Trai decision to cut interconnect fees: Who will be the ultimate winner?

Reliance Jio, seen as prime beneficiary of the move, may not change its rates, which are already at the bottom

The Telecom Regulatory Authority of India (Trai), which on Tuesday more than halved the interconnect usage charge (IUC) from 14 paise to 6 paise per minute, cited consumers’ benefit as one of the key reasons for its decision.

So, will consumers see yet another cut in telecom rates?

Sources at Reliance Jio Infocomm, seen as the prime beneficiary of the Trai move, say that the decision will not affect the rates, which are already at the bottom. There is no question of a further reduction, they say. In a statement, Reliance Jio clarified that it would hardly gain from the IUC reduction as it had “already passed on all benefits to customers”, especially with free unlimited voice calls.

However, analysts say the move will help the company save around Rs 30 per month per subscriber – that translates into more than Rs 3,000 crore a year by Cellular Operators Association of India (COAI) estimates, much more if we go by analysts’ calculations.

The company will have two choices – it could either use the savings to break even faster, or it could pass them on to subscribers and give its user acquisition drive a major push.

Sources close to Jio say, with the aggressive move through the launch of its feature phones, the company might only a few more months to reach a subscriber base of over 200 million – close to that of any incumbent operator. And, that will end the present asymmetry in calls – more calls from Jio’s network terminating at other telcos’ than vice versa. Therefore, they say, the so-called saving is exaggerated, and is in fact a substantial cost.

But analysts say Jio could still sweeten its feature phone offer for a limited time by reducing the monthly plan commitment from Rs 153 (which many consider too high) to around Rs 100, in line with the present average revenue per user (Arpu) for feature phone users. Such a move might give a major fillip to Jio’s target of bringing 300 million more customers in its fold, and prove a negative for incumbents telecom operators.

Besides, with incumbents now increasingly trying to match Jio’s plans, the earlier gap of over 20 per cent between the rates is fast-reducing. Jio could use its savings from the IUC cut to further reduce its overall tariff, posing another major challenge to incumbents, whose margins are going to take a hit because of IUC coming down.

If Jio decides not to tinker with its tariff, it would be able to advance its break-even by at least a few quarters – especially as that is a question Reliance shareholders have been asking. The argument in favour of such a move is that the company has already started moving towards a more stable pricing regime and it does not make sense for it to again go back to a price war. The company has increased the tariff for its most popular plan as well, from Rs 309 to Rs 399. Even its feature phone offer expects subscribers to make a substantial commitment. Also, as sources point out, the company has already passed on the lower cost of voice by offering it free to customers.

By comparison, the incumbent operators say that the IUC reduction is expected to spell some serious trouble for them – they will be left with no headroom to cut rates further. The Trai decision, COAI points out, will lead to a net hit of over Rs 5,000 crore for the industry.

COAI Director-General Rajan Matthew says: “The regulator has taken this decision to benefit consumers. But how does it expect telecom companies to benefit customers if the decision removes companies’ investment oxygen. How will they give better service? If the industry margins go down, how will tariff fall?”

According to analyst estimates, the earnings before interest, tax, depreciation and amortisation (Ebitda) of incumbents Bharti, Idea and Vodafone could fall by 3 per cent to 15 per cent in 2018-19. With margins further squeezed, they would hardly have a cushion to cut rates.

But some other experts say that the IUC cut will give incumbent operators the opportunity to pass on the benefit of lower charges to their subscribers on off-network calls (calls from their network to a competitor’s). Currently, many telcos have higher voice call tariffs for off-network calls than those for on-network calls, as they also price in the termination cost. With Jio offering voice services free, they will have no choice but to bring down voice call tariff by passing on the reduction.