Will cut in interconnect usage charges lead to more free voice calling?

Interconnect Usage Charges (IUC) are inter-operator payments made by telecom operators. A cut in its rates by 50% will result in short term distress for incumbents while Jio’s free calling might just pay off.

Key Highlights

The time taken to cut IUC rates has lessened over the years.

Jio is estimated to earn $500 million-600 million per year from incumbents.

EBITDA margins of Bharti Airtel, Idea Cellular and Vodafone India may decrease by 3%-6% in the financial year ending March 2018 (FY18).

Six paise. That is what calling another network is going to cost your telecom operator now as the Telecom Regulatory Authority of India (TRAI) decided to cut interconnect usage charges (IUC) rates on Tuesday.

IUC stood at 14 paise earlier this year and even after much ado from the telcos TRAI has gone ahead and slashed the rates to more than 50%.

“The financial performance of India's main incumbent telcos will be undermined by the regulator's plan to reduce the mobile termination rate (MTR) by 57% to Rs 0.06 per minute with effect from October 2017 and to remove it completely by January 2020,” Fitch Ratings said on Wednesday.

Prices of the IUC have been falling since 2003 which at that time stood at 30 paise per minute.

It took TRAI 12 years to cut the IUC rates by half to 14 paise in 2015. And in just two years it has halved the rates again.

Moreover TRAI has proposed to remove IUC completely from 2020, placing emphasis on the growing redundancy of charging for voice calls.

However incumbents like Airtel, Vodafone and Idea Cellular have expressed discontent with this discounted rate as their fate hangs in the balance. Executives from these companies wrote to TRAI in separate letters pleading not to cut IUC rates and despite their efforts TRAI moved to cut rates.

TRAI said, “While on the one hand a lower termination charge benefits the consumer, it does not have a negative effect on the telecom operator because it is open to the operator to recover whatever cost it incurs through the retail tariffs, subject to competitive market conditions.”

However companies were still not happy.

"We are disappointed with this decision and are now considering our options in response to it. The Indian telecoms industry is already experiencing the greatest period of financial stress in in its history. This is yet another retrograde regulatory measure that will significantly benefit the new entrant alone while adversely affecting the rest of the industry as a whole. Unless mitigated, this decision will have serious consequences for investment in rural coverage, undermining the Government's vision of Digital India," Official Spokesperson of Vodafone India said.

“We are extremely disappointed with the latest regulation on the IUC, especially at a time when the industry is facing severe financial stress. The suggested IUC rate, which has been arrived at in a completely non-transparent fashion, benefits only one operator which enjoys a huge traffic asymmetry in its favour,” Bharti Airtel said.

It further added, “The sharp drop in the IUC rate will only help transfer part of its cost to other operators, thereby further worsening the financial health of the industry. As part of an industry, which continues to be a critical driving force behind the economic growth in the country, we are genuinely dismayed by this decision.”

“The last reduction in IUC was done in February 2015, when the termination charges were reduced by 6 paisa - from 20 paisa per minute to 14 paisa per minute. Since this time the quantum of reduction as well as the proportion of incoming calls is higher, the impact on revenues of the larger incumbents is also expected to be higher,” ICRA said on Wednesday.

‘Free’ calling for Jio will pay off

The phrase ‘You don’t know what you have till it’s gone,’ now seemingly apt for operators who charge for voice calls.

Reliance Jio has maintained that voice calls will always be free on its network. It is the only operator in India to not charge for calling other networks. Jio now could earn 41% more in earnings before income tax deductions and amortisation (EBITDA) margins over four years, a report by HSBC said on August 7.

Jio has focused on bundled data plans in which it offered its customers unlimited voice calls, sms along with a certain amount of data in its plans.

During seven months of its operations, the youngest member of the telecom industry paid as much as Rs 2589 crore as IUC, ICRA said.

Owing to the tsunami of ‘free’ calls originating from Jio’s network to other operators it has paid a hefty sum in IUC till now.

“Operators with large subscriber bases tend to be net recipients of these interconnection fees. Bharti alone received about $75 million (Rs 498 crore) in interconnection revenue from Jio in April-June 2017,” Fitch said.

Voice calls amounted to 70% of Indian telcos revenue right up till December 2016.

So the operators that have been charging for voice calls will now witness an impact on EBITDA margins as IUC charges drop from next month.

“An operator with higher proportion of off-net incoming minutes over off-net outgoing minutes benefits by way of net inflow of IUC revenues, and vice-versa,” Harsh Jagnani, Sector Head and Vice President, Corporate Ratings, ICRA said.

“We expect the MTR cut to reduce the EBITDA of the main incumbents - Bharti Airtel, Idea Cellular and Vodafone India - by 3%-6% in the financial year ending March 2018 (FY18),” Fitch said.

While ICRA estimated that the decline in EBITDA for the larger incumbents would be in the range of 5-12%.

“We expect the move will result in a transfer of $500 million-600 million per year from incumbents to Jio,” Fitch analysts added.

Since Jio’s entry it has dictated the trends of how telcos would charge customers resulting in more bundled plans. It also accelerated the consolidation rate in the industry and put a higher emphasis on charging for data.

Which begs the question - will this cut in IUC result in another trend for the industry to make voice calls free of cost?

“The impact of reduction of IUC to zero by adopting the ‘Bill and Keep’ model from 1stJanuary 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,” ICRA said.

"Jio’s next move will drive the overall trend in tariff plans. We can expect smart-bundling of voice and data plans to counter decline in profits, keeping in mind the cost sensitiveness of Indian consumers,” said Hanish Bhatia Senior Analyst, Devices and Analytics at Counterpoint Research.

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