IUC cut impact: Jio stands to gain; pain ahead for Airtel, Vodafone, Idea

In a move that might hurt incumbent telecom service providers like Bharti Airtel, Vodafone and Idea Cellular, the Telecom Regulatory Authority of India (Trai) on Tuesday reduced interconnect user charges (IUC) by 57 per cent from 14 paise to 6 paise per minute, with effect from October 1.

The regulator plans to bring IUC down to zero in two years, removing the need for any extra payment for placing calls to other telecom networks. For other types of calls (such as wireline-to-mobile or wireline-to-wireline), the termination charge would continue to remain zero. (Read more)

"The elimination of IUC will result in direct benefit to customers through lower tariffs," Trai said in a paper on Tuesday. "Such a revision in the mobile termination charge is in line with the international trends."

Business Standard explains the full story and who stands where on the issue:

Airtel, Vodafone say decision to impact industry ‘grossly’

Incumbent mobile operators Vodafone and Airtel on Wednesday expressed disapproval over the revision in IUC and said the decision would impact the industry "grossly", especially as it is under financial stress.

Without mentioning Reliance Jio, a telco that is expected to benefit the most from the move, Airtel said the new charges had been arrived at in a non-transparent fashion and would benefit only one operator. (More details here)

Vodafone said the decision, unless mitigated, would have serious consequences for investments in rural coverage, undermining the government's vision of 'Digital India'.

Reliance Communications calls it 'level playing field’

Reliance Communications, meanwhile, welcomed Trai's decision to slash IUC charges. In a statement, the company said: “The IUC cut has already been delayed by three years. With voice calling becoming free, Trai's move will provide a level playing field.” (Click here to know more)

Telecom stocks take a beating, recover

After showing signs of jitters early in the day, Bharti Airtel pared its losses to end with a marginal gain of 0.39 per cent at Rs 396.25. During the day, the stock had fallen by 6.25 per cent to Rs 370. Reliance Industries (RIL), which rose initially to a 52-week high on the news that Reliance Jio Infocomm might benefit from the Trai move, shed some of its gains to close 0.85 per cent higher at Rs 847.10. During intra-day trade, it had gained 3.82 per cent to Rs 872.10.

The shares of Reliance Communications closed the day 1.74 per cent lower, at Rs 19.80, after falling 4.21 per cent to Rs 19.30 early in the day.

The scrip of Idea Cellular fell by 3.43 per cent to end at Rs 80.15 on BSE. During the day, it had tumbled 7.4 per cent to Rs 76.85. (Here's how the markets reacted)

Historically, analysts say, the impact of IUC cuts have not been much due to lower incoming-outgoing ratio and considerably higher Ebitda margins of incumbents. However, with a sharp decline in Ebitda margins, and skewed traffic after Reliance Jio’s launch, the impact on Ebitda should be more pronounced.

‘A disastrous tariff order’; telcos to move court

Terming the cut a “disastrous tariff order”, Cellular Operators' Association of India (COAI) Director General Rajan S Mathews said a majority of telecom operators would seek legal redressal against Trai's move.

Mathews said: “If you reduce the termination charge, the principal beneficiary is Reliance Jio because it is the one dumping traffic on to other networks. And that is going to be a problem because the amount of revenue involved will be large and incumbents are not going to take it sitting down.”

Former Trai Chairman Rahul Khullar agreed with Mathews, adding that the coming days could see a replay of the events in 2007, when IUC was reduced from 30 paise to 20 paise. 

"At that point, IUC was reduced from 30 to 20 (paise) and these guys went to court...So my greatest fear is that you are looking at litigation once again and that is not good for this industry," he said. (Read the update here)

SingTel, which owns a stake in Airtel, had earlier written against IUC 

SingTel Group Chief Executive Officer Chua Sock Koong, in a letter dated September 11, had said reducing IUC in India was likely to have adverse consequences for investment and long-term sustainability of India's telecommunications sector.

SingTel holds over 30 per cent stake in Bharti Airtel. (Read more)

Jio and Airtel take digs at each other

Bharti Airtel had two weeks earlier accused Reliance Jio of "misleading" Trai and public on IUC, and claimed it had suffered a loss of Rs 6,800 crore in the past five years due to low-network interconnection charges.

Jio had said Airtel's representation on loss due to prevailing IUC rates was "grossly incorrect and fallacious" and that the company was misrepresenting facts on purpose to create a smoke-screen and hide its ill-gotten profits.

In its representation to Trai, Jio had said that telecom operators gained Rs 1 lakh crore from the IUC. Without naming telecom firms, Jio had said one operator gained Rs 46,958 crore, another Rs 28,904 crore and the third Rs 28,752 crore. (Read more about how they blasted each other)

Clash of telcos far from over

Established telecom operators have argued that every call on the network has a cost, and expenses of an incoming call on their network should be borne by the operator from whose network the call has originated. 

War on the cards

 
  • Jio estimated to benefit by Rs 3,840 cr annually on 6 paise/minute IUC

     
  • IUC has been on a downward trend since it was first introduced in 2003

     
  • Singtel warns of adverse consequences on investments in the sector 

     
  • Trai says zero IUC will result in direct benefit to customers; COAI differs

Reliance Jio said that the cost of delivering calls on new technologies was negligible and incumbents continued to gain from IUC even after having recovered the cost of their entire network. 

The prevailing IUC Regulation had been notified on February 23, 2015, and come into effect from March 1, 2015.

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