Will Trai end the IUC debate in India once and for all?
If it was left to a popular vote, interconnection usage charges (IUC) could well be a thing of the past in India. When Telecom Regulatory Authority of India (Trai) held an open house discussion on the issue last week, about four-fifths of those who spoke were in favour of abolishing interconnection charges, which are collected by telecom when they terminate calls originating from other networks.
Many of them, including some members of parliament, spoke in favour of the so-called bill-and-keep model being propagated by recent entrant Reliance Jio Infocomm Ltd, in which companies recover costs associated with terminating a call from their own users.
But as can be expected, most of these arguments were too simplistic and ignored the nuances of the two-sided nature of the telecom market and issues that researchers have grappled with for years. As one researcher aptly puts it, “Regulation of termination charges is a Sisyphean task...With the consultancy fees available, there is no likelihood of economists running out of ideas or agreeing with each other.” One attraction of the bill-and-keep model is that it will put an end to the endless debate on issues such as what the appropriate model for calculating IUC should be.
But while that may be an attractive proposition for some, it’s hardly a sufficient cause for making such a policy decision. As pointed out earlier, a moot question is how issues related to pricing structure and competition dynamics in a two-sided market are addressed.
A number of markets such as telecom and media are so-called two-sided markets, with two broad revenue streams. See this article for a detailed discussion on two-sided markets.
For instance, a media company charges subscription fees for its products and also earns advertising revenue from those who want to tap its subscriber base. Typically, the product is subsidised with a view to grow the subscriber base and thereby attract higher advertising revenue. If, owing to a strange turn of events, there is a diktat that media companies can’t charge for access to their subscriber base, they will have no choice but to hike subscription fees to cover costs. This, in turn, will cause the subscriber base to dwindle, and make the business unviable. Of course, no one envisages such a situation.
On similar lines, telecom companies earn revenue from their own subscribers, as well as from those on other networks who want to connect to its base of subscribers.
Incumbents such as Bharti Airtel Ltd and Idea Cellular Ltd point out that the bill-and-keep model has never been imposed by regulatory fiat. When a competing network wants to access an incumbent’s subscriber base, they have historically paid for such access. In countries where bill-and-keep arrangements are in place, they are done voluntarily and are typically put in place when there is symmetric traffic between the two networks.
This is easy to understand. If the volume of traffic between, let’s say, Airtel and Idea is similar, the two firms can voluntarily decide to stop collecting termination rates from each other. After all, why bother with all the record-keeping and rigmarole of large sums going back and forth every few weeks.
But some incumbents say the ratio of incoming-outgoing traffic when it comes to Jio is as high as 9:1. Jio offers unlimited calls to its users and paid Rs2,589 crore as interconnection charges in the first seven months of operations to incumbents. In a bill-and-keep scenario, Jio could save about Rs4,400 crore annually on IUC, while there would be equal and opposite loss for incumbents. It’s little wonder the dispute over IUC has been so noisy.
Airtel’s founder chairman Sunil Bharti Mittal entered the fray this week with a letter to Trai asking why it’s even considering the bill-and-keep model for domestic networks, when there is no such discussion when it comes to international traffic.
Jio, in turn, has pointed to research favouring the bill-and- keep model in its comments to Trai, and has bolstered them using a report prepared by a consultant associated with Deutche Telekom AG. To be sure, left to themselves, incumbents tend to demand high termination charges and use them to grow their own subscriber base and thwart competition. But that is precisely the reason regulators, including Trai, have set caps for termination rates.
Proponents of bill and keep also argue that since subscribers use telecom services not just to make calls, but also to receive them, there is no harm in recovering all costs from them. But again, this disregards the fact that telecom services don’t exist in a silo, and must talk with other networks to be able to provide full-fledged services to their subscribers. To that extent, whenever the services of another network are tapped into, a payment for that access seems like a fair demand.
“It is hard to find a more controversial issue in industrial policy than that concerning the terms on which entrants can gain access to an incumbent firm’s network,” Mark Armstrong, professor of economics at All Souls College, University of Oxford, wrote in a paper titled The theory of access pricing and interconnection over 15 years ago.
This is as true now as it was then, and Trai must make the required effort to explain its position thoroughly when it frames its IUC recommendations. If the intent is to end the IUC debate once and for all, the least one can ask for is a worthy last debate. Of course, the regulator has inspired little confidence in this regard in the past. For instance, the regulator hasn’t yet provided detailed calculations on how it arrived at the prevailing termination rate of 14 paise/minute.
Trai will do well to address these concerns as well as those of other regulatory bodies, the majority of which continue to support the case for interconnection charges.