Bangladesh: Peculiar pricing of spectrum

Posted on August 10, 2011 / 3 Comments

The long dragged-out drama of license renewal in Bangladesh has taken one step toward closure, according to the Daily Star.

The government yesterday finalised the process of how it will charge four mobile operators — Grameen-phone, Banglalink, Robi and Citycell — for renewing their licences for the next 15 years.

A high-profile meeting presided over by Prime Minister Sheikh Hasina decided that the operators will pay at the rate of Tk 150 crore for per megahertz of airwave, which will be multiplied by the total allocated spectrum and a ‘market competition factor’.

The meeting held at the Prime Minister’s Office also decided to give 3G (third generation) technology licences through auction.

The per-MHz amount has been set arbitrarily. But let us not dispute that. The operators can use as much frequencies as fit their business plans, returning some if the overall cost is too much. So that is also excluded from discussion. Now what remains is the “market competition factor.” What is this and why is it being included in the computation?

Telecom Secretary Sunil Kanti Bose said the operators will have to pay Tk 150 crore for per megahertz of spectrum and the amount will be finalised on the basis of their market share.

Now an operator with a big subscriber base will pay higher than a low-subscriber operator, he said.

“Otherwise some of the operators will be affected and won’t survive.”

Now Grameenphone will have to pay higher than its nearest peers; Banglalink and Robi will be in the middle, while Citycell will pay less, on the basis of the calculation — Tk 150 crore/ per megahertz of spectrum multiplied by the total amount of spectrum and the market competition factor.

The rate for all bands of spectrum — including GSM 1800 Mhz, 900 Mhz and CDMA 800 Mhz — will be the same: Tk 150 crore.

Before we get to the main point, look at the last line. The per MHz price of frequencies in three bands with different characteristics are the same. What are these characteristics that have a bearing on arguments based on the “level playing field” metaphor?

Most handsets in the market are designed for GSM 900 and 1800 bands. Network and customer equipment that can be used in these bands are quite cheap, because they are the foundation on which the mobile boom was built. The propagation characteristics of 900 are “superior” to 1800 in terms of distance, making it somewhat more attractive in low-population-density rural areas. But in densely populated urban areas, 1800 has advantages. Therefore, most operators like to work with a mix. No big problem about pricing 900 and 1800 the same, as long as all operators have a mix.

In purely technical terms, one could argue that CDMA is superior to GSM, in that one can easily operate a CDMA network on 2.5 MHz, whereas GSM requires around 5-7.5 MHz minimum. However, as evidenced by worldwide market share of GSM and the decision of Reliance and Tata in India to cease to be solely CDMA operators, suggests on balance that GSM may have the edge. Of course, 3G and 4G will over time make the CDMA-GSM competition irrelevant.

What the relative efficiency of CDMA means for the renewal pricing debate is that Citycell, the sole CDMA operator appears to benefit from the decision to equalize spectrum charges in the three bands, given it can function with less frequencies than GSM operators. But this may be offset by the possible lower prices for GSM network equipment.

Now we come to the nub of the problem, Secretary Bose’s justification for charging operators with more customers a higher per-MHz price than those with fewer customers. The smaller operators will not survive, unless we do this he says.

So let us look at an analogy. Let’s assume Bangladesh has five manufacturers of bottled water, with the following market shares: A has 50% of the market; B has 20%; C, D, and E have 10% each. The government controls and sets the price for the input which is “raw” or unprocessed water. If a unit of raw water is priced identically to all manufacturers, A will pay 5 times what C,D,E pay and 2.5 times what B will pay.

Should the government include a market competition factor into the pricing and make A pay more than 5 times what C,D and E pay, and more than 2.5 times what B pays?

Seems illogical.

Now take the analogy further. By being more efficient (e.g., collecting rain water, reducing waste in processing, etc.), A manages to supply 50% of the bottled water market, but without taking 5 times the raw water as C, D and E. The market competition factor is derived from market share, not from how much raw water is used.

Will this pricing formula cause A to drop marginal customers, in order to reduce market share and thereby reduce the market competition factor? Will it cause it to invest more in efficiency in order to reduce the use of government water?

The former is a bad thing, in light of Bangladesh being the pioneer of the Budget Telecom Network business model that has enabled it to offer the lowest prices for voice in the world. The latter is not a bad thing per se, but given the way networks are operated, could have negative effects on quality of service. If the objective is that of conserving the scarce input (raw water or spectrum), would it not be better to have “slab pricing” for the input: x per unit for units 1-10 for example; x+y per unit for units 10-20; and so on.

So the government decision is peculiar, indeed.

And a last question. It is well known that market shares change over time. The above analysis indicated that the big players will now be incented to drop marginal customers and reduce market share (not revenue share). So the question then is whether the market competition factor will be recalculated periodically and the price per MHz adjusted accordingly? How exactly will the pricing scheme work in light of the fluidity of market shares?

3 Comments

Mustafa Hussain
August 14, 2011, 5:17 pm
Bangladesh had to offer free licenses 14 years ago, and all the foreign operators took advantages of the opportunity. Initially there was no spectrum acquisition fee for the access frequency of Mobile Operators.2G licenses issued to private telecom players at throwaway prices 14 years back. .Now the government should realize that foreign operators have earned huge revenue and profit in last 14 years from Bangladesh. Mobile operators got spectrum for free. If they had paid the fees, some billion would have been collected.

