The great battle of the IUC and BAK PDF Print E-mail
Friday, 21 July 2017 03:58
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RJio stands to lose around R6,000-7,000 cr if IUC not replaced by BAK and Airtel 40% of pre-tax profits if it is


Even though RJio offers voice calls to its customers for free, it pays around `6,000-7,000 crore a year to other telcos for this. Since it costs telcos money to set up and run a network, each incoming call pays an Interconnect Usage Charge (IUC), currently 14 paise per minute, for using this. Over time, if Operator A and B have as many calls going to each other’s networks, the IUC becomes zero. That is the genesis of Bill and Keep (BAK) and while RJio wants BAK, incumbent telcos like Airtel and Vodafone say that even when Trai had talked of BAK in 2011 and 2015, it has said this would happen only when traffic was roughly symmetric. In FY17, market leader Airtel earned a pre-tax profit of around Rs 7,700 crore—BAK would mean this falling by around Rs 2,300 crore from RJio and around Rs 1,000 crore from other players; on the other hand, BAK would lower RJio’s costs by Rs 6,000-7,000 crore. Since no operator is going to sit by and see revenues collapse, BAK means Airtel/Vodafone/Idea must either start charging customers for incoming calls or hike rates for outgoing ones—either will spell disaster in a market as competitive as it is today.

Not surprisingly, the battle between the two sides is quite bitter. RJio has accused the incumbents of taking an extra Rs 1 lakh crore from subscribers over the last five years—and that’s the present value of the money. RJio’s presentation says ‘Operator 1’, presumably Airtel, took Rs 9,378 crore extra from subscribers in FY17—that’s significantly greater than its pre-tax profits of Rs 7,723 crore, suggesting the incumbents’ already poor RoCE would collapse if BAK was introduced.

RJio’s maths assumes the IUC should be zero, based on Trai saying, in 2011, that it felt traffic would be fairly symmetric in two years, at which point BAK could be introduced. But, the incumbents argue, with RJio’s free calls, the asymmetry has only risen. While the regulator needs to take a call on whether to use IUC or BAK—or what the IUC should be—this can only be done with a cool head, not by competing power-points; the two sides are making such diametrically different points, it is difficult to believe they are describing the same universe. In order to do that, SC must clear all cases pertaining to IUC—some go back to 2006—and decide whether TDSAT can even examine Trai’s IUC ruling; in 2010, TDSAT had said IUC had to take into account capex costs but Trai had challenged its jurisdiction. And while RJio talks of needing to move to BAK, Airtel’s presentation talks of it spending over Rs 40,000 crore in just buying voice spectrum—if you assume a 15% interest plus amortisation, based on the number of minutes an Airtel gets on its network, that means a 4.5 paise IUC needs to be allocated for spectrum costs alone; in 2015, Trai had allocated 0.79 paise for this. Given the amazing complexity, and sensitivity to even one number going a bit wrong, Trai has to make public its model for determining IUC so that telcos can argue it threadbare. The exercise also requires a discussion on whether BAK will hurt, as the incumbents argue, rollout in rural and other areas/segments that have more incoming than outgoing calls.



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