September 22, 2017 1:38:41 am
Cut-throat competition in the Indian telecom industry notwithstanding, the Telecom Regulatory Authority of India’s (Trai) decision to reduce interconnect usage charges (IUC) by 57 per cent effective from October 1, and the indication of a glide-path to nil IUC from 2020 has caused uneasiness among various mobile companies in India. While this development may not directly impact consumers of mobile services by way of reduction in tariff in the short term, analysts say that the reduced charges could further intensify the battle between operators allowing users to benefit.
Analysts and sectoral experts suggest that Reliance Jio’s free and unlimited voice service offerings have resulted in significant skewing of traffic in its favour while compressing the revenue pie of the industry. As a result, the reduction in IUC, which is paid by the service provider of the calling party to the operator of the recipient for using the latter’s network, is expected to benefit Jio the most.
“Most of the calls that are currently taking place are going to incumbents and a far fewer number is coming into the Reliance Jio network. The direction of the calls is predominantly towards incumbents or between them. So, there was a significant asymmetry in calls. As far as consumers are concerned, in theory, they will benefit. However, in practice, probably not. The reason for this is that most operators now offer one or more data packages with free voice,” said Mahesh Uppal, director, ComFirst India.
“So, the immediate impact on consumers is negligible. However, there is no doubt that the intensity of competition will increase because a new competitor is going to benefit from the decrease in IUC, as it will pay out less than it used to and will earn more revenues that it can retain. In that sense, it is now going to be more fortified to compete,” Uppal said.
The financial implications
For the existing operators, which are already under competitive pressure due to low tariffs, the move could stress their books further. In a note to its clients, CLSA said that for Bharti Airtel and Idea Cellular, 9-15 per cent of their consolidated revenues came from IUC earnings. This could result in the two companies seeing their earnings before interest, taxes, depreciation and amortisation (Ebitda) for 2018-19 reducing by 4-7 per cent, while in the zero IUC regime, which is set to begin from January 1, 2020, Bharti and Idea would see a higher 8-12 per cent hit on their Ebitda.
Fitch Ratings noted that the move would result in a transfer of benefits to the tune of $500 million to $600 million annually from the existing operators to Jio. “Operators pay the MTR (mobile termination rate) when one of their customers makes a voice call to a user on another network, with the fee going to the operator on which a call terminates. Operators with large subscriber bases tend to be net recipients of these interconnection fees. Bharti alone received about $75 million in interconnection revenue from Jio in April-June 2017,” Fitch said.
However, Jio said it won’t derive any benefits from the move. “There is no question of any advantage from the new IUC regulation to Jio as it has already passed on all the benefits to customers. We deny any benefits to Jio. At a time when the world is moving towards IP-based technologies, cost of voice has come down to a fraction of a paisa and the customers should enjoy this advantage,” the company said in a statement. What does it mean for consumers?
Experts suggest that any potential savings for Reliance Jio could lead to the company not only investing more in its networks and infrastructure but also escalating the competition by offering more freebies to its consumers.
“We believe Jio will likely pass on the savings from lower IUC in the form of lower prices, particularly for its feature phone plans where its current price of Rs153 per month is higher than industry ARPU (average revenue per user). We also see a possibility that the move to zero IUC accelerates the move of Indian mobile market to bundled plans — operators will now be dis-incentivised to support low ARPU customers who primarily receive incoming calls and may move them to minimum threshold ARPU plans,” UBS said in a research note.
Traditionally, the Indian telecom companies, first due to the number of operators in the country and now because of an aggressive entrant, have responded to competitive tariffs by matching the offerings in order to prevent and reduce churn of customers on their networks. Uppal believes this time will not be any different. “Consumers can expect more freebies from Jio, which means, in turn, the incumbents will also be forced to provide them. The situation is such that incumbents will try to respond to those prices,” he said.
In the bill and keep (BAK) model, unlike the IUC regime, there are no charges being paid by operators among each other. Instead, when previously, the BAK model was in place, incoming calls were charged by operators to recover the cost of networks from their own users. However, charging of incoming calls turned out to be counterproductive as consumers did not prefer paying for calls they didn’t make, and the industry did not grow as fast as expected.
Bill and keep model
With the BAK model coming into the picture again, the technical possibility of incoming calls being charged has arisen, but analysts suggest that intense competition and the previous experiences of paid incoming will prevent it. “…the impact of reduction of IUC to zero by adopting the ‘Bill and Keep’ model from 1st January 2020 implies that an operator can charge for incoming voice minutes, but the same is unlikely given the extent of competition and continuous move towards lower pricing of voice,” said Harsh Jagnani, sector head and vice president, corporate ratings, ICRA.
UBS, in its note, pointed out that other markets that have zero IUC regime in place are predominantly postpaid markets, “where customers have to sign up for bundled packages (in short incoming is not really free in these markets either)”. As per the Telecom Regulatory Authority of India (Trai), as of March 2017, over 95 per cent of GSM and LTE subscribers in India were prepaid users. However, with internet protocol-based voice calling gaining prominence, the equation of IUC could change. Voice calls made over internet through services such as VoIP and VoLTE would consume data on both sides of the call.
In fact, the ushering in of the bill and keep system, could prompt operators roll out VoLTE, or voice-over LTE, in an attempt to save network costs. Reliance Jio already has an all-4G network, while the country’s largest operator Airtel has started deploying VoLTE, and launched the service in Mumbai earlier this month.
“The move to a bill and keep regime in coming years would force existing telcos to upgrade their networks to VoLTE as ideally telcos would like to migrate their traffic to VoLTE to reduce cost. Among incumbent telcos, we find Bharti to be best placed, with its 75k+ 4G sites to launch 4G in coming months. Our checks suggest that Vodafone/Idea are 6-9 months behind Bharti in launching VoLTE,” Bank of America Merrill Lynch noted in a report. Uppal, while acknowledging that the operators would have an interest in moving towards the IP networks, said that a large number of consumers may not be ready for smartphones yet. “They may still prefer to work towards regular phones and these consumers may not be able to benefit from pure IP calls,” he said.
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