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Why Trai’s IUC arguments are struggling to hold water

LiveMint logoLiveMint 27-09-2017 Mobis Philipose

R.S. Sharma, chairman of Telecom Regulatory Authority of India (Trai), says he is hurt by some of the criticism over the decision to cut interconnection usage charges (IUC) by more than half. In a string of interviews (see here and here, for instance), he defended the move, relying heavily on the argument that Trai’s 62-page memorandum explaining the move has answers to all questions on the matter.

The problem is that it doesn’t.

To be fair to the regulator, the explanatory memorandum goes much further than most documents that accompany policy decisions in the country. Besides, it followed an elaborate consultative process over 13 months before issuing its new IUC regulations. Still, the regulator has been struggling to defend the move. What gives?

To start with, Trai doesn’t address the elephant in the room. One major premise in its reasoning is that the cost of delivering voice services is next to nothing when IP-based technologies are deployed. As such, it sees the cut in IUC and the eventual move towards zero IUC from 2020 as catalysts for technology upgrades by service providers, which will ultimately result in lower costs for consumers.

But here’s what’s missing from the argument. We already have a service provider whose network is built on an IP-based communications protocol—Reliance Jio Infocomm Ltd. Does it really charge nothing or next to nothing for its voice services?

According to Reliance Jio, voice services are free on all its plans. But customers need to pay a minimum amount for data services to be able to access Reliance Jio’s voice services in the first place; so is voice really free?

Analysts at Kotak Institutional Equities say in a note to clients that it’s important to cut through the semantics of bundled offers: “One can easily reverse the semantics of say a Rs300/month, 30-day plan with 1GB/day data and unlimited voice allowance from ‘voice free; pay only for data’ to ‘1GB/day data free; pay only for voice’. In a bundled plan, neither data nor voice is truly free, in our view. There is no free lunch or minute or GB!”

So, while Reliance Jio can be credited with bringing down the cost of bundled voice and data services, and even tariffs in general, to say that it has brought down the cost of voice services to zero is clearly a stretch. Try asking Reliance Jio for a voice-only connection at a nominal cost; since, after all, the cost of delivering voice service is next to nothing. Well, no such plan exists.

As things stand, at the minimum, Reliance Jio’s services cost around Rs150 per month. And according to its vision for 2021, Reliance Jio expects average spends to increase to over Rs300 per month.

On the other hand, legacy technologies with so-called bloated cost structures still offer connections which entail a monthly cost of even as low as Rs30-40. This works well for customers who can’t afford higher spends on communication expenses, and are content having a connection primarily to receive calls. The regulator’s push towards IP-based technologies does nothing for this category of telecom users. On the contrary, a lower IUC can result in higher costs for them, as the effective subsidy has been reduced.

Surely, Trai’s argument can’t be that this category can pay effectively nothing for voice services by spending Rs150-300 per month on data services.

In addition, while the regulator’s memorandum spends enormous time and effort in explaining the rationale for a termination rate of 6 paise per minute, it leaves out crucial assumptions. In fact, analysts at IIFL Institutional Equities call the regulator’s calculations suspect. This is ironic because Sharma has been going to town about the high level of transparency in the explanatory memorandum, which devotes 32 pages to the cost model.

IIFL’s analysts question Trai’s conclusion that incoming calls from other service providers result in an additional cost of only 5.6% for telecom companies, even though they account for over 31% of total traffic. “This hardly seems defensible even if one considers a significant proportion of network cost attributable to data; (but) Trai not having disclosed any details prevents us from measuring the discrepancy precisely,” they say in a note to clients. In addition, while Trai has arrived at a total annual cost of Rs27,569 crore for a representative telco with a 17% subscriber share, IIFL analysts point out that according to their calculations, Idea Cellular Ltd, which has a similar market share, has a cost that is 1.5 times higher.

The decision to exclude the costs associated with acquiring spectrum is also questionable. After all, the extent of network expenses depends largely on the category and extent of spectrum used. The more companies spend on spectrum, the lower they need to on the network. By leaving out spectrum costs, therefore, the regulator has left out an important component in the overall cost equation.

Sharma said in an interview that telcos acquired spectrum to service their own customers, and that it doesn’t make sense to apportion some of that cost for incoming calls from other service providers. The memorandum uses a similar argument to dismiss the notion that IUC is a legitimate fee charged to terminate a call: “The authority observed that when a service provider establishes a network, it is not only for sending but also for receiving calls. The operator, therefore, does not do anything special or extra to provide for receiving another service provider’s calls. Thus, additionality of costs for receiving calls, in the strictest sense, is close to zero.”

Considering the number of research papers that bat for IUC in the context of the market’s two-sided nature, Trai’s reasoning above is woefully inadequate. Telecom companies typically earn revenue from their own subscribers, as well as from those on other networks who want to connect to its base of subscribers. Of course, there are also strong arguments to do away with IUC and get companies to recover all costs from their own subscribers; but Trai fails the test when it comes to explaining its position well.

As Kotak’s analysts point out, arguments underlying any change in the IUC regime should ideally have been watertight, given how critical the issue is. But according to them, some of the arguments in the memorandum are debatable.

Sharma may be hurt by some of the criticism coming his way; but what will really be harmful is an approach that doesn’t bother to respond to constructive criticism.

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