Valuation of 2G spectrum in India- A real option approach

Pankaj Sinha and Nataraj Sathiyanarayanan

MPRA Paper from University Library of Munich, Germany

Abstract: The phenomenal growth of telecommunication sector in India has largely been possible due to the contributory factors such as the efforts made by private and public telecom service providers to make services affordable to the mass market, reduction in entry barrier due to drastically lowered entry level price for devices, changing demographic profile and the increasing per-capita income. However, it the issue of spectrum pricing that has captured the centre stage with the high prices realized from the 3G and BWA spectrum auction and the outburst of the 2G Spectrum scam in India. In this paper, we use both the traditional valuation method-Discounted Cash Flow as well as the Real Option approach that takes into consideration managerial flexibility and strategic decision making aspects. The analyses have been done individually as the factors determining revenues and thereby the spectrum values are expected to be different. By dividing the DCF or ROV value thus arrived by the total spectrum allotted so far in the service areas, we obtain the price of 1 MHz of spectrum. A sensitivity analysis has also been done to check the variations arising in the value due to changes in parameters like ARPU and subscriber count. Ignoring the economies of scale arising from usage of a larger block of spectrum, this value gives a reasonable estimate of the price of the spectrum that can be used by both companies and the government. The above analyses have been done to arrive at the price of 1 Mhz of spectrum in each of the 22 telecom circles and also on a pan India level. The spectrum price range for a pan India 1 Mhz of spectrum is Rs.1535 crores to Rs.1876 crores. This is definitely higher than the price discovered in 2001 – Rs.1658 crores for 6.2 Mhz of spectrum. Finally, we also provide a comparison with the prices suggested by TRAI in its consulting paper.

Keywords: 2G spectrum; valuation of licenses; real option approach; telecom license (search for similar items in EconPapers)
JEL-codes: D45 G18 G28 G31 L96 M41 (search for similar items in EconPapers)
Date: 2012-05-21
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