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30% Frequencies Remain Unsold Mostly In Smaller Towns

It would look like the go vernment has made a kil ling on the FM auctions. It expected to get Rs 550 crore from batch 1 of the auctions but has netted more than Rs 1,175 crore. On top of this, it will collect another Rs 1,880 crore in renewal fees from existing broadcasters. So should it uncork the bubbly? Or should it pause and think about some major failures?
The high collections have come mostly from the top three metros -almost 45% from just four frequencies in New Delhi (1), Mumbai (2) and Bangalore (1). If Chennai (1), Hyderabad (4), Ahmedabad (1) and Pune (2) are added, the figure rises to nearly 66%. On the other hand, some 38 frequencies, mostly in smaller towns, have gone unsold. If this pattern continues into batch 2, when more than 830 frequencies in 250+ small towns are to be auctioned, the government may have a lot to worry about.

GAMING HURT SERIOUS BIDDERS

Industry experts say that Delhi at Rs 169 crore, Mumbai at Rs 123 crore and Bangalore at Rs 109 crore are unviable. Why then did bidders go this high? The CEO of a large radio network says, “The government created an artificial scarcity by auctioning very few channels. Then it adopted an auction format, which allowed non-serious bidders to `game' the system and raise prices to hurt competitors without facing any risk themselves.“ Add to this the fact that the auctions were happe ning almost a decade after the previous ones in 2006, and it becomes clear why bidders, hungry for expansion, were left with no choice but to bid beyond their means. “When a bunch of starving men are made to bid for a single burger that's available, they can bid it up to any price, even Rs 5,000,“ said the same CEO.“But would such prices reflect fair market value?“

SCARCITY PREMIUM ARTIFICIALLY BOOSTED PRICES

Had there been at least five channels available in each of the metros, bidding would have closed nearer their fair value. Going by I&B ministry data, Delhi would have closed at Rs 31.4 crore, Bangalore at Rs 21.6 crore, and Mumbai shade above Rs 52.8 crore. That's because Delhi and Bangalore had five bidders, and supply would have equalled demand, while Mumbai had six, which would have led to a few rounds of bidding, but nowhere near what it actually witnessed. In other words, the fair price for Delhi was its reserve price, Rs 31.4 crore, not the Rs 169 crore that was finally paid. That auction price represents what auction experts call “scarcity premium“. One auction specialist says, “Auctions should never be conducted under scarcity condi tions. Scarcity premium distorts pricing“.

Could the government have offered five channels in each metro? Absolutely . TRAI had already shown the way . It had twice recommended that by halving channel separation, the number of channels could be increased substantially . That would have raised the number of channels in the metros to 13-14, still fewer than small cities like Colombo, which has 25. But the MIB chose to ignore TRAI. By not increasing spectrum availability, it also ignored the Supreme Court's order that airwaves are public property and must be put to public good.

The `gaming' possibilities added to the woes of the serious bidders. Having information about `aggregate' or `excess' demand in a city allowed a non-serious bidder to join the fray while bidding was on the up and up; when excess demand dropped, it could exit safely . The serious bidders were left to bear the artificially pumped-up prices. Other features like low earnest money deposit (EMD) -just Rs 8 crore in Delhi, even though the final bid went to Rs 169 crore -and a facility to skip a few rounds and re-enter bidding allowed non-serious bidders to play games and hurt others. Did the government introduce these features intentionally , to boost prices?

WHY THE SMALL GOT LEFT OUT

If the big metros suffered from spectrum scarcity and scarcity premium, there was a different set of problems in the smaller towns. There were two main reasons why auctions failed here. First, the reserve prices -from where bidding begins -were simply too high.The government pegged these prices to the highest bid in the 2006 auctions. In 2006, a different auction model was used and bidders were allowed to bid whatever they felt was the right price. Taking the highest bidder's bid was outright wrong; instead the lowest of all bids should have been taken. As a result of a high reserve price, temple town Tirupati (reserve price Rs 4.5 crore) found no bidders. Ditto Vijaywada (Rs 7 crore), and many others. Second, there was a completely inexplicable `national cap' of 15% imposed on bidders -limiting their ownership to 52 frequencies nationally . Big broadcasters found their expansion plans severely curtailed. Had this cap not been there, many of the unsold frequencies could have been sold.

WINNER'S CURSE

The `success' of the top met ros will likely lead to what is called `winner's curse'.“These prices are unviable, and winners can expect to bleed for many years“ says an expert. Winners will be forced to cut headcount, reducing employment generation; use same programming across cities, reducing local content; and also slash marketing spends, strangulating the growth of the medium.

All in all, except for huge monies collected, there is very little for the government to crow about.

TIMES VIEW :

While revenue collection has been high, the auctions cannot be called a success. In fact, with nearly 30% licences unsold, some would even call them a colossal failure. The government should not have become so revenue-obsessed that it forgot what its real objectives were: to spread radio to the smallest towns, to allocate spectrum fully, and to determine prices fairly. We give it a thumbs down especially because the government created artificial scarcity, kept reserve prices high and allowed gaming despite TRAI's recommendations and the radio industry's repeated pleas.