Viewpoint Analysis of interconnect usage charges in India Sourabh Kaushal April 2011
2 Summary: Analysis of interconnect usage charges in India In India the Interconnect Usage Charges (IUC) were introduced with the launch of Calling Party Pays (CPP) regime in 2003. Before 2003, subscribers were charged for both incoming as well as outgoing calls After introduction in 2003, IUC was reviewed in 2006 and 2009 and the charges were reduced based on the prevailing market conditions. For example, in 2009, mobile termination charge was reduced to INR0.2 per minute from INR0.3 per minute Recently, TRAI has started the consultation process for reviewing the current IUC regime citing significant changes in market dynamics such as increased competition, massive subscriber growth, changing cost and launch / development of new technologies It is expected that after completion of the consultation process, TRAI will most probably recommend a reduction in IUC, especially the mobile termination charges At an industry level, reduction in mobile termination charges to INR0.1 (US cent 0.2) from the existing INR0.2 (US cent 0.4), is expected to result in a ARPU fall of 18%, assuming IUC reduction is completely passed to consumers The ARPU decline will be more among prepaid users (20%) as compared to postpaid users (8%) as prepaid users are net receiver of calls while postpaid subscribers are net originator of calls across at an industry level GSM operators, at an overall level, being net receivers of calls, are likely to witness decline of around USD212 million in annual revenues due to reduction in termination charges by INR0.1 High level analysis of a leading GSM operator KPIs indicate that it will witness 2% reduction in revenues from a INR0.1 reduction in current IUC charges while a new operator will experience revenue enhancement of around 3% At an overall level, consumers are expected to benefit from the reduction in interconnect usage charges as it will lead to lower tariffs. The industry might also witness launch of more innovative / aggressive plans
3 Interconnect usage charge was introduced in India in 2003 with the launch of Calling Party Pays (CPP) regime Figure 1: Evolution of interconnect usage charge regime in India [Source: Analysys Mason, TRAI] Before 2003, mobile subscribers were charged for both outgoing as well as incoming calls In February 2006, the ceiling for carriage was fixed at INR0.65 (US cent 1.4), while the termination and other components remained unchanged In April 2011, the Telecom Regulatory Authority of India (TRAI) has come up with a consultation paper to review the IUC charges Before 2003 2003 2006 2009 2011 The Interconnect Usage Charge (IUC) regulation was introduced in India in 2003. At that point in time, the originating, carriage and termination charges were based on the type of network in which call originated or terminated and distance travelled in a service provider s network In case of the cellular network, the charges were also based on whether the destination network was in a metro or a non-metro city. The termination charge then varied from INR0.15 to INR0.50 (for example, mobile to mobile termination charge was INR0.30) and carriage charges were from INR0.20 to INR1.10 depending on the distance From April 2009, the IUC charges were revised. The termination charge for local and national long distance voice calls to fixed wire-line, wireless in local loop (fixed), wireless in local loop (mobile), cellular mobile telephone service (both 2G and 3G) were uniformly fixed at the rate of INR0.20 per minute. The termination charge for incoming international long distance voice calls to such fixed wire-line, wireless in local loop and cellular mobile telephone services (both 2G and 3G) was fixed at the rate of INR0.40 per minute The carriage charge was retained as a ceiling of INR0.65 per minute
Citing changes in market dynamics, TRAI has recently started a consultation process for reviewing the existing IUC regime 4 Table 1: Reasons cited by the TRAI that necessitate review of current IUC regime [Source: Analysys Mason, TRAI Consultation Paper on IUC] Description According to TRAI, timely review of interconnect usage charges is important to align charges with current cost of telecom services Increased competition Massive subscriber growth Changing cost of offering services Adoption of new technologies Number of service providers have increased from 6 to 7 in pre-2008 era to around 12 to 13 currently Launch of plans such as pay-per-second Over the last few years, India has been witnessing significant subscriber addition (752 million in Dec 2010 from 234 million in Dec 2007, CAGR of 48%) To align charges with current cost of telecom network and minutes of usage This will allow services providers to offer innovative tariff plans to consumers IUC should address the requirement of existing as well as emerging technologies such as HSPA, WiMAX, FMC and NGN This will allow service providers to launch innovative tariff plans that would benefit end users Since the last ICU regime was implemented, the market dynamics have changed drastically with entry of 5 to 6 new operators, introduction of new tariff plans such as pay-per-second plan and significant reduction in overall tariff changes Apart from these, the market is witnessing deployment of new IP based technologies such as WiMAX, HSPA and LTE All these factors makes it important for review of all the components of the current IUC regime. After completion of consultation process, it is most likely that TRAI will recommend reduction in IUC, especially mobile termination charge
