Sunil Jain: Roaming rip-off

RATIONAL EXPECTATIONS

The then Communications Minister Dayanidhi Maran set the cat amongst the pigeons when, in his exit interview, he said he would have abolished roaming charges had he remained minister""to prove his loyalty, he had proposed to do this on June 3, the birthday of M Karunanidhi, the leader who got him the job and eventually, took it as well. Not anxious to be found wanting in his loyalty, Maran's successor A Raja has also said he'll look into the matter. So, the country's cellular operators have a small window in which they can persuade Mr Raja not to do anything. What's interesting is that the cellular firms are not arguing a reduction will put them out of pocket""they're arguing they're making precious little in the other services, and so will not even be able to fund their growth if this source is taken away!

Mr Raja would be well advised not to spend much time on the arguments. For one, it's hardly credible to argue firms should be allowed to milk customers in one area to subsidise operations in other areas. As for not having funds for funding capex, how do you explain the world's largest cellular operator buying Hutch at an enterprise value of $20 bn if there aren't huge profits to make?

If, however, the minister is still not convinced, he'd do well to read the Telecom Regulatory Authority of India's (Trai's) consultation paper as well as the tariff order on roaming (http://www.trai.gov.in/trai/upload/TariffOrders/61/torder24jan07.pdf). It gives pretty graphic details of just how these companies have been ripping off customers. It says "there appears to be a coordinated arrangement in pricing of roaming services among the private GSM service operators". The government, the order goes on to say, reduced the carriage costs (an important determinant of roaming costs) in February last year, but this "does not appear to have been fully reflected in the retail tariffs applicable for long distance calls and roaming services". Similarly, the sharp reduction in access deficit charges on long-distance telephony (again, a significant cost) was not fully passed on to customers; the sharp reduction in licence fees, from 15 per cent of revenues to just 6 per cent, was not passed on, either.

Just how much all this adds up to can be seen from the fact that while the GSM (cellular) firms charged between Rs 2.89 and Rs 3.09 a minute for outgoing local calls while roaming, Trai reduced this to Rs 1.40 in January this year; outgoing long-distance calls were charged at Rs 3.09-3.79 a minute and this was cut to Rs 2.40; incoming calls were charged at Rs 3.09-3.99 a minute and this was cut to Rs 1.75 a minute.

As for the funds-starved argument, the tariff order cites various reports, including one done for the Cellular Operators Association of India, to show this is not true. The PWC/COAI study, for instance, says EBITDA margins of the industry have grown from 15 per cent of net service revenue in 2000 to 44 per cent in 2005. Another report says the margins in India far exceed those in countries like Hong Kong, Japan, Korea, the US, the UK and so on. On the industry's argument that it is launching lower-priced plans each day in order to expand the country's connectivity, Trai says its calculations show several of these schemes (lifetime tariff plans, micro-prepaid cards) offer higher margin per minute than those got through the normal plans!

But, the industry will undoubtedly argue with Mr Raja, all of this is in the past, that Trai took care of this in January, when it slashed tariffs. So is roaming still a big issue that requires the minister's attention?

Any discussion on roaming tariffs has to be related to the costs of such roaming for the companies offering the service""after all, if I go to Mumbai on my Delhi Hutch connection, it does cost Hutch something to service me in Mumbai. They have to pay someone to carry my incoming/outgoing calls to/from Mumbai (in the case of a firm like Airtel, which has its own long-distance network, the costs of the network have to be amortised), and so on. Trai has estimated this cost and it ranges from 7 paise per minute for the most efficient firm to Rs 1.09 for the most inefficient (for seven firms, it is around 25 paise and for five it lies between 30 and 50 paise). While you'd expect the regulator to benchmark against the best, Trai decided to use a cost of 75 paise (of the 17 firms, only two have a cost higher than this""one is 76 paise and the other is Rs 1.09). So there's a huge cost benefit already. In the case of long-distance outgoing calls, the benefit allowed is even more. Even after taking an inflated 75 paise cost of roaming, Trai arrives at a total cost of just Rs 2.05 per minute""yet, it has allowed the firms a ceiling tariff of Rs 2.4 a minute. Trai says the costs incurred by the telcos when their subscribers send SMSs do not increase when they're roaming, yet it chose not to regulate this""as a result, telcos charge Rs 3.45 for outgoing SMSs, a number that is far more expensive than even a phone call!

And the piece de resistance: Trai's cost calculations were based on the 2003-04 subscriber data. Since the number of subscribers has trebled since then and the call minutes by even more, it is obvious the costs of offering roaming (the 7 paise to Rs 1.09) would have declined even more.
Go for it, Mr Raja.