Can Airtel resist a $273m 5G license fee?

The reserve price of $273.60 million for the remaining 2 lots of 3.5GHz spectrum the Nigerian Communications Commission (NCC) plans to auction in December 2022 has generated criticism from telecom operators.

Airtel Africa, Nigeria’s third largest telecom operator with 27.57 percent of the market, is the latest to show what it thinks about the new reserve price, which has moved from $197.4 million in 2021 to the current price of $273.60 million.

Globacom and 9Mobile appear to be sitting the auction out as they made no input on the draft Information Memorandum (IM). They were also not on the auction table in 2021.

At the Stakeholders’ Engagement on the Draft IM on 3.5GHz Spectrum Auction held on November 15, Airtel asked the NCC to set aside a lot of the 3.5GHz spectrum for it at $273.6 million, which was the price reached for the first two lots in 2021. While the offer was declined by NCC, it was a clear indication of the sentiments of the telecommunications company towards the new reserve price.

It is a sentiment shared by many stakeholders in the market. Earlier this month, an executive in the telecom industry told BusinessDay that the reserve price was “overpriced”, given that the business case for 5G is yet to be proven in Nigeria despite the launch of the network by MTN.

Apart from that, the shape of the Nigerian economy leaves little to cheer about. Telecom operators have at various times threatened to down tools if the price of their services is not reviewed upwards to reflect new realities.

Read also: NCC declines Airtel’s request for 5G licence at $273.6m

They continue to suffer the loss of revenue from damages to their equipment across the country. Gbenga Adebayo, president of Association of Licensed Telecommunication Operators of Nigeria (ALTON), said at an event by NIGCOMSAT that the industry suffered 40,000 fibre cuts in 2021. Airtel itself said it suffered 400 cuts on a daily basis.

There are also multiple taxations that continue to grow as a cash-starved government beams its searchlight on telecom operators. ALTON once put the number of taxes telcos pay at over 32.

It is on these premises that many say the new reserve price may not reflect the realities in the market.

Huawei, one of the companies that made comments on the draft IM for the 2022 auction, cautioned that a “high reserve price may result in the risk of the spectrum being left unsold.”

Nonetheless, the NCC insists that the reserve price was market-driven rather than a mere revenue decision.

“Our reserve price was set after necessary benchmarking. We arrived at some idea of what the price should be. The auction determined what the actual price should be. If we have only one party interested that will determine the price. If the reserve price throws up a higher price, that new price becomes the new price,” said Ubale Maska, executive commissioner, technical services at NCC.

Airtel Africa finds itself at a crossroads where it must decide which path to take in order not to jeopardise its future in its largest market.

The telco’s books present a mixed bag of revenue growth and rising operating costs. Airtel Africa’s half-year 2022 result shows that finance costs increased by $189 million, largely driven by a $160 million increase in foreign exchange and derivative losses, as a result of a $31 million derivative loss, a Nigerian naira devaluation impact of $30 million.

This may therefore explain the company’s pragmatic approach to the 5G licence. Airtel was among the two telcos that secured the 2600MHz band of spectrum to roll out 5G in Kenya. The company paid $40 million for the licence.

Airtel Tanzania also purchased 140MHz of the additional spectrum from the Tanzania Communication Regulatory Authority for $60.1 million. The company said the spectrum is spread across the 2600MHz (2 blocks of 2×15 MHz) and 3500MHz bands, and this will help it expand its broadband capability, including 5G rollout.

Airtel Zambia was also awarded spectrum on the 800 MHz frequency band at the cost of ZMK12.5 million, paving the way for the company to roll out a 5G network in the Southern African country.

Notwithstanding the licences, Airtel Africa has not officially launched 5G service on the continent. Some experts say it is likely holding out for Nigeria, its largest market in Africa.

But at a reserve price of $273.6 million, the 3.5GHz band is the most expensive spectrum Airtel Africa has had to compete for. In 2021, it lost out to Mafab Communications and MTN Nigeria when it couldn’t bid higher than $270 million.

Now that it is offering to purchase one lot of the licence at the reserve price of $273.6 million and the insistence of the NCC that the two spectrum must be sold through an auction process, it is not clear whether Airtel will want to join the auction given the possibility the bidding could go way higher than its appetite can carry.

But can it afford to sit by and watch MTN sail off with two licences when it has none in Nigeria?

A scenario in which Airtel is not on the auction table in December leaves the door wide open for its major competitor to upstage it and dominate the new market.

MTN Nigeria indicated an interest in a second one, according to the comments the telco made on the draft IM last week.

Nigeria has reserved four spectrum licences. In 2021, the telco selected Lot 1 (3500-3600 MHz), while Lot 2 (3700-3800 MHz) was consequentially assigned to Mafab Communications Limited.

The spectrum that will be auctioned in December includes Lot A (3400-3500 MHz) and Lot C (3600-3700 MHz).

According to the NCC’s final IM released on Friday, any licensee of the commission or any entity that has up to 200MHz in the 3.5GHz band in Nigeria will not be eligible to participate in this Auction. This technically permits MTN to be part of the auction given that it currently only possesses 100MHz in the 3.5GHz band.

“Airtel cannot afford to let the opportunity of owning a licence in one of the telecom markets in Africa slip by,” said an industry operator who chose to be anonymous to speak freely. “In many parts of the world, 2G and 3G are being phased out, leaving only 4G and 5G. South Africa is already planning it. If it should get to Nigeria it will significantly impact the revenue of Airtel.”

South Africa had in September 2022 outlined its plans to shut down 2G and 3G networks by 2025. The country’s communications minister Khumbudzo Ntshavheni has proposed that South Africa’s 2G networks be switched off by June 2024, ahead of the 3G switch-off by March 2025.

The NCC had also disclosed it is considering the possibility of taking similar paths of shutting down older networks starting with 2G. The commission is preoccupied with its upcoming auction. Airtel has an opportunity to redeem what could be a potential loss of future revenue in December by participating in the auction.