The value of 1800 MHz and 2100 MHz spectrums in India and implications for auction design

• Benchmarking of the 1800 MHz spectrum reserve price to the price discovered for 2100 MHz spectrum is conceptually flawed.
• Economic models show divergence in the values of 1800 MHz and 2100 MHz spectrums.
• 2100 MHz spectrum more valuable in high income circles and less valuable in low income circles.
• Recommendations on auction design include reducing the reserve price and halving the term of the spectrum license.

The sequence of events leading up to the upcoming auction of 1800 MHz spectrum in India has led to the auctions acquiring an extraordinary significance for the future of the Indian mobile industry. A key feature of the auction design proposed by the regulator TRAI is the benchmarking of the reserve price of 1800 MHz to the price of 2100 – 3G spectrum revealed in the 2010 auction. In the context of the low number of LTE devices available and the fragmentation in the 1800 MHz band, this paper proposes reducing the duration of spectrum holding to ten years (from the current level of twenty years), and calibrating the reserve price of 1800 MHz with its value with GSM deployment. An economic model is used to compute the value of startup and incremental 1800 MHz spectrum. The estimated values are shown to differ from the value of 2100 MHz spectrum at a pan-India level and also in their distribution across circles. A new set of reserve prices are computed based on the estimation. The estimated values are also shown to be close to the AGR-adjusted price revealed in the 2001 auction. A reserve price based on the 2001 auction is also provided. Concomitant features of the auction are suggested to give coherence to the auction design.