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ZappChai Weekend Irani: Reliance Jio, IUC drama, and the future of Indian telecom

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Last week Jio, the telecom giant who has taken the nation by storm, announced a rare set of negative news. Reneging on its promise of lifetime free calls, it announced that it would now charge outgoing calls to non-Jio phones at 6 paisa per minute to recover the costs of interconnect charges paid to other operators. Shareholders in its beaten up competitors took the news rather well, with Airtel jumping 12% and Vodafone Idea jumping 17% on the day.

In this article we decode what IUC is, why it is such an issue, and what the move by Reliance could signal for telecom competition, and you as a customer. We also try to gauge the impact the move will have on customers, regulator, and competitive behavior in the months to come.

Firstly a brief history on IUC (Interconnect usage charges). Interconnect usage charges are charges that telecom operators have to pay to each other for using the other party'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. The interconnect usage charge used to be 14 paisa per minute back in 2017 when TRAI (India's telecom regulator) slashed the rates by more than 50% to 6 paisa per minute. The move was a very strong negative for the then three industry incumbents (Idea, Vodafone, and Airtel) who lost close to 10% of their annual revenue because of the move. [Vodafone: 8.0%, Airtel 10.0%, Idea 10.2%]. The plan was to drop the charges to zero come January 2020, which would again have been a deadly blow to the already suffering incumbents, but TRAI recently launched a discussion paper seeking views on deferring the rate reduction.

Which raises the question, why is TRAI doing this? 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. Regulators had thought that with the greater spread of 4G adoption the two incumbents would be able to gain a larger proportion of 4G customers thereby reducing the inherent imbalance between them and Jio, but that hasn't happened. A move now to reduce the IUC charges to zero now, will have a tremendous financial impact on the two other players in the market because of the directionality of calls. To make matters worse both Airtel and Vodafone Idea have a tremendous amount of debt on their books, and are constantly ceding market share to Jio. The 800 odd crores that Jio pays them via interconnect charges is therefore a welcome reprieve. With competition in the telecom space dying like flies, it becomes important in someway to help protect the competition that remains.

Let us now hear Jio's side of the argument. Jio over the last three years has risen to meteoric heights capturing the market on the back of extremely cheap data and lifetime free calls. With a balance sheet unencumbered by any previous spectrum bidding and a tonne of oil business money, the firm set its eyes on capturing the promising Indian telecom market. The (minor) downside of its extremely attractive pricing was that its outgoing calls became significantly higher than its incoming calls. The 2G and 3G users on competitor networks had to incur relatively high charges for outgoing calls, which led to more calls from Jio to competition than the other way around. This is verfied in the outgo of around ~850cr from Jio to its competitors per quarter.

Jio even went as far as to argue that many of the current 2G and 3G users on competitor networks gave missed calls to users of Jio. Jio users who until now had free outgoing called back, causing a sharp cash outflow to its competitors. To back their claims they mentioned the close to 300 million missed calls they got every day. This not only means less revenue to it via IUC charges that its competitors would have to pay, but also an outgo at their end when, in most cases, their users call back. The "missed call epidemic" is thus hurting Jio two fold. In a response to the issue Jio had initially slashed its outgoing call ringer (the duration the phone rings before it gets disconnected) for calls on competitor networks from 45 seconds to 20 seconds, in a weird attempt to increase missed calls on the competitors networks forcing their users to call back! The 45 second ringer duration has has a 45% acceptance rate, which falls by 20% when reduced to 20 seconds. Upon some backlash the time was increased to 25 seconds.

And then it came out with its trump card, charging customers the interchange directly every time they call competition. For Jio in isolation the move will have two major impacts. On the upside it will ease its financial outflow, by moving one cost head from themselves to the customer. On the down side its offerings are now not as competitive as they used to be vs competition, with the customers having to bear a higher cost.

But the more interesting implications, are ones outside of the firm. The move to keep the 6p/minute charge on its customers has been viewed by some as Jio trying to strong arm the regulators, by effectively keeping the charges present till the IUC is removed. This to me seems unlikely. Infact it might just be playing right into what the regulator wants to happen.

Why would the regulators want the customers to pay a higher bill one might ask? Well, because a slightly higher bill now is preferable to a very high bill 5 years later. And that is exactly what could have happened if Jio continued to undercut its competition into perpetuity. As it gains market share competition around it will continue dying. A lot of smaller players have already seen this fate, and we have been effectively reduced to a market with 3 serious private players (Jio, Vodafone Idea, and Airtel) and one public player (BSNL). If Jio were to continue gaining customers on the back of pricing, it was very likely that more of its competition would die, effectively ending up in a pseudo monopolistic duopoly. In a market like this, where barriers to entry are high, Jio would have free reign to raise prices as they wish, which is a bad scenario for everybody. Well, everybody but Jio.