Second thoughts on 3G

This is the ultimate irony. The country’s cellular mobile operators who’re arguing that 3G licences are not a new service, and therefore cannot be auctioned, are essentially relying upon a change in their licence conditions made at the time when Reliance and the Tatas gained a backdoor entry into the mobile telephony market in 2003. Something they objected to at that point of time! Under the original licence, the only mobile telephony that could be provided was a 2G one. It was only when the government decided to allow the fixed-line telecom providers to provide full-blown mobility using CDMA technology that the Unified Access Services Licence (UASL) dropped the term 2G and the scope got broadened to “provision of all types of access services”, which, you could argue, includes 3G services as well.

Which is probably why when the Prime Minister’s Office asked the Department of Telecommunications (DoT) for its view in December 2004, the DoT said that under the UASL, 3G services were part of 2G licences, and that the only issues that needed to be addressed related to the allocation of this 3G spectrum and the criterion for this.

In other words, had the GSM cellular players (Hutch/Airtel, etc) got their way and stopped the CDMA-based Reliance/Tatas’ back-door entry in full-blown mobility, they wouldn’t have had a case for opposing the telecom regulator’s (Trai’s) recommendation that 3G services be considered a new service!

But whether you agree that 3G spectrum needs to be bid for or that it should be given free like the 2G one, what’s troubling is that in a sector where most agree the regulatory system is the best, the regulator should do a complete U-turn on 3G policy. In May last year, the regulator was very clear that 3G was simply an extension of 2G and that it could not be priced. Today, the same regulator, with a new chief though, has no hesitation in saying 3G is a separate service, that while 2G is essentially about voice traffic, 3G is really about data. Trai has tried to justify this by saying there was a serious spectrum crunch in 2005 and, since it didn’t look as if any more 2G spectrum would be available soon, the 2005 recommendation on 3G was a response to this.

That’s a feeble excuse since there has been little change in the spectrum position since May 2005. The proposal to get the defence forces to vacate an additional 25 MHz of 2G spectrum—this is enough to service around 50-60 mn new subscribers—in the 1,800 MHz frequency band, which is going to happen now, was first agreed to by a Group of Ministers in September 2003. And, in May 2005, Trai reiterated that this was to be made available by December of that year.

It is equally unclear how Trai justifies its changed view on 2G spectrum. In May 2005, it said spectrum vacated by the defence should be given to the GSM firms; the current view is that GSM firms should vacate some spectrum in the 900 MHz band and this be given to the CDMA lot! Though this loss is to be made up in the 1,800 MHz spectrum, this will cut into the GSM lot’s fresh allocation since only 25 MHz is available.

In other words, it will take a while before a genuinely robust regulatory mechanism that’s independent of personalities develops. That’s good or bad news, depending upon where you stand.

Though sensible on the whole, Trai’s latest 3G recommendations still have some inconsistencies. First, the rollout obligations specified is a bad idea since the DoT has rolled these back in the past in other services like fixed-line and long-distance telephony. Second, the suggestion that CDMA players who want spectrum in the 800 MHz frequency match the bid of the second-bidder in the 2,100 MHz is unfair. If Reliance/Tata, the CDMA lot, want to offer 3G services in the 800MHz band why should they pay less than what Airtel/Hutch (the GSM lot) pay when they bid for spectrum in the 2,100 MHz band?

The argument given is that, to do 3G services in the 800 MHz band, the CDMA lot will have to dedicate 1.25 MHz (called a “carrier” in jargon) to only data communication and so, if there aren’t enough 3G customers, this is a dead loss—the GSM lot, in contrast, can use their 3G spectrum to provide voice services to existing 2G subscribers as well. True, but the CDMA lot needs to buy less spectrum than the GSM lot, so they save there.

While Trai has chosen not to disturb the existing practice of giving 2G spectrum free, it will have to apply its mind here eventually, since this prevents its proper utilisation. An example will make this clear. If Reliance or the Tatas want to do 3G CDMA services in the 800 MHz band, they have to buy one more “carrier” (by matching the second-bid in the 2,100 MHz band). They can, however, do this even today by releasing one of their existing “carriers” in this frequency band, but under the new 3G policy, they have to buy a new “carrier”. But if they buy a new “carrier” here, they cannot do 3G GSM (like Reliance is supposed to be inclined to do) in the 2,100 MHz band. This is illogical, but the reason for it is obvious—if the GSM firms have to pay for their 3G spectrum, why should the CDMA chaps get it for free?

A fair enough point, but it ensures the economy’s making sub-optimal choices. The sooner the pricing of 2G spectrum is discussed, the better.