Why Reduction in Inter Connect Charges (IUC) by TRAI will Hurt Telecos Except Jio?

The Telecom Regulatory Authority of India (TRAI) has reduced the inter connect charge (IUC) effective 1^st October 2017 to 6 paise from 14 paise earlier. This is a more than 50% reduction that is likely to reduce the bills of consumers if the companies decide to pass on this benefit. They have also announced that IUC charges would be abolished in the country by 2020.

Inter connect usage charge (IUC) is a fee paid by one provider to other when you make calls to other network subscribers. This is charged on a per call basis and is one of the cash cows for the incumbent mobile service providers such as Airtel, Idea and hurt the most to new providers such as Jio.

However, it looks to be taking away a lot of revenues from incumbent players and it will hit their bottom lines impacting Revenue per User (RPU).

The most benefited company would be Jio who recently took the industry by storm and has set new standards leading to price reduction and better internet services across the board in the country.

Impact on the Telecom Players

Jio as a new entity has been offering discounted tariffs to acquire market share will now have to pay 50% less IUC charges to other players that will have a positive impact on its net margins.

It is estimated that Jio spends around INR 7,500 CR in a year on IUC and due to this cut, it will be able to save a huge amount and would definitely look to further intensify the competition by reducing the charges for the customer.

At the same time, the incumbent players like Airtel, Idea and Vodafone would have an impact of 8%-10% on their net profit. This impact would unlikely be recovered from customers through increase in charges due to stiff competition from Jio.

“We are extremely disappointed with the latest regulation on the IUC, especially at a time when the industry is facing severe financial stress. The suggested IUC rate, which has been arrived at in a completely non-transparent fashion, benefits only one operator which enjoys a huge traffic asymmetry in its favor,” Bharti Airtel said in a statement.

Cellular Operators’ Association of India has released a statement, “this massive reduction is disastrous for the financial health of the sector. Majority of our members will look for legal redressal”.

Telecom industry in India is under serious financial stress

All major Telecom companies are under serious financial stress due to the debt taken by them to acquire limited spectrum in all available circles and technologies such as 2G, 3G & 4G and marketing spend on customers through various low cost attractive offers.

At this time, reduction in IUC charges would further hit their EBITDA and the ability to pay back the debt.

In a report to government by SBI, it is estimated that combined telecom industry EBITDA is around INR 65,000 CR annually whereas the debt has crossed INR 4 Lac crore. This is unsustainable and industry is already cutting costs wherever possible.

The report highlighted that there is a need of immediate intervention to control debt and save the companies through measures such as bail-outs before it goes completely out of hand.

It is to be noted that Top 6 telecom players of India saw their debt burden rise by up to 20% in FY2016 -17 thereby increasing the financing costs.