Analysis of WIMAX/BWA Licensing in India: A real option approach

Sinha, Pankaj and Gupta, Akshay (2011): Analysis of WIMAX/BWA Licensing in India: A real option approach.

Abstract

Indian Internet and broadband market has experienced very slow growth and limited penetration till now. The introduction of Broadband Wireless Access (BWA) is expected to aid in increasing the penetration of internet and broadband in India. The report sheds light on the guidelines and procedure used in 4G/BWA spectrum auction and presents comparative analysis of the competing technologies, providing the information about suitability of each technology available. Recently held 4G/ BWA spectrum auction saw enthusiastic participation by the industry and even saw some new entrants in Indian broadband market. Government benefited by Rs, 385bn that it earned as revenue from the auction of the spectrum and projected it as successful auction. However, the question remains if the auctions were efficient and whether they led to creation of value or will it prove to be burden to the telecom operators and will depress their balance sheet for years to come. The report uses both traditional valuation methods such as Discounted Cash Flow as well as Real Option approach to answer such questions. Using DCF analysis, the broadband subscribers have been forecasted to grow from present 13.77mn to 544mn by the end of 2025. The wireless subscribers are forecasted to be 70% of the total broadband subscribers after 5 years of roll out as it will be difficult to replace all wireline subscribers with wireless subscribers in India due to the high cost of wireless broadband and new technology. WiMAX is expected to increase its presence with time and reach 90mn subscribers from meager 0.35mn subscribers by 2025. Using industry wide cost of capital as 12.05%, the Net Present Value has been found Rs 221bn aggregate with an IRR of 17.1%. Using Real option approach, the value of license has been calculated as Rs 437bn which is 13.5% more than the spectrum fees paid by the operators. This mismatch, between the auction value and the correct value that should have been discovered by supply-demand dynamics, can be due to limited participants in BWA spectrum auctions and companies such as TATA and Reliance opting out of the auction process midway as well as uncertainty about acceptance of new technology with Indian subscribers.

• Item Type: MPRA Paper
• Language: English
• Keywords: WiMAX, broadband, 3G spectrum, 4G,broadband wireless access, valuation, licensing, real option
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G38 - Government Policy and Regulation; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; G - Financial Economics > G2 - Financial Institutions and Services > G20 - General

References

Aircel Report, “Recent trends in mobile data needs”, 2010

Alleman, James, “A new view of telecommunications economics”, Telecommunications Policy, Vol. 26, pp. 87-92, 2002

Basili, Marcello, Fontini, Fulvio, "The option value of the UK 3G Telecom licenses: Was too much paid?", info, Vol. 5 Iss: 3, pp.48 – 52, 2003

Binmore, K. and Klemperer, P., “The biggest auction ever: the sale of the British 3G telecom licenses”, Economic Journal, 2002

Chang, Jow-Ran, Hung, Mao-Wei, Tsai,Feng-Tse, “Valuation of Intellectual Property- a real option approach”, Journal of Intellectual Capital, Vol.6, No.3, pp. 339-357, 2005

CMIE Database, accessed on 9/3/2011

Confederation of Indian Industries, http://www.ciionline.org/Economy.aspx?enc=LqAXY5bXIsb2PzUHQxy2iQ==, accessed on 9/3/2011

Dai, Q., Kauffman, R. J. & March, S. T., ‘Analyzing investments in object-oriented middleware: An options perspective.’ In Proceedings of MIS Research Center Working Papers Carlson School of Management, Minneapolis, University of Minnesota, p.p.1–27., 2000

Damodaran, A., “The dark side of valuation”, New Jersey: Prentice Hall, 2001

Damodaran, Aswath, "The option of Real option", Journal of Applied Corporate Finance, Vol. 13, No. 2, pp. 29–44, 2000 DoT, "Auction of 3G and BWA spectrum", Feburary 2010

FICCI, "3G and BWA: The Next Frontier", January 2009

Herbst, Patrick, Walz, Uwe, “Real Options Valuation of Highly Uncertain Investments: Are UMTS-Licenses Worth their Money?”, Department of Economics, University of Tuebingen, 2001

HSBC Global Research, “Indian Telecoms”, June 2010

http://articles.economictimes.indiatimes.com/2010-05-25/news/27573892_1_bharti-airtel-3g-third-generation-mobile-spectrum, accessed on 10-03-2011

http://economictimes.indiatimes.com/news/news-by-industry/telecom/Indian-telecom-market-to-be-at-Rs-344921-crore by 2012/articleshow/2563062.cms, accessed on 9/3/2011

ICICI direct research report, “BWA spectrum auction”, June 2010

IMRB, “Mobile Internet in India”, December 2009

Intel Corporation, “Internet everywhere – 4G technology”, April 2010

International Monetary Fund, http://www.imf.org/, accessed on 9/3/2011

Mastroeni, Loretta, Maurizio Naldi, “A real option model for the transferability value of telecommunications licenses”, Annals of Telecommunications, Vol. 65, No. 3-4, pp. 201-210, 2009

Michel, Benaroch, Kauffman, Robert J., “A case for using real options pricing analysis to evaluate information technology project investments”, Information Systems Research, Vol. 10, No. 1, pp. 70-86, 1999

Moja, N., Mkhize, M., “The application of real option valuation techniques in the cellular telecommunication industry in South Africa”, South Africa Journal of Business Management, Vol. 40, No. 3, 2009

Mun, J. 2006, “Real options analysis – tools and techniques for valuing strategic investments and decisions”, 2nd Edition, New Jersey, Wiley Finance

PressReleases/ 798/prerdiv9feb11.pdf, accessed on 1/3/2011 Protiviti, "WIMAX: The Quintessential answer to broadband in India", 2009

PwC Report, "Mobile Broadband Outlook-2015”, 2010

PwC Report, “The World in 2050”, Jan 2011

Reliance Industries Limited, “BWA – Analyst report”, June 2010

Stille, R., Lemme, C., Brand , L, “An application of Options of the Royal Evaluation of the License of the benefits system 3G Mobile Telephony Services in Brazil”, Journal of Finance, Rio de Janeiro, Vol 8, No. 3, 329-349, 2010

TRAI December Report, http://www.trai.gov.in/WriteReadData/trai/upload/