Why telecom sector needs IUC model

There have been demands to bring in the Bill and Keep (BAK) system and do away with the interconnection usage charges (IUC) in the telecom industry. The BAK regime, it is said, will usher in consumer benefits and technology upgradation. But little has been said on why IUC should continue to remain in force.

There are two inherent assumptions made by proponents of the BAK regime. First, the IUC impacts tariff in a linear fashion; hence, if IUC is reduced, consumer tariff will come down as well.

Second, Voice over Long Term Evolution (VoLTE) has already taken over (far from it), and it forms the majority component of the total telecom market; the existing IUC regime is a hindrance in the adaption of VoLTE technology.

The blended rate (postpaid and prepaid) for outgoing calls per minute for the quarter ending June 2017 (TRAI Performance Indicator Report) was 26 paise. After the recent reduction, the IUC charge is 6 paise per minute, which is almost 23 per cent of the total cost. IUC forms only 13 per cent of per minute cost in postpaid calls. This clearly highlights that IUC is not the only component, which if eliminated, will miraculously result in reduction of end tariffs.

Even before the present reduction in IUC charges, directed by the Telecom Regulatory Authority of India (TRAI), IUC rates in India were among the lowest in the world. It was 11 per cent of what OECD countries charge.

In fact, Airtel had already filed a case in the Delhi High Court in 2016 highlighting that termination rates are fixed below cost, resulting in a loss of 19 paise per minute and an accumulated loss of ₹1,500 crore. The calculation is based on the fact that Airtel’s mobile network receives more than 80 billion minutes per year in excess of outgoing minutes. While the veracity of the cost cannot be commented upon as the case is sub-judice, all market players have complained about lower than essential IUC.

Elimination of IUC harms the interest of existing consumers because the operators would either squeeze new investments or increase consumer tariffs. We need to arrive at IUC charge with studied commercial and economic principles. Further, expecting BAK to be followed in the international traffic settlement where the outgoing is a meagre 4.5 billion minutes vis-à-vis an incoming of 88 billion minutes, should VoLTE be adopted, would lead to colossal losses to our carriers, even at the present rate of 53 paise a minute.

Linked to IUC charge is the technology upgradation argument. According to the Global Mobile Suppliers Association Report (October 2015), there were 111 operators in the world investing in VoLTE services in 52 countries which includes deployments, trials and studies with 30 operators commercially launching VOLTE-HD in 21 countries.

In India, only Reliance Jio has launched VoLTE services, i.e. PS-RAN service, and that too in a testing phase, while Airtel launched that in the Mumbai circle recently. Further, of the total $96.30 billion telecom API market, only $3.78 billion of market is VoLTE based, which is not even close to 4 per cent of the global market.

Thus, clearly VoLTE services have a long way to go before they can form a major chunk of the telecom market. The question is whether induction of VoLTE is going to change the calling pattern, and bring about symmetrical call flows. Traffic flow is not governed by technology, but by human behaviour.

ITU-APT’s response during the review of IUC specifically mentions that no telecom regulator in the world has changed its charging approach because of technological developments. Rather, technological developments get incorporated into the costing model of IUC.

The point highlights the fact that investments in the networks need to be made, and it is from such investments that one can expect a fully functional telecom system. It is important to ask if proponents are advocating that 96 per cent of the CS-RAN system should pay for 4 per cent of the PS-RAN system.

By TRAI’s own admission to the Supreme Court in 2011 on IUC, “it would take another two years for the asymmetries in the traffic flows to converge to some form of equilibrium between the new and old service providers and it was opined that the BAK arrangement may, therefore, be implemented after two years”. The statement essentially highlights that BAK regime cannot be fully implemented in an asymmetrical market.

Even the Federal Communications Commission (FCC) in its own order (report) in 2011 on Notice for Proposed Rulemaking mentioned, “It may be, however noted, that the statute does not permit the imposition of bill-and-keep where there is a significant imbalance in the traffic exchanged among interconnected LECs”.

The Indian market is highly asymmetrical. Network coverage and traffic availability varies substantially between one operator and another, where a few companies even cover deep rural areas, while others cover just a few clusters.

Further, in a country as large as India, where there is still a huge demand for voice services — close to 70 per cent — from the customers, which is primarily a CS-RAN system, it would be naïve to switch overnight to 100 per cent PS-RAN system, which is what the BAK regime is based on. Further, a Vodafone-India analysis (report) shows that only 12 countries have had a BAK regime, while 66 countries in the world have Calling Party Pays (CPP) regime (IUC charges), with India being one of them.

Thus, IUC is still an acceptable model, based on the simple logic that operators need to recover the cost they have invested in developing the network.

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While no one can argue against the fact that competition is necessary, it cannot be generated at the expense of existing players and for the benefit of newcomers. Moreover, the Indian market dynamics are not prepared to move towards a BAK regime, due to inherent asymmetries..

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The need of the hour is tariff rebalancing in order to make full use of technological evolution towards data, and not shortcuts such as eliminating IUC.

The writer is former CMD of VSNL

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