Ambani suddenly looks like the smart guy after TRAI termination charge cut

Operators such as Bharti Airtel, Vodafone, BSNL and Idea Cellular are likely to cut call tariffs for 2G and 3G users after TRAI decision to cut ‘termination charges’ to 6 paise per minute from 14 paise.

More importantly, the bet that Mukesh Ambani placed by making voice free seems to be paying off as his company will no longer make losses on its voice offering.

Termination charge refers to that part of the call charge that is passed on to the operator of the called party.

In other words, if an Airtel customer calls a Vodafone customer for a minute and pays 60 paise for the call, 14 paise out of the 60 paise has to be passed on by Airtel to Vodafone to cover the cost of patching the call through.

With the cut, Vodafone will now get only 6 paise per minute from Airtel.

This gives Airtel the freedom to reduce its call rate from 60 paise to 50 paise per minute.

The key question, however, is whether they will do so or not, and by all indications, they will.

“Lower termination charges are therefore likely to benefit consumers overall (both fixed and mobile) because operators will have greater retail pricing flexibility,” TRAI said. “Operators would be able to offer consumers a wider variety of retail packages and tariff structures.

“A well-designed IUC regime would cover the relevant cost reasonably and provide reasonable incentive to service providers to enable them to offer innovative tariff plans.”

WILL THEY, WON’T THEY?

The key question on everybody’s minds is whether this reduction in the termination charge will nudge incumbent operators to cut their call tariffs.

While under normal circumstances, they could simply hold on to their existing tariffs, that becomes less likely due to the fast growth of Reliance Jio.

They have so far been reluctant to cut voice prices because they knew that Jio could not endlessly keep paying them a termination charge of 14 paise while offering voice ‘free’. They were betting that somewhere, sometime, Jio will have to modify its free voice offering.

However, with the termination charge now reduced to 6 paise per minute, wait and watch is now no longer a valid strategy to take on competition from Jio.

With the reduction in the rate to 6 paise, the Mukesh Ambani-led firm can now stop making losses on its ‘free voice’ service.

This is because an average subscriber consumes only around 500 minutes of voice per month, even when it’s offered ‘free’ of charge. That leads to an obligation of just 30 rupees per month for Jio to pay to other operators in the form of termination charges.

Given that Jio charges about 150 per month for its ‘free voice’ service, it is still left with 120 rupees (or about 24 paise per minute) to cover its own costs and generate a profit.

In other words, with the termination charge cut, Jio’s voice operations are now a viable, long-term proposition, and its rivals cannot wait for the company to run out of money funding its free voice offer.

However, there is a second reason why the incumbents feel they can continue to charge Rs 50 per paise — handset compatibility.

To use Jio, someone has to get a 4G handset, which used to cost at least Rs 3,500.

However, with Jiophones — priced at Rs 1,500 — ready to start hitting the shop shelves in two weeks, that advantage too is likely to disappear over the next six months.

This leaves the incumbents with only one option — compete with the newcomer by giving unlimited voice for Rs 200 per month.

At present, unlimited voice packs are priced at around Rs 350 per month, which has prevented most 2G and 3G users from opting for them.

Though it may sound like a steep cut, it actually is not. For example, 200 rupees for unlimited voice works out to 40 paise per minute, assuming that users continue to consume only an average of 500 minutes per month.

An outgoing call rate of 40 paise per minute implies a blended rate of 23 paise per minute for voice traffic on the network, assuming parity between incoming and outgoing calls on the network.

This is not very far from the current prices that they are charging. For example, Idea Cellular was able to realize only 24.4 paise per minute during April-June for voice traffic on its network.

That is not to say that the company will be able to survive on a tariff of 23 paise per minute; after all it made a pretax loss of around Rs 1,080 crores in the period on revenue of 8,166 cr.

REACTIONS

The incumbents are also likely to approach the courts to try to restore the old rates.

So far, only Vodafone has come out with a response ┬áto TRAI’s moves.

“We are disappointed with this decision and are now considering our options in response to it,” it said.

“This is yet another retrograde regulatory measure that will significantly benefit the new entrant alone while adversely affecting the rest of the industry as a whole. Unless mitigated, this decision will have serious consequences for investment in rural coverage, undermining the Government’s vision of Digital India,” it added.