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How To Face Competition: Management Lessons From Telcos

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India’s telecom market continues to be one of the most baffling ones in the world. You’d think, as the Telecom Regulatory Authority of India (Trai) does, that having 8-10 service providers would ensure the market works, so it doesn’t really need to regulate tariffs. And yet that isn’t really so. Sure, India has the lowest telecom tariffs in the world and that shows markets are working and Trai is correct in keeping tariffs under what’s called “forbearance”. But, at the same time, the new players that have just begun offering their services argue the interconnection agreements being signed between them and dominant players, like Bharti Airtel, are one-sided. This is where Trai needs to come in, since it is mandated by law to set out interconnection agreements which, in turn, are cost-based and help prevent dominant behaviour — if Trai doesn’t come in, it’s likely that someone will approach the Competition Commission. If incumbents like BSNL and MTNL were allowed to abuse their dominance in the mid- and late-1990s when the likes of Bharti and Vodafone came in, the private operators would never have grown to the size they have today.

Bharti Airtel is asking new players to give it 10 paise each time its network receives an SMS from their networks. Its argument is that new players are wooing subscribers by offering very cheap SMS facilities, but since these SMSs are necessarily being sent to subscribers of existing firms like Bharti Airtel, they need to be paid for their networks being used. This, of course, is the basis for the Interconnect Usage Charges (IUC) — till March, when a voice call came from one network to another, the calling network paid 30 paise per minute to the network being called; this “termination charge” was lowered to 20 paise in March 2009.

The question is whether this 10 paise SMS-termination charge is too high. Since the IUC, for voice calls or SMSs, is based on the amount of the network that is being used, the size of the file being transmitted is critical. Well, a 160-character SMS has a size of around 1kb, while a voice call is around 16kb per second. Today, with voice calls priced at 1 paisa a second, this means that instead of the current 50 paise to a rupee, SMS tariffs should be a fraction of 1 paisa, and the IUC on them even less.

Indeed, in August 2006, Trai had a consultation on whether or not there should be IUC on SMSs and concluded that telcos were free to charge what they wanted from each other, it added the costs of terminating SMSs were negligible and SMSs got sent only when the network was not being used for voice calls — “Moreover, there is no supplementary cost for the terminating and transiting traffic. Primary resources utilised for SMS, i.e. the signalling channel (TS-16), are a necessary provision for handling the signalling for the voice traffic and are used for SMS only during the period when it is not used for voice traffic signalling or any other service.”

On March 9, 2009, when Trai reviewed the IUC, it re-looked the issue of termination charges on SMS and said, “The cost involved with the handling of SMS in any of the service providers network is insignificant as compared to the cost for handling voice.” So, on what basis are incumbents like Bharti charging 10 paise as IUC from the newcomers?

Several amazing issues arise, apart from the obvious one that just having more players doesn’t necessarily mean the market will work — telcos still charge Rs 6-7 per minute for international calls, to cite another example, despite the fact that global majors charge them just 40-50 paise to carry the call from India to the US/Europe. One, Trai doesn’t know when to intervene and when not to. So, when Tata DoCoMo introduced pay-per-second billing, which reduces telephone bills by 10-20 per cent, Trai didn’t think the market would work and its chief JS Sarma announced he would make a per-second billing mandatory — even before he could begin the consultation process, the market responded and major players, including BSNL, came up with pay-per-second pulse plans. And when it is obvious the market is not working, whether in the case of SMS tariffs/termination charges, or in the case of international calls, Trai does precisely nothing. Indeed, in the case of value added services like ringtones and music downloads, the global practice is to give a larger share of revenues to developers, while it is the opposite in India — once again, Trai needs to see if this is abuse of market power. And whether or not it regulates tariffs, Trai needs to keep a tab on the difference between costs and tariffs of various services being offered.

Postscript: There is no doubt the new operators like Unitech/Swan got their licence/spectrum dirt cheap, but Bharti/Vodafone charging them a high SMS IUC isn’t going to bring money back into the government coffers, so it’s best not to confuse the sweetheart deal they swung with the government with the IUC agreements they need to make amongst themselves.

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