The Hindu Business Line : Lowered roaming, access charges

Regulatory decisions on roaming or access charges that lead to a reduction in connectivity costs have substantial knock-on effects across the system by triggering substantial growth in demand.

Indians are among the most price-sensitive clients. A case from Britain illustrates this well. At one time, long-distance call rates from the UK to India were very high. This was primarily because of the access charges the countries levied on each other for delivering calls. The originating carrier that billed the call would add on a handsome margin, and the final price per minute of an international call was substantial relative to what it is today.

One recollects paying upwards of £2 per minute, on an average, for a call to India. Even with the rate now slumping to five pence per minute — a drop of over 95 per cent — carriers are still making substantial profits. Call volumes have increased exponentially given the high price elasticity of demand the Indian community exhibits for telephone services.

Carriers in Britain discovered that when international calling rates were reduced for calls from Britain to many countries, the largest relative increase in volume was in the traffic to India. Consequently, that sector became the focus of further price-cut strategies and, now, the UK-India calling segment is among the most important for all international carriers.

Impact of Lowered Roaming Rates

Therefore, the decision of the telecom regulator to reduce mobile roaming rates is right and will lead to a substantial expansion of the Indian market. Roaming charges are the premium one pays for the facility to use one's mobile outside one's principal service territory. If one were to use a Mumbai service area registered mobile phone in, say, Madhya Pradesh or Tamil Nadu, one would have to pay a premium.

A high roaming charge would, in fact, limit one's mobility which goes fundamentally against the logic of mobile phones. If one were peripatetic, as most Indians are, but is unable to use the mobile phone, it would prove a damper to one's economic and social activities.

In fact, it is this enhancement of one's mobility that the telephony network was supposed to engender. Paradoxically, if one travelled widely within India, the quality of mobility and communicability would be substantially compromised by high roaming and access charges.

Therefore, the reduction in roaming charges has substantial consequences as it, immediately, enhances the desire to connect, for both social and economic reasons. Given the high price elasticity displayed by the Indian consumer, a reduction in roaming rates translates into a decline in the cost of calling, if one is out of one's territory, and leads to a greater-than-proportionate increase in the calling volumes generated. This is the economic logic behind the Indian consumer's calling predilections.

In fact, the total spending on mobile telephone calls will increase because of the predilection to talk more often with customers perceiving the rates to be quite low. Thus, the decline of rates due to a reduction in roaming charges will also lead to a large increase in the Average Revenue Per User (ARPU) for mobile carriers, in general.

This is of substantial benefit to the carriers, and their initial negative reactions to a reduction in roaming charges were, in fact, unfortunate and conceptually misplaced. Reduction in roaming rates can only have the effect of enhancing the footprints of the mobile operators.

Lowering Port Access Charges

By the same logic, the lowering of port access charges can trigger higher call volumes. Access charges are paid for interconnectivity and the cost borne by one carrier is another's revenue gained. The lowering of access charges for port facilities will certainly lead to a drop in revenue per call for the carrier providing the port facilities.

Nevertheless, for the carrier providing port facilities, this decline in revenue will easily be outweighed by the additional revenues from the larger call volumes.

Consequently, the lowering of the port access charges is a useful regulatory decision that can serve to extend the growth of calling volumes in India. The growth in calling volumes not only adds incrementally to the revenue streams of the carriers but also provides carriers with a larger base of calls over which to spread their fixed costs.

Lowered costs and Investment Patterns

Do firms take such regulatory factors into account while making investment decisions? Does the lowering of charges for facilities such as roaming and access trigger higher levels of investment? Surprisingly, they do.

A study of telecommunications firms in the US by the author showed that whenever access charges were lowered in a particular jurisdiction, the carriers there invested more heavily in broadband relative to their counterparts elsewhere.

A lowering of access charges would, by generating substantial additional calling volumes, result in the availability of larger cash streams for carriers. This cash would, in turn, permit these carriers to invest in broadband. A lowering of access charges, in fact, led to a diffusion of broadband assets across the US.

Hence, the clamour of many carriers that a lowering of access charges would lead to their economic deprivation was, in fact, misplaced and merely a device to keep entry barriers high.

Telecommunications economics is markedly different from that of the other sectors because of the connectivity feature; yet, simple concepts such as price elasticity of demand play an important role in shaping the competitive contours of the sector. Regulatory decisions on roaming or access charges, and the carriers' corporate strategy that leads to a reduction in the cost of connectivity have substantial knock-on effects across the system by triggering substantial growth in demand.

These effects are magnified because of the connectivity feature. In India, where the people are particularly price-sensitive, and yet have the desire to travel and communicate with one another, the demand growth can be explosive. Such explosion in demand growth would trigger further network building. The cumulative impact of cost- and price-reduction activities is to significantly accelerate the diffusion of advanced telecommunication networks across the country and enhance the welfare of its citizens.

(The author is Professor of Technology Strategy, University of Texas at Dallas. He can be contacted at majumdar@utdallas.edu)

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