The case for par­ing IUC in tele­com sec­tor

Mint Asia ST - - Theirview -

One

of the main fronts in the on­go­ing war for mar­ket share in the tele­com sec­tor is in­ter­con­nect us­age charges (IUC). While all the in­cum­bents are sup­port­ing a rise in IUC rates, the new giant en­trant, Re­liance Jio, has backed a re­duc­tion. IUC is a charge telco A pays to telco B, to en­able B’s cus­tomer who is the re­ceiver of a call from A’s net­work. The ar­gu­ment is that B has in­vested in the net­work to re­ceive the call, and should be paid for it ac­cord­ingly. This is reg­u­lated by the Tele­com Reg­u­la­tory Author­ity of India (Trai) since mo­nop­oly power can be ex­er­cised by B since B’s cus­tomer is bound to B’s net­work.

This is not a prob­lem in most coun­tries since their phone com­pa­nies charge the con­sumer both for send­ing and re­ceiv­ing calls. In that scheme, they adopt a sys­tem called Bill and Keep, where each firm bills its own cus­tomer for send­ing and re­ceiv­ing calls. But in India we have the call­ing party pays regime, where the call­ing party of A pays to A for the en­tire in­ci­dence of the call, and the re­ceiver of a call pays noth­ing (ex­cept while in roam­ing).

This has helped poor peo­ple, who re­ceive calls much more than make them, enor­mously. We have per­fected the art of send­ing a “missed call”. As a re­sult, since the cus­tomer does not pay for re­ceiv­ing a call, the cost of re­ceiv­ing the call has to be re­im­bursed to the re­ceiver’s phone com­pany. Trai fixes this rate which A should pay to B for re­ceiv­ing calls from A.

Tele­phone in­vest­ments are lumpy in­vest­ments and are mostly what are called sunk costs, i.e. costs that can­not be re­cov­ered when there is com­pe­ti­tion be­tween tel­cos. Be­sides, the re­ceiv­ing net­work is not dis­tin­guish­able from the send­ing net­work; no telco makes any in­vest­ment ex­clu­sively un­der this cat­e­gory to re­ceive calls. So strictly speak­ing, they do not in­cur any in­cre­men­tal or di­rect costs for re­ceiv­ing; re­ceiv­ing is a by-prod­uct of send­ing. Ac­cord­ing to this po­si­tion, the ques­tion of pay­ing for re­ceiv­ing just does not arise be­cause no one in­vests specif­i­cally for re­ceiv­ing calls.

But then, the telco may say, “It is my net­work, and I won’t re­ceive your call from your net­work, un­less I am paid.” To tackle this prob­lem, govern­ments have leg­is­lated “com­pul­sory, non-dis­crim­i­na­tory open ac­cess” to fur­ther com­pe­ti­tion. Now, if one agrees to the prin­ci­ple that the re­ceiv­ing net­work has to be com­pen­sated for re­ceiv­ing, then one has to de­fine what this cost is and then com­pute it. The tele­com in­dus­try has three types of costs for this pur­pose: fully al­lo­cated costs (FAC), long-run in­cre­men­tal costs plus (LRIC+), and pure long-run in­cre­men­tal costs. FAC is the high­est and pure LRIC is the low­est in quan­tum. FAC is pro-in­vestors and pure LRIC is pro­com­pe­ti­tion. The bot­tom line is that this cost for re­ceiv­ing calls can­not be separately found by any sim­ple man­ner of cost ac­count­ing, let alone have clar­ity on which type of cost is jus­ti­fied for which sit­u­a­tion.

There is noth­ing stop­ping tel­cos from in­creas­ing their prices to re­cover this cost. In tele­com par­lance, this is called the “wa­ter bed” con­cept, where, if the cost rises in one place, the price can rise else­where. How­ever, the fear of losing mar­ket share keeps tel­cos from truly em­ploy­ing this logic.

Thus, IUC be­comes free money for tel­cos. On a net ba­sis, tel­cos with smaller net­works end up pay­ing money and those with big­ger net­works end up re­ceiv­ing money. Un­sur­pris­ingly, the big net­works who re­ceive money typ­i­cally ar­gue for a high IUC based on full cost re­cov­ery. Mean­while, smaller net­works ar­gue for low IUC based on mar­ginal cost re­cov­ery, which is close to zero. Nat­u­rally, both par­ties of­fer par­ti­san ar­gu­ments. There was a case of a Nor­we­gian tele­com ma­jor ar­gu­ing for full cost re­cov­ery in its home coun­try, where it was big, but ar­gu­ing for mar­ginal cost-based IUC in India, where it was a small com­peti­tor, us­ing the same ex­pert econ­o­mist.

The reg­u­la­tor has also to be seized of the fact that the money- re­ceiv­ing tel­cos will use this “free money” to sub­si­dize their on-net calls, i.e. calls made within their net­work, thus try­ing to fur­ther in­crease the dis­par­ity in size and con­se­quently in­creas­ing mo­nop­oly power.

Trai has been pro­gres­sively re­duc­ing the IUC from 20 paise to 14 paise, and there is scope for fur­ther re­duc­tion. Un­til now, re­duc­ing IUC has been pro-com­pe­ti­tion and hap­pened to also favour smaller net­work com­pa­nies. But now there is a para­dox­i­cal sit­u­a­tion: re­duc­ing the IUC will favour the giant player that has en­tered the mar­ket and threat­en­ing the ex­is­tence of erst­while lead­ers. But that is not an ar­gu­ment for not re­duc­ing IUC where the ob­jec­tives of com­pe­ti­tion and ef­fi­ciency will be served by align­ing IUC with mar­ginal costs.

The ba­sic plaint of in­cum­bent tele­com ma­jors seems to be that com­pe­ti­tion from an en­trant is hurt­ing them. This is be­cause the en­trant has re­de­fined the mar­ket as data in­stead of voice, made voice a by-prod­uct, and also low­ered the rates on data sig­nif­i­cantly be­sides of­fer­ing voice free. It is play­ing the vol­ume game, which is the main fea­ture in tele­com. By chang­ing the strat­egy from spec­trum-voice based to fiber-op­tic-data based, it has rein­tro­duced a nat­u­ral mo­nop­oly in an in­dus­try which was rid of it through spec­trum, tow­ers and mo­bile.

The prog­no­sis is that prices will be low­ered to new lev­els, be­cause there is sur­plus trans­mis­sion ca­pac­ity and mar­ginal cost is close to zero. If in­cum­bents do not change and play to the new strat­egy, they may be forced to exit this price war, wounded. But such ex­its, I ven­ture to say, may be good for the in­dus­try. So, nei­ther the reg­u­la­tor nor gov­ern­ment should be per­suaded by the ar­gu­ment that in­dus­try is fac­ing dif­fi­cul­ties and of­fer sops for be­ing in­ef­fi­cient.

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