Reliance Jio versus the telecom sector: war over interconnect charges escalates

What is the debate?

Incumbent operators like Bharti Airtel, Vodafone have pitched for more than doubling of the interconnect usage charges (IUC) from the current 14 paise per minute.

However, Reliance Jio, which entered the market in September 2016, is against the proposal and wants the telecom regulator to implement a “bill and keep model”, which means zero charge.

An interconnect charge is paid by a service provider to its counterpart to link a customer's call to the latter's network.

The warring parties want the regulator to believe that their suggested model would be in the best interest of consumers as well as the sector.

In 2015, Trai had cut the mobile termination charges to 14 paise per minute from 20 paise per minute and had scrapped fees for calls made to and from landlines to zero. Till 2009, the IUC for a mobile-to-mobile call used to be 30 paise a minute.

According to incumbent players the, slashing IUC rates will impact their revenues of the telecom operators who are facing a tough time following the launch of Jio.

They have also argued that the removal or lowering of IUC would be detrimental to the growth of telecom infrastructure in rural areas, as it largely depends on revenue from incoming calls.

However, Jio, in its argument, has said that it would provide 99% coverage by the end of this year even at zero IUC rates.

Which line of argument is progressive and beneficial for the sector?

A global perspective

J Scott Marcus, a telecom expert affiliated to The Federal Communications Commission of the United States, in a study conducted in the US and Eurozone, argued that the use of interconnect charges model is based on the underlying assumption that the party that originates the call is the cost causer.

The interconnect charges system based on calling party's network “tends to create perverse economic incentives. Carriers tend to be motivated to set termination rates vastly in excess of real costs, because in doing so they raise, not their own costs, but rather the costs of their rivals. To the extent that these costs are reflected in retail prices, they are reflected in the prices of their competitors, and not in their own prices,” he found.

The report further says, “Once a consumer subscribes to the carrier’s service, that carrier controls a bottleneck that confers a degree of market power as regards calls that terminate to that customer. The market power arising from this bottleneck control is referred to as the terminating monopoly.”

Impact on the Indian market

Coming back to the Indian market, it is noteworthy that the call rates in India came down substantially in post 2009 due to reduction in ICU.

A higher IUC regime benefits an operator with higher number of subscribers, as a service provider with lower subscription base will end up generating more calls to connect with the large subscription based service provider. This will force the service provider with fewer subscribers to either charge more from its customers or incur loses.

In a free market economy, the competition between an incumbent player and that of a new entrant should be based on the quality of services rather than the first movers' advantage in terms of higher subscriber's base. This is so that there is always an incentive for the incumbent player to keep its services better rather than earning revenue from the those subscribers who chose the network of a new incumbent.

At a time when the industry has moved towards unlimited voice calls at a fixed monthly rental, increasing the IUC does not make any sense and would be regressive if implemented.

The incumbent players must look generate revenues through offering value-add services by way of offering bundled plans. That would be more innovative and competitive.