Telecom on the rocks with a twist of IUC
In September, the Telecom Regulatory Authority of India (Trai) cut interconnection usage charges (IUC) to 6 paise per minute from 14 paise per minute, triggering howls of protest from incumbents. Has the regulator indeed accelerated the move toward VoLTE (voice over long-term evolution) networks and thereby violated the principle of technology neutrality?
The service provided by one network to another to provide access to its members is called interconnection. When a subscriber of network 1 calls the subscriber of network 2, then network 1 is called the sending network and network 2 is called the terminating network. The sending network pays the terminating network an IUC for the connection and the terminating network incurs a cost of termination.
Operators can be divided into access surplus operators like Bharti Airtel Ltd and Vodafone India Ltd that have an excess of incoming traffic to outgoing traffic (and thereby receive a net payment) and access deficit operators like Reliance Jio Infocomm Ltd that have an excess of outgoing traffic. Access surplus operators would seemingly lose out from a reduction in interconnection rates while access deficit operators pay interconnection revenue and would apparently gain.
We can divide the technologies used by sending and receiving networks into legacy 2G or 3G technologies and advanced VoLTE technologies (currently used only by Reliance Jio). The cost of termination is minimized when the sending and terminating networks use VoLTE technology. Does this mean that with reduced IUC we will see an industry-wide migration to VoLTE networks?
To analyse this question, let us first focus only on an operator’s profit or loss related to interconnection. Assume that Jio is sending 100 minutes of traffic to Airtel and receiving 80 minutes of Airtel’s traffic. Then Airtel runs an access surplus of 20 minutes. At 6 paise a minute, it receives 120 paise from Jio and incurs a cost of terminating 100 minutes of calls from Jio. The difference of the two is the net surplus (or deficit) of interconnection. On the other hand, Jio is running an access deficit of 20 minutes. It has to pay Airtel 120 paise and also incur a cost on terminating the 80 minutes of traffic from Airtel. The sum of the two is the net deficit of interconnection.
Irrespective of the level of the IUC, Airtel would prefer to migrate to a VoLTE network in order to minimize the cost of termination as this would synchronize the technology of the sending network and the terminating network in our example. However, Airtel does not merely terminate traffic from Jio’s VoLTE network but also from the network of other non-VoLTE (legacy) operators. Currently, 90% of traffic in India comes from such networks. If only Airtel switches and no other or only a few legacy operators do, then Airtel will continue to have to terminate quite a few 2G and 3G calls on its brand new VoLTE network. Given the mismatch of the sending and terminating technologies, it could well make sense for Airtel to stick to its legacy network. But if a critical mass of legacy operators switch to VoLTE, then it would make sense for Airtel and everyone else to switch to VoLTE too as it would minimize costs of termination by matching the technology of the receiving network with the technology used by the majority of incoming minutes.
Thus, the choice of the legacy operators can be thought of as an “assurance game” in which either no one migrates or everyone does after a tipping point is reached. The equilibrium pay-offs of all legacy operators are higher when they migrate. So, will it become a “focal point” of the game in the sense that the game gravitates toward this equilibrium?
As the Italian guide said to Mark Twain: “mebbe, mebbe not”. Recall that a migration of legacy operators is also beneficial to Jio as it will then be able to terminate VoLTE calls on its VoLTE network. If the gain from the switch is far greater for Jio than for the legacy operators (this is possible if, for instance, the cost of terminating a 2G call on a VoLTE network is far higher than the cost of terminating a VoLTE call on a 2G network), would they still choose to migrate?
Of course, VoLTE networks have lower operational costs, especially for data. In a telecom circle where data services are critical, an operator is likely to migrate. However, voice still appears to be the main source of revenue in most non-metro areas. There are also significant costs of migration, with the prospect of an upgrade to 5G technology not too far away. Hence, in most circles, one may not see a compelling business case for migration.
So far, our argument holds true for any level of IUC. What is the impact of lower IUC levels? The lower levels of IUC serve to increase operating margins for Jio. If it chooses to adopt even more aggressive marketing practices as a result, then it would increase the percentage of VoLTE calls flowing to legacy networks, thus hastening the onset of the tipping point. This practice appears to be counterproductive for Jio as an increased access deficit will reduce its operating margins. However, with data being the “new oil”, margins from telecom services appear to have become immaterial. The view of the regulator on net neutrality and the new data privacy law will have significant consequences on this prospect.
The episode of the reduction of interconnection charges indicates that the new kid on the block continues to be very much in the driver’s seat. With Rs8 trillion of debt on its books, the telecom story just got more nerve-racking.
Rohit Prasad is a professor at MDI Gurgaon, and author of Blood Red River. Game Sutra is a fortnightly column based on Game Theory.
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