Advantage Jio: Trai Cuts IUC to 6 Paise Per Minute From October 1

Charges to be zero in two years; incumbents set to move court

In a fresh blow to incumbent mobile operators, including Bharti Airtel and Vodafone, the Telecom Regulatory Authority of India (Trai) has cut the interconnect usage charges (IUC, also known as terminating charges) by 57 per cent to 6 paise per minute effective October 1, from 14 paise currently. In two years, the charges would come down to zero, meaning there won’t be any payment for calls landing on other telcos’ networks.

The new charges are being seen as a relief for the latest entrant, Reliance Jio. It is estimated to save about Rs 3,800 crore annually from this move. 

However, the reduction is likely to hit the profitability and revenues of the incumbents further. Analysts at HSBC said in a recent note that a significantly lower IUC would be a boost for Jio and there may be some more pricing disruption after downward revision of IUC rates. Jio has, since its launch last year, paid about Rs 3,000 crore as IUC to incumbents. Ebitda margins for Jio, which are in the negative currently, will turn positive at about 7-8 per cent over the next two years, given the cut in IUC, analysts said.

ALSO READ: Reliance Jio impact: Top 3 telcos lose 5 million users in August

Incumbent operators, who are already reeling under sharp decline in realisations, both in the voice and data segments, will be the worst hit. Currently, IUC accounts for 12 per cent of Airtel’s operating profit, while for Idea it is much higher at 23 per cent. Analysts estimate that the hit to Idea’s operating profit could be about 10 per cent, while for Bharti the same would be 5 per cent for IUC at 6 paise per minute. The stocks of Airtel and Idea could see some correction given the Rs 10-15 per-share impact from the IUC cut. 

According to the Trai, reduction in termination rates would benefit consumers and enhance competition. “Going the full distance, i.e. reducing terminating rates to zero by introduction of the BAK (bill and keep) regime, would help in immediately realising these benefits,” Trai said.

However, industry body COAI was not in agreement with Trai. 

COAI Director General Rajan S Mathews said, “This is clearly disastrous financially for an industry already reeling under financial pressure. Majority of the members will certainly seek court relief given the magnitude of the financial loss. Majority of the members will also seek clarity from the Trai on the model used, methods, assumptions and cost parameters used to arrive at their number.”

The Trai said the BAK regime would encourage flat-rate billing and time-differentiated charges, both of which were meant to improve capacity utilisation and be in the interest of consumers. It would also result in elimination of price differential between on-net and off-net calls, Trai said, while issuing the Telecommunications Interconnection Usage Charges (Thirteenth Amendment) Regulations. “The elimination of IUC will result in direct benefit to customers through lower tariffs,” Trai said. 

Mathews said that any indication that this would drive down tariffs and benefit customers was misguided, as IUC had no correlation to market prices. He added that market prices were rather driven by competitive dynamics. IUC, which an operator pays to another for completing calls, has been a bone of contention between incumbent operators and Jio over the past few months. Incumbent operators, including Airtel, Vodafone and Idea, wanted IUC to be increased to around 30 paise per minute or retained at the current level, whereas Jio proposed that the charges be brought down to zero. In India, the termination charges have followed a downward trend since their first introduction in 2003. The steady decline in consumer retail tariff rates has coincided with a fall in termination rates during the same period.

Some analysts suggested that Trai struck a middle ground by fixing IUC at 6 paise and not at zero. For all the other types of calls, like wire line-to-mobile, wire line-to-wire line, the regulator has retained the termination charge at zero. Leading telco Airtel did not give any comment. But Vodafone India spokesperson said, “We are disappointed with this decision and are now considering our options in response to it. This is yet another retrograde regulatory measure that, unless mitigated, will have serious consequences for investment in rural coverage, undermining the government's vision of Digital India.”

Ahead of the Trai announcement, foreign investor Singtel had warned about adverse consequences for investment in India’s telecom sector if the charges were reduced. Singapore-based Singtel, which has around 36 per cent stake in Airtel, said when mobile operators decide on investment levels, they reasonably anticipate IUC for terminating traffic on their network. It would simply mean that there is less revenue available to mobile operators to finance both their existing and future investments, Singtel Group CEO Chua Sock Koong said in a letter to Communications Minister Manoj Sinha.

MORE WARS ON THE CARDS

• Jio estimated to benefit by Rs 3,840 cr annually on 6paise/minute IUC
• IUC has been on a downward trend since it was first introduced in 2003
• Singtel warns of adverse consequences on investments in the sector 
• Trai says zero IUC will result in direct benefit to customers; COAI differs

Reference - http://www.business-standard.com/article/companies/advantage-jio-trai-cuts-iuc-to-6-paise-per-minute-from-october-1-117092000058_1.html