The timing of Telecom Regulatory Authority of India’s (Trai) decision to cut interconnection usage charges (IUC) is impeccable as far as Reliance Jio Infocomm Ltd is concerned. Deliveries of its new feature phone are expected around the same time—some news reports suggest the delivery date has been pushed to 1 October.
When the company announced its feature phone pricing plan two months ago, tariffs had seemed a tad high for the segment. The IUC cut can help correct this anomaly.
“We do not see Jio being able to penetrate the mass market with the announced (feature phone) offer, as we see the monthly price of Rs153 and Rs1,500 initial deposit as still being steep for low-income consumers," analysts at Bank of America Merrill Lynch had written in a note to clients in July.
Besides, the announced tariff was higher compared with existing spends in the segment as well as tariffs applicable for smartphone users. The effective tariff for Jio’s smartphone users works out to around Rs133 per month currently.
But if a chunk of the IUC savings is deployed by Jio in targeting feature phone users, tariffs could be much lower. The 57% cut in the termination rate is estimated to lower Jio’s IUC spend by around Rs4,000 crore on an annualised basis.
This provides ample ammunition for the company to target the feature phone segment. “Jio may use the lower mobile termination rate to introduce unlimited voice calling at Rs100 price point (vs. Rs153), to gain subscriber market share more rapidly," analysts at JM Financial Institutional Equities wrote in a note to clients.
Also read: IUC cut: An aggressive Reliance Jio a big worry for Airtel, Idea
The saving grace for incumbents is that this segment accounts for a relatively smaller proportion of revenues. Analysts at JP Morgan point out in a note to clients that the bottom 40% of subscribers ranked by Arpu contribute around 20% to revenues. As such, the impact on overall revenues may not be as severe as in the past year, when Jio went solely after higher-end smartphone users.
Of course, it’s early to rule out price cuts in the smartphone segment as well. On one hand, Jio has been attempting to gradually increase tariffs in the segment—it may well decide not to go in the reverse direction, and choose to retain a chunk of the savings from the IUC cut. But on the other hand, Jio was quite vociferous in the IUC debate, pointing out, among other things, that a cut will result in lower tariffs for consumers. It will look strange if it now chooses to retain or increase tariffs for smartphone users.
For the past six months, things had been stable on the tariff front, since Jio had started charging for its services and had, in fact, even increased tariffs mid-course. The IUC cut has introduced tariff-related risks afresh for incumbents.