Future Revenue projection for Mobile Operators

Operators Active
Subscribers
Crore ARPU Revenue in Next 15 years
Grameen Phone Ltd. (GP) 2.9970 227 122457.42
Orascom Telecom Bangladesh Limited (Banglalink) 1.9327 160 55661.76
Axiata Bangladesh Limited W(Robi) 1.2368 197 43856.928
Pacific Bangladesh Telecom Limited (Citycell) 0.1811 136 4433.328
Total 6.3476 720 226409.436
Crore

The total number of Mobile Phone Active Subscribers has reached 68.645 million at the end of December 2010 according to BTRC website. Next 15 years the number of subscriber will be doubled. Operator will actually earn more revenue what was projected here.

Grameenphone Ltd (GP) reported Tk 43.40 billion revenues for the first half of 2011, a solid 21 per cent increase from the first half of 2010. Net profit after taxes for the first half of 2011 was BDT 6.77 billion with 15.6% margin compared to BDT 4.83 billion with 13.5% margin of the first half of 2010. EBITDA margin for the first half of 2011 was 50.6%, which also has increased by 2.0 percentage points compared to the first half of 2010.

BTRC and MOPT issued a Draft Mobile Operators’ License Renewal Guideline on spectrum pricing and decided that the operators will pay at the rate of only Tk 150 crore for per megahertz of airwave, which will be multiplied by the total allocated spectrum and a market competition factor. The rate for all bands of spectrum — including GSM 1800 Mhz, 900 Mhz and CDMA 800 Mhz will be the same: Tk 150 crore. The revenue sharing proposal of 5.5 percent for the mobile operators and operators will pay 1 percent of their revenue to Social Obligation Fund, a new idea to help implement the government’s vision for a ‘digital Bangladesh’.

Around the world, operators have paid significant sums of money for 2G spectrum allocations.
The goal of Regulator is setting out a path for the current and future availability of spectrum and with the main principles of encouraging competition and growth and a level-playing field and maintaining a technology neutral stance.

Let’s look at India as an example, At present, Indian Operators hold separate permits for each of the 22 circles in the country and these are valid for a period of 20 years. The government gave away mobile permits from mid-90s. About 11 mobile phone companies will have to renew their permits between 2014 and 2021.
All leading GSM operators will have to give up ‘excess’ airwaves they have when their mobile permits come up for renewal beginning 2014. This implies companies such as Bharti Airtel, Vodafone Essar and Idea Cellular, among others, which currently have up to 10 MHz or units of 2G airwaves in many regions, will be given only 6.2 MHz of radio frequencies when they renew their permits.
TRAI had recently prescribed that every MHz of 2G airwaves up to 6.2 MHz limit be priced at 1,769.75 crore INR ( BDT . 2919.26 Crore) which is 20 times higher than what is proposed for Bangladesh. You may think India population is huge, but indias mobile user is 800 million and Bangladesh 80 million. Subscriber in india is 10 times higher than Bangladesh. But Specrtrum is 20 times higher.

TRAI also fixed that each MHz of spectrum beyond 6.2 MHz should be charged at Rs. 4,571.87 crore INR ( BDT . 7840.58 Crore) which is 52 times higher than what is proposed by BTRC and MOPT.

In Bangladesh, Most of the operators are holding more than 6.2 MHz frequency. GP is using 22 MHz of spectrum.

SL. Operators Total
No. 800MzCDMA (MHz) 900MHz GSM/EGSMB and (MHz) 1800MHz GSM Band (MHz) Assignment (MHz)
1. GP 7.4 14.6 22
2. Orascom 5 10 15
3. AXIATA 7.4 7.4 14.8
4. PBTL 8.82 MHz for 15.12
Dhaka
6.30 MHz for
outside Dhaka

In India, Universal Service Obligation Fund (USOF) is 5% of all operators’ revenues. In Contrast Bangladesh has proposed only 1% for Social Obligation Fund.

Our Telecom Policy is formulated to encourage local businesses and enterprises in telecommunication sector.
I strongly recommend BTRC and MOPT to reassess its spectrum fees and expectations of revenue generation from these license renewals.
Abdullah Mamun
August 15, 2011, 1:50 am
Indian spectrum price is not comparable with Bangladesh as the per Mhz spectrum price is for the whole country. Also all the 22 circle won’t pay same. That is complicated too.
Rest of the 6.2 Mhz price will be decided in auction not in administrative way. That is transparent way. Bangladesh could do that in a same way.
The TRAI has just proposed the price, rest would done after consultation as BTRC proposed Tk 12,118 crore and finally govt would confirm Tk 7,563 crore.
TRAI also proposed for 10 years renewal not 20 years. Also the renewal fee would be a huge amount.

Abdullah Mamun
Aslam
August 17, 2011, 5:44 am
Hi, I have heard enough of this popular “free spectrum 14 years” phrase in past two years. Can anyone please tell me what was the price of spectrum in early 90’s in South Asia or other developing Asian country?

We should be arguing with evidence and not by emotions.