With Jio’s market share rising rapidly, there is a view it may soon become a net receiver of IUC
On the other hand, Jefferies' analysts estimate the move will result in an 18% drag on Reliance Jio Infocomm's operating profits
Exactly two years ago, the Telecom Regulatory Authority of India (Trai) had slashed the interconnection usage charge (IUC) by more than half to six paise. It had also said that the fee will be abolished from January 2020. This newspaper’s headline then read, ‘Trai lowers IUC, Reliance Jio prevails over Airtel, Idea’.
As it turned out, Reliance Jio Infocomm Ltd’s net outgo on IUC fell to ₹1,082 crore in the December quarter of FY18, when the charge was slashed, from Rs2,140 crore in the preceding quarter. With annualised savings of over ₹4,200 crore for Jio, it was amply clear who had gained the most from Trai’s change of rules.
Now, Trai appears to have a change of heart, and has asked telecom operators and other stakeholders to give feedback on whether it makes sense to postpone the abolition of IUC.
There is a conspiracy theory that the seeming U-turn in Trai’s thought process will in some way work to the advantage of Jio again. The reasoning given is that Jio is now the market leader and is gaining subscriber market share at a rapid pace every month. As a result, it would soon have more incoming calls into its network, than outgoing calls to other networks. It would then be a net receiver of IUC, which is paid to the operator where the call terminates. Against this backdrop, it makes sense for Jio if IUC was not abolished.
But those arguments are too simplistic. As the chart alongside shows, Jio’s share of outgoing to incoming calls with other operators stood at 85.6% in December 2017, two months after IUC was sshed. In June 2019, it has fallen to only 64.3%. One would have imagined that with the sharp increase in its subscriber base, the asymmetry in voice traffic would have disappeared.
In July, Jio had a subscriber market share of 29.1%, up from 19% in the year-ago period, and higher than Airtel’s 28.1% share. Vodafone Idea had a subscriber share of 32.5% in July. With these companies almost neck-and-neck in terms of their subscriber base, why isn’t Jio’s network receiving as many incoming calls as the number of outgoing calls by its subscribers?
The simple reason is that Jio’s purely 4G network makes little room for subscribers at the lower end of the pyramid, who primarily receive incoming calls. While the incumbents support this set of customers on their 2G networks with low tariff plans, Jio mostly has customers who can make unlimited calls.
Even though Airtel’s 4G reach is now nearly as large as its 2G reach, this relatively poorer set of customers have stayed on the 2G part of its network, given the lower cost of handsets and tariff plans available for this technology. As long as this difference remains in the profile of subscribers, the outgoing to incoming ratio will remain skewed.
Also note that Jio paid out net access charges of Rs851 crore in the June 2019 quarter, not vastly lower than what it had paid soon after the IUC was reduced in 2017. This means the continuation of the IUC regime will hurt it more, and incumbents will naturally gain.
It’s heartening to note that Trai is willing to revisit its decision two years ago, now that its earlier assumptions are proving untrue. “After 2 years, majority of the calls will be terminating on the packet based technology in which voice will be like an application," Trai had said while announcing the IUC cut on 19 September 2017. But as it turns out, only 5% and 18% of Vodafone Idea and Bharti Airtel’s voice traffic is now carried over their 4G networks.
The continuation of IUC will mean that low value 2G subscribers can continue to be subsidised to some extent by their richer cousins using 4G technology. As this column pointed out last year , the reduction in this subsidy had resulted in higher costs for these low value subscribers, because of the minimum recharge plans launched by incumbents.