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TRAI finalises reserve price for new cities in FM Phase III auction

MUMBAI: The Telecom Regulatory Authority of India (TRAI) has finalised the reserve price for the new cities included in the FM Phase III auctions.

As per Phase III policy, the rules for deciding the reserve price for auction of FM radio channels will include—for new channels in existing FM Phase II cities, the highest bid price received for that city in Phase II; for new cities, the highest bid price received during FM Phase II for that category of cities in that region; in case of unavailability of the benchmark from Phase II for a particular region, the lowest of the highest bid received in other regions for that category of cities.

Meanwhile, for new cities in border areas with a population less than one lakh, the reserve price has been set at Rs 5 lakh.

The successful bid amount arrived at through the e-auction will determine the non-refundable one-time entry fees (NOTEF) for grant of a channel.

The need for revision of reserve prices for these cities has arisen as the methodology provided in the Phase III policy guidelines for determining the floor prices for new cities yielded inconsistent and/or irrational results.

TRAI states that the 264 new cities, where FM radio channels are to be auctioned in Phase III, are largely Tier III cities. This auction is, therefore, different from the previous auctions in Phases I and II, which primarily covered Tier I and II cities where a large part of India’s economic activity is concentrated.

Thus, “fixing of reserve prices for these new cities would require an approach which is more suitable for nascent markets. Optimally set reserve prices will induce participation by a large number of competitors in the auction, while the inherent design of an ascending e-auction would enable discovery of the underlying market value (price) of FM radio channels in each city,” it said.

Since advertisement is the primary source of revenue for radio, factors like purchasing power of a citizen, total FM radio listenership and past revenue earning data appeared to be relevant variables for assessing the economic activity of the city/region.

Therefore, along with population, three other variables were identified for grouping cities with similar revenue generation potential. These were per-capita income, listenership of FM radio, and per-capita gross revenue earned by existing FM radio operators.

However, the data for radio listenership in new cities is not available. Thus, it needs to be estimated based on certain measurable proxy variables and for which data is available. Radio listenership directly depends on the penetration of radio receivers. The larger the number of radio receivers in a state, the greater is the number of radio listeners in that state.

The steps envisaged for estimating the value of FM radio channels in new cities include the following—regrouping of cities based on the identified three relevant variables; price information available from Phase II auction to determine the valuation of channels for a group of new cities; taking into account the increase in the permission period from 10 years to 15 years by applying a factor of 1.5; accounting for inflation by applying a factor of 1.7983 based on WPI for the period 1 April 2005 until 31 December 2014.

Most stakeholders did not agree with the proposed methodology. They argued that it would lead to a very high reserve price and render channels in small towns unviable. However, stakeholders did not provide any alternative methodology.

They argued that the logical reserve price for Phase III auctions should be based on the floor price of Phase II bidding, i.e. 25 per cent of the highest bid received in Phase II or the lowest bid of Phase II. They stated that even at the reserve price of Phase II, which was 25 per cent of the highest bid received, many frequencies were left unallotted.

Operators also observed that advertisement rates on FM radio had fallen over the last six years. They further suggested that advertisement rates and the valuations of the FM radio industry should be taken into account to determine the inflation factor. Some stakeholders added that the spread of digital streaming would further dampen radio advertisement pricing and FM radio revenue growth could turn flat or negative within 10 years or so.

The authority further recommended that reserve price for radio channels in a new city is to be set equal to 0.8 times the valuation of FM radio channels in that city.

On 16 December 2014, the MIB had sought TRAI’s recommendations on reserve prices for FM radio channels in 264 new cities. The 831 FM radio channels in these cities are proposed to be auctioned through an ascending e-auction process as provided in the Phase III policy.

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