Strategic Spectrum Bidding: Navigating Vodafone Idea's Approach in the 2024 Indian Telecom Auction

By bidding for the 26 GHz band, Vodafone Idea (VI) can reduce its GSM vertical Spectrum Usage Charges (SUC) by an additional 44%, enhancing its potential to monetize the spectrum as it becomes viable.

The upcoming spectrum auction in India, scheduled for June 6, 2024, marks a critical juncture for telecom operators, with the government setting a reserve price of Rs 96,000 crore for the available spectrum. To participate in bidding for the entire spectrum, an Earnest Money Deposit (EMD) of Rs 8,028 crore is required. While telecom giants like Bharti Airtel, Vodafone Idea (VI), and Reliance Jio (RJIO) have submitted EMDs of Rs 1,050 crore, Rs 300 crore, and Rs 3,000 crore, respectively, these figures indicate diverse financial strategies and bidding capacities.

This article will specifically focus on analyzing Vodafone Idea's (VI) bidding strategy. Given VI's relatively modest EMD, the analysis will delve into how VI plans to navigate the auction landscape to optimize its outcomes. This piece will serve as a detailed exploration of VI's approach, setting the stage for later discussions on other key players. Let’s explore VI's strategy in depth.

Vodafone Idea's Spectrum Strategy

The chart below details Vodafone Idea's (VI) existing spectrum holdings across various circles, categorized by revenue potential, followed by a column indicating the license fees paid during FY 23—an indicator of revenue generation from these circles.

With an Earnest Money Deposit (EMD) of just Rs 300 crore, VI's purchasing power in the upcoming auction is significantly constrained; this amount represents only 3.7% of the total EMD required to bid for all available spectrum. Consequently, VI can acquire only a small fraction of the total spectrum on offer. Notably, VI already possesses adequate spectrum in most key circles for both 4G and 5G services in the mid and high-frequency bands. The need is more acute in the low-frequency band, where additional spectrum could enhance service delivery. However, given the limited EMD, acquiring significant low-frequency spectrum may be unfeasible unless VI opts for strategic, selective bidding.

Thus, VI's approach to the spectrum auction must be strategic, focusing on objectives beyond mere spectrum acquisition. Let's explore this further.

Vodafone Idea’s Spectrum Usage Charges Analysis

The accompanying chart details the breakdown of Vodafone Idea’s (VI) spectrum payments in terms of Spectrum Usage Charges (SUC) across various license categories.

The analysis reveals that VI's SUC payments are categorized into three license types: MWA(GSM), MWB(GSM), and GSM. While the fees for MWA(GSM) and MWB(GSM) have remained relatively stable, there has been a significant decrease in the SUC for GSM licenses—dropping from Rs 738.38 crore in FY22-23 to Rs 219 crore in FY23-24. This sharp decline can primarily be attributed to the acquisition of spectrum in 2022, which came with a 0% SUC rate.

This strategic purchase significantly reduced VI’s overall SUC expenses and more is possible if VI takes 26 GHz Band spectrum, as illustrated in the chart.

The detailed calculation how these figure has been arrived at is listed in the table below. In order to execute this calculation, I had referred to the DOT latest SUC calculation order dated 21st June 2022.

VI’s Cost Saving Analysis for 26 GHz Spectrum Acquisition

Assessing whether it is financially beneficial for Vodafone Idea (VI) to acquire additional 26 GHz band spectrum requires a detailed cost-saving analysis. A key aspect to consider is whether VI has sufficient Earnest Money Deposit (EMD) for this spectrum segment. The EMD requirement to acquire all the 26 GHz band spectrum listed is Rs 223.5 crore, which is comfortably within the Rs 300 crore EMD that VI has already submitted.

The investment cost for VI to secure the 26 GHz spectrum is estimated at Rs 2612.5 crore. In terms of savings, the annual reduction in Spectrum Usage Charges (SUC) from acquiring this spectrum is projected to be about Rs 96 crore. This estimate is based on reducing the current SUC of Rs 219 crore proportionally by the 26 GHz band's 35% contribution from the total SUC rate of 80%.

The figure below illustrates the Net Present Value (NPV) of these cost savings over a 20-year period. This analysis will determine whether purchasing the additional 26 GHz band spectrum makes economic sense for VI, factoring in the long-term cost efficiencies.

Therefore, if Vodafone Idea (VI) can achieve a nominal revenue growth rate of 12%, the expenses incurred from purchasing additional 26 GHz band spectrum will be precisely offset by the costs saved. Furthermore, VI will have the opportunity to monetize the additional 26 GHz band spectrum, potentially generating increased revenue over time. This strategic acquisition is expected to yield additional benefits as the deployment progresses and market dynamics evolve.

Conclusion

In conclusion, Vodafone Idea's (VI) strategic approach to the upcoming spectrum auction is dictated by its current financial constraints and the competitive dynamics of the telecom industry. With a limited EMD of Rs 300 crore, VI's ability to bid aggressively for spectrum is constrained, yet there remains a significant opportunity to optimize its spectrum portfolio through judicious bidding. The analysis suggests that focusing on strategic acquisitions, particularly in the 26 GHz band, could enable VI to balance its expenditure with substantial cost savings and potential revenue enhancements. As VI navigates these challenges, the key will be to leverage any acquired spectrum to maximum effect, ensuring that each decision aligns with broader financial health and competitive positioning. By adopting a targeted approach, VI can not only meet immediate financial constraints but also lay a foundation for future growth and stability in an increasingly digital and connected world.