India’s Telecommunications Regulatory Authority on Tuesday reduced the mobile termination rate by a massive 57% to 6 countries per minute from the current 14 countries per minute, a measure that would give an annual loss of more than 4,000 rupees a year to the three big holders – Bharti Airtel, Vodafone and Cellular Idea – while leading to annual savings of around Rs 5,000 crore for Reliance Jio. While the new rate, which would come into effect from 1 October, will surely be questioned in court by the other actors in the industry, Trai for the first time also established its future course of action by stating that termination rates are would convert to zero (invoice and hold or BAK in technical language) from January 1, 2020. Termination rates were last reviewed by Trai in March 2015, when it was reduced from 20 countries per minute to 14 countries and the regulator had stated that the rates should be reviewed after a period of two years.
Industry analysts told FE that the cut in the termination charge announced by Trai was very strong and ideally should have been no more than 20-25% to around 10-11 countries per minute. More shocking to analysts was the decision to announce BAK from 2020 when it is difficult for the industry to move entirely to the VoLTE network where call delivery rates are very low. Trai’s former president, Rahul Khullar, told FE that in no part of the world has the completion rate been zero by law. He said that the only country where there is a BAK model is the United States, but also not by law, but by agreements between operators, since the flow of traffic is almost the same. “The history of the interconnection use charge has always been contentious and ends in the courts. Such a drastic cut when there is a strong traffic imbalance is sure to be questioned in court, which would be bad for the sector,” said Khullar , adding that in a sector where changes are rapid, establishing a law that would apply in 2020 is not right.
The cut in the load goes against the demands of the historical operators like Bharti, Vodafone and Idea, who wanted the termination rate to rise and compared with the actual cost, which is around 30-35 paise per minute according they. On the contrary, Reliance Jio was seeking to waive the charge, saying it will benefit consumers. A termination fee is paid to the operator in whose network the call terminates through the originating network. This charge has been on a downward trend over the last few years. However, Reliance Jio’s entry last year and its free services led to asymmetric calls – about 92% of Jio’s calls end up in the networks of headlines, while only 8% of calls terminate on the network. Jio. This led to the claims of the incumbents to raise the termination fee, as it is below cost, which has led Jio to drown their networks. According to estimates by Kotak Institutional Equities (KIE), a 50% reduction in completion rates would have had a direct impact of 5.5% on quarterly Bharti Ebitda and 8-9% on Idea.
On the other hand, for Jio it would mean an annualized saving of Rs 2,700 crore. KIE had estimated that Jio’s net interconnection bill is currently running at about 4.5 billion rupees per month. Similarly, KIE had estimated that if the rate becomes zero, for Bharti it would mean a direct impact of 10-11% or Rs 1,800-2,000 crore to its wireless Ebitda per quarter. Likewise, for Idea the success would be around 16-17% or Rs 1,100-1,200 crore per quarter. However, for Jio it would mean a savings of almost 7,000-7,500 crore on its interconnection bill on a quarterly basis. The wireless Ebitda of Bharti and Idea has been declining sequentially since April-June quarter FY17, which was the pre-Jio launch period. For example, at Q1FY17, Bharti’s wireless Ebitda was at Rs 6,400 crore, which fell to around 4,400 crore in the April-June quarter of FY18. Jio had launched his services last year since September 5.