Impact of marginal reduction in interconnect charges

Impact of marginal reduction in interconnect charges
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First Published: Thu, Mar 12 2009. 09 53 PM IST

Updated: Thu, Mar 12 2009. 09 53 PM IST
The Indian telecom regulator’s proposal?to reduce interconnect charges only marginally would have come as a relief to incumbents such as Bharti Airtel Ltd and Idea Cellular Ltd. There was a fear that the mobile termination charge would be cut to zero from the existing level of 30 paise, but instead, it has been cut to 20 paise.
Given that policy decisions tilted towards new entrants till recently, the recent move comes as a relief.
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This would limit the extent to which new entrants in the GSM space such as Reliance Communications Ltd (RCom) can cut tariffs to gain market share.
Already, the company is offering free minutes to customers and the 10 paise cut is unlikely to result in further free minutes being offered.
Citigroup Inc. expects that the lower termination charge would reduce RCom’s losses on its GSM launch, as the cost of terminating discounted minutes on other networks reduces.
On the other hand, incumbents will have a marginal negative impact because of the reduction in termination charges they receive from other operators.
Of course, if operators choose to pass on some of this to consumers, the impact on earnings would be higher.
It looks unlikely that incumbent GSM operators will pass on the termination rate cut to consumers, given their posturing that the revised charge isn’t enough to cover costs, especially since they are rolling out networks in rural areas.
In any case, incumbents have so far resisted from responding to Reliance’s aggressive pricing strategy, and it’s unlikely that they would use this as an opportunity to cut rates.
Having said that, tariffs are expected to fall in the medium term owing to new competition.
Citigroup expects revenue/minute for telecom operators to fall by 10-11% per annum in fiscal 2009-10 and 2010-11. But the markets have already factored that in.
If anything, the recent ruling eases some of the regulatory overhang over telecom stocks.
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Graphics by Paras Jain / Mint
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First Published: Thu, Mar 12 2009. 09 53 PM IST