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A much needed breather for Voda-Idea & Airtel: Understanding the implications of IUC deferral

In our post back from October we had predicted that concerns over maintaining competition in the telecom market will keep the telecom regulator from taking the IUC (a charge telecom operators have to pay each other for making an outgoing call to their network) from the current 6p/min to 0, despite Jio's apparent attempt to strong arm the regulator into doing so by passing it on to the customers. And exactly that happened. The charges which were scheduled to go down to zero in Jan 2020 have been deferred another year by the regulatory body.

[ If you have time on your hands (10 minutes to be exact), you can read our much more detailed piece on the IUC issue and its impact on Telecom: ZappChai Sunday Irani ]

For those reading about the topic for the first time, lets do a quick recap. The IUC is effectively a charge that telecom operators have to pay each other for using the other's network. When a Jio user calls an Airtel user for 10 minutes for example, Jio will have to pay Airtel 0.6 rupees under the current interconnect charges. One major difference between Jio and its competitors is the customer cohorts the two have. While Jio has only 4G customers, its competitors have a lot of 2G and 3G customers still with them which tilts the outgoing calls from Jio phones to VodaIdea and Airtel causing Reliance to pay up a sizeable amount every quarter. To avoid this, Reliance had started charging customers for outgoing calls to other networks at the same 6p/min rates, saying it will reduce them to 0 the moment the regulator does. Well, it looks like that is going to wait another year.

What the TRAI's move effectively does is keep Reliance paying Vodafone Idea and Airtel significant IUC for another year. As it is now charging these rates to its customers vs VodaIdea and Airtel who have free outgoing calls, it has a weaker competitive positioning atleast on the outgoing calls front while also steadily handing out cash to its competitors. The regulator was surprisingly honest about its motivations behind the move when it said " in a capital-intensive sector with a long gestation period, and where entry of new service providers in the short run is difficult, maintaining effective competition amongst service providers is necessary for ensuring affordable services to consumers", which is exactly inline with our expectations in our post earlier this year.

For the debt ridden Telco incumbents who were hurt further this year when an additional fine was levied on them by the SC, this will certainly be a welcome move. But with just a year at their hands before the IUC is removed, they will have to move fast in their transition to 4G and their attempts at profitability to stay in the game in 2021 and beyond.


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Zapp 5: (Day's 5 top stories in 3 lines or less)

1. Sensex breaches all time high: The bulls seem to be back stronger than ever as the Sensex breached its all time highs rising more than a percent to 41,352

2. Surprised by extent of slowdown in India -IMF : Gita Gopinath, Chief Economist at the IMF said in an interview yesterday. She also suggested measures including bank clean up & labour reforms.

3. TRAI defers scrapping IUC by a year: The 6p/minute charge that telecom operators receive for incoming calls will continue for a year, a relief for Voda-Idea and Airtel who gain from the move.

4. Prince Pipes & Fittings IPO opens today: The polymer pipe manufacturer will open today. It plans to raise 500cr of which 250cr will be an OFS. (Detailed analysis on firm part of tomorrow's piece)

5. Former Pakistani President sentenced to death:  The special court announced the sentence in the high treason case against him for suspending the constitution in 2007


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