Citizens, business people and industry professionals everywhere are congratulating the National Broadcasting and Telecommunications Commission (NBTC) for finally injecting much needed new bandwidth into the Thai telecom market, at a price which is arguably fair market value for all _ state and industry alike.
Advanced Info Service vice-chairman Somprasong Boonyachai at the 3G spectrum auction on Tuesday. Bidding for the spectrum slots was fair and the new licences will bring a lot of benefits to Thailand, argues the NBTC. APICHIT JINAKUL
Commercial mobile network operators (MNO) will now use this spectrum to deploy and offer a wide array of affordable wireless broadband (3G and 4G) services which will bring Thailand massive economic and social benefits.
However, while it seems everyone agrees on the benefits 3G and 4G can bring to Thailand with the allocation of the 2.1GHz spectrum, it also seems that the final auction result has caused much heated discussion fuelled by threats of legal challenges and unfounded sensationalist claims of "super low prices bringing a windfall to private operators at the expense of the state".
Why do I use such strong words? It is because from an independent professional and analytical standpoint, so far there seems to be a lack of quantitative assessment published of the prices paid for the 2.1GHz spectrum versus industry benchmarks. There has also been no published structured analysis of the industry issues/dynamics and trade-offs which the Thai telecom industry finds itself in today to explain why it so desperately needs to move ahead without more uncertainty.
Thailand earned 41.625 billion baht from selling 45MHz of the 2.1GHz spectrum band at the auction last week.
Despite claims of "super low prices", in fact the Thai auction achieved a price of US$0.47 (14 baht) per MHz/capita, a price higher than wealthier countries such as Singapore, Germany and South Korea. It is also more than three times the price of similar developing countries such as Indonesia and Mexico.
Now, if _ as some are claiming as a basis for legal challenge _ Thailand should have achieved "the correct price" of around 60 billion baht for the spectrum, this would have corresponded to $0.65 per MHz/capita, which would have put Thailand's spectrum price even higher, exceeding those of Belgium and India. India is a market where, regulatory uncertainty aside, profitability of MNOs is suffering greatly and the take up of 3G has been well below analyst projections to date.
The issue at hand is not how much percentage over reserve price was achieved at auction because this is not a relevant measure of comparative prices or fair value.
I believe it is hard for anyone to argue that Thailand, as a developing country trying to deliver affordable broadband to its citizens, should be charging much higher prices than countries like South Korea or Singapore or Belgium on a benchmark basis, especially those threatening legal challenges in the name of safeguarding the affordability of 3G.
We do not live in a perfect world and we cannot put blinkers on to analyse a specific event in isolation. Aside from the clear pricing benchmarks demonstrated, there are several relevant and related issues in the Thai telecom sector which must be considered in any discussion of the current 2.1GHz spectrum allocation.
Those with the main implications for Thailand are spectrum availability, concessions and competition.
Spectrum availability is the number one critical issue for MNOs the world over. MNOs desperately need to buy spectrum to provide high speed data services _ if there is a shortage of spectrum, then there is increasing congestion every day as more users join networks, and in the end the service provided is slow and of poor quality.
In Thailand, MNOs have been short of spectrum for wireless broadband and have had significant uncertainty over future spectrum availability (I avoid mentioning 3G too specifically; the NBTC's 2.1GHz licence is technology neutral and can be used for 3G and/or 4G as in Japan and South Korea).
When MNOs are short of spectrum but need to provide higher speed data services to meet customer demand there are two potential effects, each with negative implications.
First, they may have to allocate some of their 2G spectrum (like 900MHz) for 3G, which means the amount available for 2G voice is reduced (and there is no "room" for 4G deployment). Second, they may then have to significantly over-build with more base stations/towers, at extra cost, in order to accommodate the demand for both voice and data with less bandwidth.
The knock-on effect to the customer is relatively higher prices and lower quality services than could otherwise be offered.
Having the 2.1GHz spectrum will not only allow MNOs to deploy 3G and/or 4G services in this new band, but by adding to the available resource pool it opens up possibilities for the MNOs to re-engineer their entire network to more efficiently deploy 2G/3G/4G services across all its spectrum holdings.
Concessions are also a relevant factor in the analysis of the urgent need for the 2.1GHz spectrum for two reasons.
First, because Thailand currently has the highest regulatory cost burden of comparable markets, and possibly in the world.
