07 Feb 2018 19:45 IST

How cuts in interconnect charges impact operators

Telecom tower

Telecom majors face a sharp increase in losses after TRAI’s latest 57% cut in termination rate

Telecom operators in India just can’t seem to catch a break. The December quarter was one of the worst for the likes of Bharti Airtel, Vodafone India and Idea Cellular, as the reduction in interconnect charges took a toll on their revenues and profits. In fact, Idea’s losses widened substantially.

Interconnect charges are levied by operators when using each other’s networks to complete a call. It is payable by a service provider whose subscriber originates the call, to the provider in whose network the call terminates. The Telecom Regulatory Authority of India (TRAI) reduced this charge by 57 per cent from October 1 last year, severely hurting the operators’ financials.

Already fending off intense competition on call and data rates from Reliance Jio, the timing of the new tariff regime could not have been any worse.

Let’s discuss the hit that operators took and the challenges they will face in the future.

Industry woes

The top three mobile service operators — Bharti Airtel, Vodafone India and Idea Cellular — witnessed a 13-27 per cent fall in revenues in the third quarter, compared to the same period last year.

On the profits front, the cuts were even deeper. Vodafone’s pre-tax profits plunged a steep 43.5 per cent, while Idea’s losses more than doubled to ₹1,351.9 crore. Airtel’s profits fell more than 39 per cent.

Clearly, the reduction in interconnect charges from 14 paisa per minute to 6 paisa meant that the new giant, Reliance Jio, and other operators had to pay a lot less to the top mobile service providers for using their networks to terminate calls. According to a report from brokerage house Emkay, Jio had to pay only ₹1,082 crore this quarter in interconnect charges compared to ₹2,140 crore earlier.

With this cost benefit, Jio reported net profits of ₹504 crore in the December quarter, within just 15 months of starting its operations.

The top operators are also witnessing down-trading while opting for suitable tariff packages. In its conference call with analysts last quarter, Airtel’s management indicated that customers opt for lower tariff packs as they come bundled with free voice calls and SMSes, and substantial data limits(1GB+/day). So, a pack that would have cost ₹500-600 earlier is now available for less than ₹150 per month.

These tariff wars are not going away, given that some operators have now increased the daily limit for data consumption.

For a sector with ₹7.7 lakh crore of debt and with major operators facing a steep fall in operating profits, the stress on the telecom industry is fairly pronounced.

Regulatory push

While the reduction in interconnect charges can explain the December quarter’s woes for operators, it is important to note that TRAI has been trimming these rates for the last 13-14 years.

From 30 paise per minute in 2004, the charges were lowered to 20 paise in 2009. Subsequently, the rate was brought down to 14 paise per minute in 2015.

The telecom regulator has thus been consistent in bringing charges down, though top operators argue that the cut was the steepest this time around.

The global experience

The TRAI report made a couple of interesting points on the interconnect charges prevailing in other countries.

According to consulting firm Ovum’s report in 2014, the ratio of call termination charges to retail price of the call (customer tariff rates) is approximately 45 per cent in India. In China, the ratio is just 1 per cent, in the UK, Germany, France and Japan, it is 10-13 per cent. This difference suggests that termination charges are a key component of a customer’s call charges.

Another observation made by the regulator is that in the UK, the telecom regulator (OFCOM) brought down mobile termination rates from 24 pence per minute in 1995 to less than 1 pence per minute in 2014. These rates have been reduced further to 0.507 pence per minute in 2017.

The regulatory move to bring down termination rates to zero by 2020 and suggesting that operators move to IP-based networks (VoLTE) for offering low-priced voice calls did invite criticism.

Media reports suggest that the former TRAI chairman Rahul Khullar has said that no one could be sure of technological developments and if there will be balanced traffic flow between operators. He further said that no country has moved fully to an IP-based network and that getting there by 2020 seems tough.