MTR cut: Customers' benefit operators' loss

BANGALORE, INDIA: India set up symmetric termination charges in 2003, as part of the Telecommunication Interconnection Usage Charges (IUC) regulation. This regulation means that termination rates for all types of domestic calls, including fixed to fixed, fixed to mobile, mobile to fixed, and mobile to mobile, are set at the same level.

Setting of symmetric and low termination rates

Charice Wang, analyst at Ovum, says that the IUC cost methodology for mobile termination rates (MTRs) is based on a fully allocated cost (FAC), top-down model with historical average costs from all mobile service providers.

According to Ovum’s quarterly Asia Pacific benchmarks (PPP), India now has a low MTR of $0.0115 (PPP). After the MTR cut in April, India will continue have one of the cheapest MTRs in the region, and indeed lower than average amongst a number of Middle Eastern countries.

The cut will benefit consumers, but it is a mixed picture for the industry

With the TRAI’s specific request for operators to pass on the wholesale cut in the form of lower retail prices, customers are certain to benefit from a lower local mobile tariff. It will also give rise to strong subscriber growth and increase penetration rates from their currently low level of around 40 percent.

The reduced MTRs will have a negative impact on the leading operators’ revenues, but it will benefit smaller operators that are net payers of MTRs to major players. MTRs are an important source of income for major operators such as Bharti and Vodafone, which handle most off-net incoming calls.

Thus, major operators, which are already seeing their ARPUs eroded by fierce retail price competition, may slow down their investments in rural rollouts, particularly given during the economic downturn.

In contrast, the small players and new entrants such as Telenor and Etisalat will welcome this move as it is mostly a matter of cost and not revenues for them, given that they pay for more outgoing off-net calls. To promote telecoms development for remote areas, at the beginning of March the TRAI published a consultation to seek an approach to accelerating growth in rural areas.

We expect the TRAI to announce more measures soon to encourage investment and services in remote areas, such as restructuring the universal service fund, expediting infrastructure support for mobile and broadband services in rural areas.

Challenge may be in store for pure 3G operators with symmetric regulation

As the 3G auction and subsequent deployment of 3G services is just around the corner, it is important to consider the treatment of 3G termination rates. After taking into account international practices, the TRAI concluded that both 2G and 3G voice termination charges should be treated the same. India therefore falls in line with the technology neutral approach. It is also in line with the increasing trend of converged networks with forthcoming next-generation networks.

We see diverse regulatory treatment of MTRs for pure 3G operators across the EU. The UK has taken a light approach to allow 3 UK have higher MTRs, but in Sweden and Austria the regulators adopted symmetric levels for greenfield operators and 2G/3G operators.

Given the high cost of investing in and rolling out a network, the symmetric regulation will cause increased difficulties for pure 3G operators entering the Indian market in the near future. Potential pure 3G bidders for the forthcoming 3G licence auction, which is likely to take place in April 2009, may now be reassessing their bids.