Telecomm – incumbent operators assaulted yet again

Ever since Reliance Jio entered the fray about an year ago, telecommunication industry has plunged into a state of turbulence that shows no sign of receding. The turmoil has been aggravated by a recent decision of the Telecom Regulatory Authority of India [TRAI] to reduce interconnect usage charges [IUC] – termination charge paid to the network operator on whose network calls terminate by the network from which the call originates – from the current 14 paise per minute to 6 paise per minute. From January 2020, the IUC will be zero.

Even as the decision is in sync with the demand of Reliance Jio [RJ] for bill and keep [BAK] model – a jargon for zero IUC – this has caused big disappointment among the incumbent operators viz. Bharti Airtel, Vodafone India and Idea Cellular who were pitching for more than doubling of the rate. The latter have even threatened to challenge the decision in the court.

The reaction of incumbent operators was expected as reduction in IUC will make a dent of about Rs 5000 crores annually in their financials already in dire straits courtesy, RJ. The latter made its entry with aggressive tariff plans viz. ‘free’ and ‘unlimited’ voice calls and low-cost data tariff forcing the former to match the offers out of sheer compulsion to retain customers. Currently, the data is charged at throwaway price Rs 50 or less than US$ 1 per GB [this is a fraction of the rate charged globally].

At such rock bottom tariff, almost all companies [including RJ] are bleeding. The industry’s debt to the banking sector is estimated at over Rs 450,000 crores. The total EBITDA [earnings before interest, taxes, depreciation and amortization] of telecom service providers on an annualized basis is Rs 65,000 crore which is a mere 1/3rd of the cash needed to meet payment liabilities such as loan installment, interest, spectrum charges and capital spend.

A high level inter-ministerial panel set up in June, 2017 to take stock of the crisis facing the industry, has already finalized its recommendations. The intent is to give some relief by letting companies pay for spectrum over 16 years [plus two-year moratorium] instead of 10 years now and lowering interest rate on loans by shifting from extant prime lending rate [PLR] to marginal cost of funds-based lending rate [MCLR].

In this backdrop, it is abhorrent for the regulator to impose further cost on existing players which will push them into the intensive care unit [ICU] requiring even greater support from the government for survival. But, there is corresponding gain mainly to RJ as more than 92 per cent of the calls are outgoing from its network to those of incumbents and hence it will pay less due to lower IUC.

The decision of TRAI seeks to benefit the very company that is responsible for the carnage in the telecomm sector. It is no secret that Reliance Group has used tens of thousands crores from other sectors [refinery and petrochemicals] to cross-subsidize losses in telecomm sector. In this backdrop, it makes no sense to give RJ a few thousand crores extra via reduction of IUC.

Some experts have argued that this decision is consumer friendly as this will help RJ in further reducing tariff to users. The argument is fallacious. First, thanks to ‘predatory’ pricing [fixing tariff at level even lower than the cost] already even without cut in IUC, Jio is offering services at throwaway price. Second, public interest is not served merely by keeping price low. For this, companies should be able to provide services on a ‘sustainable’ basis and maintain ‘quality’ which won’t be possible if a big chunk of the industry [read: incumbent players] is crippled financially.

TRAI ought to have nipped ‘predatory pricing’ in the bud. But, it saw nothing wrong in it. Even the Competition Commission of India [CCI] has held a similar view. It is ironical that none of the regulators made intervention when it was needed and now when it was uncalled for and unjustified, TRAI has proceeded with steep reduction in IUC leading to complete elimination by January 2020.

If, the regulator can leave pricing of services viz. data and voice call to  market forces by the same logic, it should let termination charges be determined mutually between the two networks i.e. from where a call  originates and where it terminates. In such a scenario, with RJ having to pay to incumbent operators IUC at reasonable level [reflective of latter’s cost], there will be at least some pressure on former to bring about a semblance of discipline in price setting.

Jio’s argument that the cost of incumbents network is higher because they did not invest in technologies [since it uses VoLTE – Voice over Long Term Evolution - the cost of terminating call on its own network is lower] is not tenable as VoLTE which goes with 4G was earlier not available. Indeed, much of the network of incumbents is on 2G and 3G which cannot be changed overnight.

Strangely, RJ sees nothing wrong in its pricing strategy. The government is also getting carried away as it is in sync with Modi’s grandiose plans for pan-India broadband connectivity [low tariff helps increase in coverage especially majority of the poor]. But, what it does not realize is that this is leading to a blood shed and almost all companies are lining up before banks to bail them out.

Surely, it cannot be RJ’s case that it has surfeit of surplus that it will continue to fund losses at ground scratching tariff ad infinitum. It cannot also be government’s case that it will continue to bail out the companies. The industry and in particular, RJ needs to do serious introspection and consider revision in data tariff to reasonable level and shun the practice of free voice call.

If, RJ does not do on its own, TRAI should take necessary initiative to force the former come around. Increasing tariff to say US$ 2 per GB may not prick consumers much but it will help service providers garner much needed cash to pay back loans. This will also enable them fund the much needed investment in infrastructure for expanded coverage and give quality services in a sustainable way.

If, the government feels that this price is too much for the poor, it may consider giving them direct subsidy instead of forcing companies to sell cheap to all and sundry and land themselves in a catastrophic situation.

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