INTERCONNECT: How Incumbents are taking one last stand against Reliance Jio

As any trial user of Reliance Jio’s new 4G network knows, calling phones on rival networks is currently a hit and miss affair with a high chance of being greeted with the ‘all routes are currently busy’ message.

It’s the oldest trick in the book that incumbents have traditionally used to thwart new entrants — prevent access to own subscribers.

In this case, this is reportedly being done by limiting the amount interconnection points between Jio’s network and that of the other operators.

For example, if 1000 users from Jio’s network calls subscribers on Airtel Mumbai, but Airtel Mumbai has provided only 500 interconnect points, the remaining users will hear the ‘all routes in this line are busy’ message.

This has led Jio to take up the matter with Department of Telecom, where it lodged a complaint against the incumbent operators for trying to block the calls of its subscribers by limiting interconnection points.

In response, the GSM players are claiming that Jio’s subscribers are generating so much voice traffic that their networks are being overwhelmed.

Cellular Operators’ Association of India, in its letter to the DoT, called into question the need for such a high number of interconnection points, implying that the traffic is being generated because of Jio’s unlimited calling offer, and the volumes may not be sustained once the free test calling ends.

“Such pseudo tests with free calling are throwing up one-way traffic, which is leading to never ending pseudo demand for more Points of Interconnection,” the association claimed.

Once the unlimited calling offer ends, the argument goes, traffic will dip and such a large number of interconnection points will no longer be required.

To be sure, the COAI also requested the DoT to direct Reliance Jio to stop this massive free trial process as it was ‘choking’ their network.

WHO IS RIGHT?

It would seem like the incumbents are resorting to the oldest trick in the book used by incumbents against new entrants.

When these same mobile operators started off 15-20 years ago, the biggest incumbent was BSNL.

At the time, companies like Bharti Airtel were forced to make a lot of hue and cry to get interconnection with BSNL, which they alleged was delaying providing interconnection as a strategic measure.

“We will make expensive claims on the government if the interconnectivity is not provided to us immediately. We don’t know the reason for the delay. It is against the licence agreement,” said Sunil Mittal in 2002 when BSNL was seen as blocking Bharti’s attempt to expand its voice services.

Fast-forward 15 years, the roles are reversed.

It is another new entrant Jio which is being forced to approach the government after allegedly being denied enough interconnect points to do its business.

THE REAL REASON FOR WORRY

Other than the threat of increased competition, incumbents are worried about another big factor — ‘imbalanced voice’ traffic.

Traditionally, the number of incoming calls on a network like that of Bharti Airtel would be largely the same as the number of outgoing calls made by Bharti’s subscribers.

But if Bharti’s outgoing call rates are very high, then users — especially those with dual-SIM phones — will use these connections primarily for attending to incoming calls, while using another SIM from a low-cost operator for making outgoing calls.

This will then result in an ‘imbalance’ between incoming and outgoing call traffic on Airtel’s network as there would be more incoming calls and fewer outgoing ones.

To some extent, this is already the case.

For example, Idea Cellular, which is part of the three incumbent players, gets about 12% of its revenue in the form of interconnect charges, while it pays only around 9% as interconnect charges to other operators.

In other words, Idea gets about 33% more incoming calls than outgoing made by its subscribers to those on other networks.

This is because of cheaper call rates offered by players like Tata DoCoMo and Anil Ambani’s Reliance Communications.

What is worse for these companies is that they make only a small profit on incoming calls, and make most of their money on outgoing calls.

An incoming call generates a revenue of only 14 paise per minute, while an outgoing call to another network generates about 60 paise per minute of revenue (even after adjusting for the 14 paise that has to passed on to the receiving operator.)

So, if the ratio of incoming calls increase and outgoing calls decrease, the profit margins of these big operators tend to fall.

This can have devastating consequences for incumbents if a big player like Jio comes into the market and offers call rates of 25 paise per minute. Such a move would further skew the incoming-outgoing ratio.

Voice services are very lucrative. Operators like Idea Cellular, Vodafone and Bharti Airtel make most of their profit from voice services, and charge between 50 paise to Rs 1.20 per minute for local and national calls.

If the ratio between incoming and outgoing calls gets skewed further, they will have no option but to lower their outgoing call rates to encourage their users to make calls using their SIMs. But doing so will also hurt their profit margins.

This is what the real fight is about, and not about Reliance Jio flooding their networks. Jio currently has only 2 mln subscribers, and these subscribers generate only about 360 minutes of voice calls per month — far lower than what would be required to flood the networks of incumbent operators.

In comparison, Bharti Airtel has 255 mln subscribers, and each subscriber generates a traffic of 414 minutes per month, and there are no complaints about choking. In fact, Airtel adds 2 mln new subscribers per month without facing any hitch.

Incumbent networks that support hundreds of millions of subscribers are unlikely to be ‘choked’ by Jio’s 2 mln users.

The fight, in other words, is about what will happen when Jio actually launches its services, and not about whether the trial operation is overwhelming their networks or not.

IMPACT ON JIO SUBSCRIBERS

This turf war could have its impact on Jio subscribers as they could find their calls getting stuck at the interconnection points.

Even though Reliance Jio has only 2 mln subscribers at present, even this small base is finding it difficult to make outgoing calls to subscribers of other operators.

According to Jio customer care, certain circles like Kerala and the metros are the worst affected. However, the customer care representative said, Jio’s network and policy team are hard at work to resolve the issue and this would be done very soon.