This is in line with global experience, where IUC charges are reviewed regularly, although the methodology of determining IUC varies 5 Table 2: IUC charges across various developing and developed countries [Source: Analysys Mason, TRAI, News Articles] Description Australia Mobile Termination Charges: AUD0.09 per minute for Jan 09 to Dec 2011 period Framework: Cost based pricing approach according to Total Service Long Run Incremental Cost (TSLRIC) methodology. The current charges have been determined for three years and would be revised from Jan 2012 China Germany Mobile Termination Charges: Based on actual cost of termination Framework: All operators submit cost data to the Ministry of Information Industry (MII) every year, which then makes a settlement based on these costs with the help of an independent auditing agency Mobile Termination Charges: Varies by operators (Vodafone & E-Plus: Euro0.0336 per min, Telekom Deutschland: Euro0.0338 per min, and Telefonica O2: Euro0.0339 per min for the period of Dec 2010 to Nov 2012) Framework: Forward Looking Long Run Incremental Cost (FL-LRIC) methodology is used for determining termination charges Mobile Termination Charges: As decided by the Korean Communications Commission each year Korea Framework: KCC directly determines termination rates for each mobile operator according to a LRIC-based framework. The Korea Communications Commission publishes the exact methods by which call termination prices was determined for each year
ARPU (INR) Analysis of interconnect usage charges in India 6 At an industry level, AGR ARPU is estimated to fall by 18% with reduction of mobile termination charge to INR0.1/min from the existing INR0.2/min Chart 1: Impact on AGR 1 ARPU due to reduction in IUC on overall industry, postpaid and prepaid (INR) [Source: Analysys Mason, TRAI] 600 400 200 0 IUC @ INR0.2 539 497 100 83 82 66 Industry Postpaid Prepaid As of Dec 2010 Industry Postpaid Prepaid Subscribers (million) 734 27 708 Outgoing MoU per sub (minutes) 180 524 156 Outgoing charges @ INR0.2 (INR / min) IUC @ INR0.1 0.52 0.74 0.49 Outgoing @ INR0.1 (INR / min) 0.42 0.64 0.39 At an overall level, the ARPU is expected to decline by approximately 18%, if the IUC reduction is completely passed to end users However, the ARPU decline will be more among prepaid users (20%) as compared to postpaid users (8%) as prepaid users are new receiver of call while postpaid subscribers are net originator of calls on across all the mobile networks If the reduction in termination charge is not passed to the end users, the revenue impact will only be ~1% for a INR0.1 reduction Any change in carriage charges (max. INR0.65 per min) will not have any major impact as operators are already paying significantly lower rates than the ceiling defined by the regulator The current carriage charges paid by operators vary from INR 0.1 to INR 0.3 per minute based on the negotiation between the operators Note: 1. Adjusted gross revenue
Revenue Impact (USD million) Analysis of interconnect usage charges in India 7 GSM operators, being net receivers, are expected to witness as loss of ~USD212 million in annual revenues due to reduction in termination charges Chart 2: Annual revenue impact on GSM and CDMA operators due to reduction in IUC (USD million) [Source: Analysys Mason, TRAI] 500 400 300 200 100 0-100 425 GSM 319 213-19 CDMA -14-10 For INR0.1 (US cents 0.2) per minute reduction in IUC, CDMA operators, being net callers, would gain a total of ~ USD9 million while the GSM operators will loose ~ USD212 million, at current industry level voice usage levels The analysis is based on subscriber base as of Dec 2010 and minutes of usage data for quarter ending Dec 2010 as reported by TRAI The net annual revenues have been calculated using the difference of national outbound and total inbound MoUs At an overall level, GSM operators will be impacted the most due to reduction in mobile termination charges IUC @ INR0.2 IUC @ INR0.15 IUC @ INR0.1
8 Analysis of a leading GSM operator KPIs indicate that it will witness a 2% decline in revenues from a INR0.1 reduction in mobile termination charge Table 3: Analysis of impact on an existing & new GSM operators due to reduction in IUC [Source: Analysys Mason, TRAI, Industry Inputs] As of Dec 2010 Leading GSM New GSM 1 Average subscribers for FY 2011 (million) 145 10 Outgoing MoU per sub (minutes) 202 169 Incoming MoU per Sub (minutes) 247 138 Net Incoming MoUs (minutes) 45-31 Current net termination revenue / sub / month (USD) Net operator current annual termination revenue (USD million) Reduction in revenue due to INR0.1 decline in termination charge (USD million) 0.2-0.1 348-16 174-8 Overall impact on revenue -2% 3% Analysis of termination revenue for a leading and a new GSM operator indicates that incumbent GSM operators, being net receiver of calls, will experience reduction in revenue, while the new operators, being net originator of calls, will gain from reduction in termination charges as a result of reduced pay-out to other operators The net impact on leading GSM operator s revenue is expected to be a decline of approximately 2% for a INR0.1 reduction in mobile termination charge At an overall level, incumbent GSM operators who are net receiver of calls will witness a negative impact on the revenue while CDMA and new operators will experience a positive impact due to reduction in net termination out-go charges Note: 1. Assuming that 55% of total minutes of usage of new operator is contributed by outbound calls
9 At an overall level, consumer will benefit from the reduction in IUC and the industry might witness launch of more innovative / aggressive plans Figure 2: Overall impact of reduction in interconnect usage charges [Source: Analysys Mason] Reduction in tariff charges Mostly operators pass on any reduction in termination charges to end users by reducing the voice tariff / charges With most of the new subscriber additions coming from low end users, reduction in tariff will further improve the affordability of mobile services Launch of innovative plans Currently, innovation in tariff plans is restricted due to fixed termination out-go for off-net calls Reduction in IUC will provide more freedom to operators in launching new innovative plans similar to pay-per-second plan Reduction in government revenues Decrease in operator revenues due to the reduction in ARPU would also lead to a proportionately lower collection of service tax, telecom license fees and spectrum charges for the Government. However, this might get offset by increase in penetration / usage of mobile services