality.
- Countries with the highest spectrum prices, on average, would have covered 7.5% more of the population if they had acquired spectrum at the median spectrum price.
- Penetration of 4G service would have been on average 11–16 percentage points higher, had the spectrum been awarded at least two years earlier.
- The amount of spectrum licensed to operators had a significant impact on network quality. An additional 20 MHz of 4G spectrum increased average download speeds by 15% (between 1 and 2.5 Mbps).
The Road Ahead — Towards the Launch and Beyond
While the government did provide some last-minute financial support to Vodafone Idea to ensure that market remains competitive with at least three private players, the expectations are much more towards future commercial sustainability and growth. The reduction in spectrum reserve price across various bands is quite less than what operators were demanding but the removal of SUC (Spectrum Usage Charge) on all future acquired spectrum is a welcome move. Though this will surely provide some encouragement to operators to bid generously for 5G spectrum in the current auction, the burden of SUC will continue for legacy spectrum where the major chunk was renewed for next 20 years in 2021 only.
As the global ecosystem is ripe now for launching 5G services and with some positive changes in the spectrum reserve prices and policies, it is highly expected that at least Airtel and Jio will pick pan-India spectrum in the ongoing auction. While spectrum is the very basic and first cog in the mobile services value chain (as explained above), there are a whole lot of other components and measures that goes towards making it a success. In a couple of days, we will get to know who gets how much spectrum. And in most likelihood, we will have commercial 5G service available in some parts of the country by end of 2022 or early 2023.
Apart from just allocation of spectrum, government should also provide support in deployment of network with objective of wider reach, coverage and development of entire ecosystem.
Taking a cue from so many global examples here, government can provide support in multiple forms:
- Performance linked subsidies for each 5G site deployment in designated rural areas
- Subsidized electricity used at 5G sites for initial period of deployment
- Regulatory compliance support for passive and active infrastructure sharing to help with cost reduction.
- As 5G requires more dense networks especially with small cells to cater to hotspots, government should support with site access approvals and other government properties like traffic lights or own buildings.
- Extended the spectrum tenure for 5G use, say 40 years in place of 20 years. This will provide significant leverage to operators to invest in network roll out faster.
- Cost linked to obligations should be deducted from final price paid for spectrum.
- Performance linked incentive scheme for milestones in service penetration and usage.
While it is important to keep an eye on the short-term revenues especially with fiscal budget constrained due to excessive pandemic led measures, we must not ignore the long-term and sustainable benefits of introducing, facilitating and developing a next generation technology for the society at large.
Here is a summary of multiple short-term and long-term benefits of adopting a holistic approach to spectrum allocation and allied policy measures as suggested above to kickstart 5G in India:
- As Telcos are already reeling under heavy debt and questions are being raised over ROI, strong backing with favorable policy initiatives will send positive signals about the governments approach and will go a long way in building confidence among international investors.
- With financial support in various forms including spectrum, Telcos would be able to invest in network rollout faster increasing service penetration.
- This will have a snow ball effect on other industry players providing infrastructure and other allied services to Telcos coming forward for local investment and R&D.
- Though 5G handsets are now available but yet mostly in the premium segment. With deployments in sights, we will see much faster availability of cheaper end-user devices further encouraging mass adoption.
- It will provide impetus to application developers to innovate with new use cases and localize applications for Indian consumers.
- Subsequently, Telcos who have by now already invested in infrastructure and tested the business model with existing base of users won’t mind bidding for additional spectrum. It is now that the government can maximize value for national scarce resources though market forces.
- With these liberalized measures, credit rating of the country will also get a big boost.
- Last but not the least, these measures will elevate government’s public image. Even though notional, the amount of benefit / subsidy provided to Telcos can be attributed as public expenditure for sector development.
Akin to what road, rail and air transport infrastructure was to earlier industrial revolutions, 5G is the backbone for Industry 4.0 and all its use cases.
China is already leading in the standardization and patents of the digital ecosystem, manufacture of equipment, etc. with 5G ecosystem well established; we are still in the process of spectrum allocation for 5G services. Even though India missed the 2G, 3G or even the 4G bus, we have done extremely well despite the late start. India can grow in Industrial Revolution 4.0 given its human capital pool, the start in the use of algorithm prowess and an established IT hub, only if we have the adequate support in terms of well-established 5G network systems. If we have to catchup with the leaders in the 5G technology, its high time we break the shackles of bureaucracy and take some bold decisions. We can’t afford to lose any more time while the world takes the lead. Let us hope the current spectrum auction is just the start of the next gen mobile tech revolution that will place India among the global leadership stage and well poised to win the race.
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