Without a move to a licensing regime, MNOs would have to deploy 3G/4G under the existing concession arrangement (using 850MHz or 900MHz, which are also internationally industry-standard 3G bands just like 2.1GHz) and prices will simply have to be higher given that the regulatory burden will be around five times higher.
Second is that with the ending of concessions over the next 5 years there will be several mission-critical 2G, 3G and 4G spectrum bands which MNOs are going to have to buy at new auctions to be run by NBTC _ in 2013, one-third of the 1.8GHz band expires; in 2015 all 900MHz expires; and in 2018 the remaining 1.8GHz and some 850MHz expire.
This means mandatory massive new capital expenditure by the MNOs which in turn impacts on the reality of balancing profit margins and end-consumer service prices.
If one was to argue for much higher 2.1GHz pricing now, which would then be used as a benchmark for all future spectrum auctions according to stated policy, the flow-on effect could multiply and be financially burdensome for the MNOs, and in turn for consumers, because higher pricing is inevitable if MNOs are financially over-burdened.
Competition and industry development is the final factor which requires our attention in analysing the outcome of the 2.1GHz spectrum auction. The reserve price of the 2.1GHz spectrum was already high on a relative benchmark basis and there are several spectrum re-acquisitions which must be made over the coming five years.
What is also relevant is that there are three strong, publicly listed, commercial MNOs with 95% of the market share (excluding TOT and CAT) who have invested several hundreds of billions of baht in telecom networks over the past decade. The prospect of a new entrant in the Thai telecom sector has never been a realistic scenario for many reasons.
Not the least of these are regulatory uncertainty (including concessions and increasing legal challenges/disputes published widely and on a regular basis over the past five years) and the need to invest in new infrastructure against strong incumbents with many levers available to fiercely compete _ these therefore have invalidated the business case of even the most aggressive international player taking a look at the Thai telecom market.
It was inevitable and not a negative prospect that only AIS, DTAC and True were to bid for spectrum; this scenario of balanced supply and demand has been seen in several international markets _ for example in Singapore and South Korea. In such situations, the role of the regulator in allocating national resources like spectrum most efficiently and at fair market value is critical.
In Thailand's situation where an already adequate reserve price ensured fair value, there was little need to enforce an "N-1" rule which would have meant that one of the MNOs would have walked away with less spectrum than the others (making it less competitive), and in all MNOs paying an artificially higher price for the spectrum. Such lessons have been learned already with poor financial outcomes as in the case of British Telecom.
Whilst not definitionally correct, some have argued that an "auction" must have more demand than supply such that the final price must be "more than 10% higher" than the reserve, so somehow the NBTC's process was flawed.
This point is academic and, as highlighted, has not likely damaged the state or provided a windfall to companies because benchmarks show that the actual prices paid are relatively fair and that there are a series of new auctions coming which require significant capital outlay and which the telecom companies must participate in to continue operations.
With the successful 2.1GHz allocation now, and no more legal obstacles hobbling our industry, the next series of auctions can now proceed and the industry can develop for the benefit of society.
Apart from the direct revenues from the 2.1GHz auction of 41.625 billion baht, MNOs will reportedly spend around 120 billion baht more to deploy their infrastructure to provide wireless broadband services using this spectrum. It is widely proven in several independent international studies that broadband investment contributes measurably to economic and social development.
Wireless (3G and 4G), enabled by last week's 2.1GHz allocation to the MNOs, will play a large part in bringing affordable broadband to all Thais in city, regional and remote areas alike. The 2.1GHz licence rules have ensured this by requiring minimum 50% population coverage within two years and minimum 80% population coverage within four years.
There is also a Universal Service Obligation (USO) fee of 3.75% of revenues which will then ensure there are pooled funds available under the NBTC to potentially extend coverage to "non-commercial" populated areas.
Having said that, it must be noted that achieving nationwide coverage on 2.1GHz is not very efficient due to technical limitations of the high frequency; a better internationally recognised cost-effective practice is to use 2.1GHz in cities and suburbs but re-use 850MHz or 900MHz for 3G in regional/rural areas, all of which are available to MNOs in Thailand.
Therefore it is counter-productive to argue for anything exceeding 80% population coverage on 2.1GHz _ even 80% is a very high requirement in a country with relatively sparse population density.
The only "windfall" from this auction, if it survives all the misguided challenges, is for the Thai people.
Dominic Arena is the managing partner of Value Partners Management Consulting for Southeast Asia and India regions. He has been involved in the Thai telecoms and media industry for 11 years, including as an independent adviser to the NBTC.