All you wanted to know about the India’s 3G & BWA Spectrum Auction process, by Srinivasa Addepalli. Crossposted from Global Gyan

What is being auctioned

3G: Three slots of 5MHz spectrum in most circles; 4 slots in a few. That means, in addition to BSNL or MTNL, you will have at least 3 private operators offering 3G services in each circle.

BWA: This is Broadband Wireless Access spectrum. This is spectrum in a different frequency band where a few technologies like WiMax and LTE are available/being developed to offer very high speed data connectivity. 2 slots of 20MHz each are being auctioned. Again, BSNL and MTNL have already been allocated one slot of this spectrum.

Circles and Eligibility Points

India is divided into 22 telecom circles:

2 Metros: Mumbai and Delhi (NCR)
5 Category A Circles: Rest of Maharashtra, Karnataka, Tamil Nadu, Andhra Pradesh and Gujarat
9 Category B Circles: Kolkata, Punjab, Kerala, UP (East), UP (West), Haryana, Rajasthan, MP and Rest of West Bengal
6 Category C Circles: HP, Bihar, Orissa, Assam, North East and J&K

In order to bid in the auction, bidders needed to obtain Eligibility Points (EP). Each Metro and Category A circle needs 32 points, Category B circle 12 points and Category C circle 4 points, totaling 350 EPs. The EPs were obtained by paying earnest money in proportion to the number of EPs sought; most bidders obtained 350 EPs. The points are fungible across circles, i.e. if you had only 100 points, you could use them to bid for any combination of circles within that limit. Eligibility Points determine how many & which circles a bidder can bid on, at any time.

Bidding

Bidding for all 22 circles happens simultaneously in each “clock round” of bidding. The first round starts at the Reserve Price (Category A: 320 cr; Category B: 120 cr; Category C: 30 cr for 3G; and half of these for BWA). About 4 to 6 rounds of bidding happen daily (based on the last 30 days of bidding).

In each round, a bidder has to only say Yes or No for each circle at the current round price.

The price for the next round is determined based on the level of demand (i.e. number of Yes bids) for each circle in the previous round. Excess Demand is calculated as Demand (number of Yes Bids) – Supply (number of Spectrum Slots). If ED is 0 or 1, the price increase is 1%; if ED is 2, it is 5% and if ED more or equal to 3, the increase is 10%. If ED is less than zero, i.e. demand is less than supply, then price does not increase. Price increments are also capped at Rs 40 cr (Rs. 20 cr for BWA) in each round.

The interesting thing is that even if there is no excess demand for a circle in a round, the auction for that circle does not end: it goes on till all the circles have reached a point of no excess demand. So you could have a situation that demand equals supply in a circle, but its price increases in the next round because some other circles still have excess demand. This is probably the only “flaw” in the auction design — of course, it benefits the Seller (the Government in this case).

Activity Ratio

A bidder can bid for only those circles that are within the Eligibility Points that it has at that time. Thus, the EPs associated with all the “Yes” bids of a bidder determine how many bids it can place in the subsequent round. In the initial rounds, however, this is relaxed and a bidder can retain its EPs, if it bids at or above the specified Activity Level. So, the auction starts at 80% level, i.e. a bid equivalent to 280 points (80% of 350) retains the bidders 350 points in the next round. The Activity Ratio is increased by the Auctioneer to 90% at a later stage and then to 100%. At 100%, bidders have to bid (i.e. choose Yes) in order to retain the associated EPs, unless they are a Provisional Winner in that circle.

What! More complexity!

During each round, the Auctioneer declares (based on pre-set rules) a number of Provisional Winners (equal to the number of slots). Being a Provisional Winner does not automatically guarantee the circle to a bidder; the primary benefit is that a Provisional Winner is deemed to have bid for the next round and can therefore retain Eligibility Points even when it chooses “No” for that circle. The Provisional Winner concept can be used by the bidders to “reduce” the demand level and consequently, the price increment in that round.

The End

The auction comes to an end when two conditions are met:

1. Activity Ratio is 100%
2. Excess Demand is 0 or less in all circles simultaneously

The Government has said that winners in the 3G auction will be allocated spectrum in September 2010. Based on that schedule, we can expect that services should be available in a few major markets in early 2011. The BWA spectrum is likely to be allocated immediately to the two winners; depending on their technology choices, wireless broadband services could be available towards the end of 2010.

(Note: I have tried to keep this quite simple and have not gone into all the details/complexities of the auction design. For those interested in the painful details, I am happy to answer your questions)

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