Since the disruptive entry of Reliance Jio in September last year, India’s leading telecom incumbents – Bharti Airtel, Idea and Vodafone – have been hemorrhaging subscribers, revenue, and profits. But even in their darkest days of misery, they had one silver lining—every time a Jio subscriber called one of their own, their cash registers rang up 14 paise ($.002). This was the “interconnect usage charge” (IUC) that any wireless operator in India has to pay its peer for “terminating” a call on the latter’s network.
On first glance the amount looks too small to matter. Till you realize the incumbents have over 650 million subscribers between them. And that, thanks to the asymmetry of a new player ramping up, they ended up receiving roughly 9 calls from Jio’s network for every call out from their own to Jio. The paise add up quickly.
Bharti Airtel alone, for instance, is estimated to have earned Rs 500 crore ($92 million) from Jio’s incoming calls in the most recent quarter. The contribution of IUC to Bharti Airtel and Idea’s wireless income was estimated by Mint to be 14% and 18% respectively.
This month, that silver lining is about to start disappearing. India’s telecom regulator TRAI is expected to announce a drastic cut in IUC this month. Estimates of the cut range from 50% to 100%.
The impact of that on Bharti Airtel and Idea’s pre-tax profits range from 4-6% and 9-15%.
Tempting as it may be to blame Reliance and its legendary ability to swing regulatory decisions in its favour, in this case, the incumbents are as much to blame. Through a mix of arrogance, overconfidence, and lack of strategic foresight, they’ve painted themselves into the same corner as state-owned telco BSNL did in the early 2000’s. Today’s incumbents were then the challengers.
The clock’s come full circle.
Obstruct and choke
“In 2003 Reliance painted the same incumbents as monopolists safeguarding their higher prices, turning customer and regulatory sentiment against them. It’s literally the same movie playing again,” says Kunal Bajaj, CEO, ETIPL, a telecom services startup and former telecom analyst.
He’s referring to Reliance’s original disruptive telecom play, Reliance Communications. Like Jio today, RCom used an advanced technology as a differentiator to enter a crowded race late. For Jio’s 4G LTE, RCom had 3G CDMA.
Like LTE today, CDMA was advanced for 2003 because it was optimized for data traffic too. The incumbents, led by Bharti Airtel, instead of co-opting CDMA for their own future, banded together under the GSM (the network technology powering most conventional networks then) umbrella and attacked CDMA.
Over the years, due to a mix of adverse customer selection, an intra-family split within the Ambani family and successful lobbying in favour of GSM by the incumbent operators, CDMA never really took off in India. Even though it was demonstrably a better technology.