The Telecom Regulatory Authority of India’s (TRAI) recommendations on the interconnection usage charge (IUC) have stirred a hornets’ nest. While the new operators are in favour of reducing or removing the IUC, incumbent operators have opposed the move as IUC forms a substantial part of their revenues. Operators also differ on methodology of calculating these charges. Industry experts discuss the necessity for changes in the IUC regime, their impact on tariff trends and IUC calculation methods.... 

Is there a need to revise the IUC? If yes, why? 

Abhishek Chauhan 

Yes, there is a need to revise the IUC in the interest of customers and for industry growth. Telecom operators should not burden customers with unnecessary costs.

Sridhar Pai 

The IUC is necessary wherever the market has severely distorted subscriber ownership, thereby resulting in lopsided traffic flow. This is typical of large countries where multiple levels of licensing are necessary to ensure deeper penetration of mobile services. Companies that were awarded licences years after the incumbent operators are at a disadvantage as their off-net calls will be significantly large in volume and, more importantly, they will request more termination of calls than receive termination requests for in-bound calls.

There could be a need to revise the IUC, but it may not be possible to do away with it completely. The context of having the “calling party pays” or “bill and keep” billing models, and the history of Indian telecom, with its evolving regulatory regime, need to be understood before judging the IUC revision. For example, large private operators that are carrying the bulk of the traffic may have no incentive to terminate the traffic of smaller or new licensees. They may offer a poorer quality of service (QoS) or restrict the leased bandwidth to just 1 or 2 E1s per site. This will impact the QoS of small operators.

On the other hand, if the government makes it a free market, the large operators may exercise their scale and artificially create a minimum termination charge, which is a lot higher than the current rates. If the small players enter a free-fall zone, it could stifle their operations, thereby making them unviable.

Prashant Singhal 

A timely review of the IUC regime helps to ensure consistency of these charges with the current cost of the network, minutes of usage (MoUs) and prevalent tariff plans. In India, the IUC regime was implemented in 2003 under the fully allocated cost model, and was first revised in 2009. If we take the example of globally developed markets such as the UK, the country’s regulatory body, Ofcom, undertook the first revision of IUC in 2007. As per the policy, these charges were to be revised at a fixed rate till 2011. Ofcom implemented the next round of revision, applicable from 2011 to 2015, taking into account present and future market conditions. Considering that the Indian telecom market is in some ways similar to the UK market, for example in terms of the spectrum fees generated from the 3G auctions, a revision of the IUC regime seems to be a logical proposition.

If implemented, what would be the impact of TRAI’s recommendations on incumbent and new players? 

Abhishek Chauhan 

It would help new operators in two ways. First, they would be able to capitalise on the IUC reduction to offer more affordable and attractive tariffs, and attract consumers to their networks. Second, it would boost their profitability. Currently, most of the subscribers are on the networks of bigger players, which means that the new players have to pay high IUC to established telecom companies. This would change if the IUC is reduced.

Sridhar Pai 

It depends on the level of IUC implementation – right now it seems to be skewed towards some parties. This is a tricky situation where you need to ensure that all parties are at least reasonably taken care of while not upsetting the fundamental commitment to increase mobile penetration. The government should ensure that mobile voice calls today, data calls tomorrow and video calls later are affordable for the masses.

Prashant Singhal 

The impact of revising IUC depends on the ratio of off-net incoming and off-net outgoing calls. Players may witness a positive or negative impact with the revision of the IUC regime depending on the ratio of calls that terminate on their networks and originate from the competitors’ network and vice versa.

How are the recommendations likely to impact the industry’s tariff trends?

Abhishek Chauhan 

These should result in a tariff reduction. However, the reduction should be realistic as the industry is already witnessing low ARPUs and data revenues will need some time to take off.

Prashant Singhal 

As per TRAI’s recommendations, the IUC should be revised downwards, which will result in a further decline in tariffs. Considering that current tariffs are the lowest across the globe and most players are operating at a loss under this tariff model, a further reduction would question the sustainability of telecom service providers in the Indian market. The GSM ARPU declined by 70 per cent from Rs 366 in March 2006 to Rs 105 in December 2010. In comparison, MoUs increased by only 7 per cent during this period. Current operator revenues are a reflection of the growing subscriber base, which has witnessed a compound annual growth rate of 55 per cent since 2005-06. Considering that the country’s overall teledensity is more than 65 per cent, a further reduction in tariffs may not be directly proportionate to the increase in the subscriber base, which will impact the revenues of operators.

Should capex be taken into consideration when calculating IUC? Why? 

Abhishek Chauhan 

Taking into account the capex, which is relevant to call termination, in the calculation of IUC makes sense. However, irrelevant aspects of capex should not be included. Moreover, complete transparency in the calculation procedure as well as policy changes should benefit everyone in the telecom ecosystem.

Sridhar Pai 

Depending on the operator in question, the response to this will vary. Cost considerations for arriving at the IUC is tricky and there are several points of view – incumbents and new operators will have different views as their cost commitments and expected continued spends will be different.

Prashant Singhal 

During the past two years, telecom operators have invested over $15 billion in capex. It is imperative for them to recover this cost as they are facing stressed profit margins. The current IUC regime, implemented by TRAI in 2003, is based on the fully allocated cost model, which allocates all historical costs to date to individual services based on a set of criteria such as relative capacity utilisation and MoUs or proportionate revenues generated. This model overlooks the incremental and forward-looking costs for providing interconnection. The inclusion of capex for IUC computation could facilitate faster recovery of costs. Capex is an inseparable part of a telecom operator’s cost and the inclusion of the same for IUC computation will be an added advantage.  

Note: Sridhar Pai's responses were given prior to May 15, 2011.