Cartels at work

The unbundling of telecom services has affected landline operators like BSNL. - V. GANESAN

The inability of the Telecom Regulatory Authority of India to prevent mobile phone operators from raising prices in unison has reinforced fears that a cartel is operating in the telecom industry.

TRUANT schoolchildren need a pliable headmaster who would allow them their whims. Likewise, whimsical business cartels need an indulgent regulator to be able to impose their fancies on the market. The inability of the Telecom Regulatory Authority of India (TRAI) to check mobile phone companies from raising prices in unison, after having established a mobile phone industry-friendly policy regime, enables it to qualify for the role. In early February the major mobile phone companies raised tariffs for calls made from their networks. The increases were substantial, 15-20 per cent, and the reasons cited were the revised inter-connect and other charges that the regulator had announced in October and that came into effect recently. The fact that the major private companies, among them the market leaders Reliance Infocom and Bharti, acted in unison has reaffirmed the fears about the oligopolistic tendencies in the Indian telecom sector since deregulation. The fact that state-owned Bharat Sanchar Nigam Ltd (BSNL) refrained from hiking tariffs has only reinforced the fear that a cartel is very much in operation in the business.

As a result of the increase in tariffs, national long-distance calls are costlier by one-third while local calls are costlier by at least 10 per cent. For instance, the rate of long-distance calls made on cellular networks from one Airtel phone (belonging to the Bharti group) in Delhi to an Airtel subscriber in Mumbai are higher by 50 per cent, increasing to Rs.2.99 a minute from Rs. 1.99 a minute. Calls to fixed-line phones are also costlier. For instance, a mobile subscriber of Airtel's Plan-150 making a call to a landline now has to pay at the rate of Rs.2.49 a minute, compared to Rs.1.99 earlier. While Hutch, the other operator with a large market share, has made no changes in its local call rates, its hike in STD (subscriber trunk dialling) rates is of the same magnitude.

The mobile phone companies claim that the increase in tariffs has been necessary because of TRAI's revision of two sets of charges, which the regulator imposes on telecom players. The first is the Interconnect User Charges (IUC) and the second the Access Deficit Charge (ADC). The IUC is a product of the deregulation of the telecom industry. When the Department of Telecommunications (DoT) was the sole service provider, there was only one network. Deregulation has meant not only multiple operators but also an unbundling of the telecom business. The multiplicity of operators is just one aspect of the new situation. Unbundling has meant that there are now separate operators for carrying national long-distance traffic and international calls. In commercial terms, the fragmentation of the business with multiple operators offering multiple services requires a means by which a settlement can be reached when these operators interconnect in a seamless manner. This is represented by the IUC. Traditionally, the Calling Party Pays principle performed this function, implying that the revenue was retained in the network from where the call originated. However, the growing complexity, particularly when not only networks are technologically different but one network is associated with the status of being the provider of a premium service, changed this simple arrangement for settlement.

It is important to recognise the role the TRAI-mandated IUC has played in the cellular revolution in India. TRAI's IUC revision in late 2002 made it cheaper to call a cellular network rather than a fixed line. Lower cellular phone tariffs have played a key role in the churn in telephone subscriber base, which led a movement away from the plain old telephones services (POTS). In fact, the latest figures released by TRAI place the mobile phone subscriber base at 31.4 million. In comparison, fixed line and fixed line wireless in local loop (WiLL) subscribers number 42 million. In fact, the subscriber base of the mobile industry expanded by 17.14 million between April 2003 and January 2004, compared to 4.84 million during the same period in 2002-03.

Telecom experts have pointed out that the substantial expansion in the subscriber base, coupled with falling capital costs associated with the building of cellular networks, has added to the advantage enjoyed by the mobile phone companies. An industry source told Frontline that the average cost of providing a cellular line is about Rs.8,000, compared to about Rs.18,000 per fixed line. However, he pointed out that the cellular companies operated on a much shorter time horizon when they calculated the rate of return that they needed to generate. They work on the assumption that the network will last a mere eight years, compared to the 50-year horizon that is associated with the copper cable technology. What this implies is that the mobile phone companies try to generate their returns on investment at a much quicker rate. It also implies that if they are willing to extend their time horizon, they can reduce tariffs substantially. This, in turn, can expand their subscriber base because it will enable them to attract more and more cost-conscious subscribers. Critics of the private mobile companies argue that these companies are indulging in "profit gouging" instead of promoting the long-term development of the telecom industry in the country.

The Indian telecom network also suffers from disparities that mirror those in society. The government's claim that the teledensity has expanded significantly in the last year is generally met with disdain because it has happened largely owing to a substantial expansion in the mobile phone subscriber base. Given the fact that a significant section of mobile phone subscribers use the mobile phone in addition to the landline, there would be a significant problem of "double counting" the number of Indians who are connected to the Indian telecom network.

The unbundling of telecom services, which resulted in the separation of long-distance and international segments as independent services, has also affected operators like BSNL. Traditionally, these services were regarded as "premium services" because they were made use of by the better-off sections. This made it possible for the government to maintain local call rates within reasonable levels, which enabled better penetration of telecom facilities in the country. The deficit incurred by the state-owned company could thus be met from surpluses gathered through the provision of premium services. However, in the new situation, such means of balancing tariffs are regarded as cross-subsidies, which is a strict no-no in the spirit of liberalisation. Although TRAI tried to correct the situation by imposing high IUC for calls made by cellular users or calls made through long-distance operators, this created other problems. Instead of resolving the problem for the landline service providers the situation worsened because cellular users now found it cheaper to place their long-distance calls to other cell users. This added to the pressure on landline providers, particularly BSNL.

Apart from this there is a significant imbalance in the use of telecom services. It is well known that telecom traffic is skewed in several ways. First, the metros dominate the traffic. Second, there is clearly a rural-urban divide in telecom service usage. Third, even within cities, the usage is clearly biased in favour of "high-calling subscribers" linked to income levels. Even among urban subscribers of telecom services, a substantial portion confine their usage to the "free calls" allowed by the dominant landline service provider BSNL. In fact, fearing a political backlash, the political handlers of the ruling coalition felt it necessary to abandon Information Technology Minister Arun Shourie's move to increase landline tariff by over 50 per cent. It is in recognition of these imbalances that both TRAI and the political establishment have found it necessary to levy an ADC. Accordingly, TRAI has justified the levy of the ADC on all operators to recover costs associated with the provision of "affordable" telecom facilities. These include the continuation of the provision of "free calls" to subscribers, concessionary tariffs for rural users. In fact, in a discussion paper issued in May 2003, TRAI included "any other below cost tariffs" which serve the purpose of making "basic telecom services affordable to the common man." The ADC, akin to a levy on all calls, is meant to recover costs associated with losses arising out of services priced below costs.

TRAI had initially estimated the access deficit at more than Rs.13,000 crores, which was generally regarded as being inflated. In October, TRAI scaled the ADC down to Rs.5,340 crores. The revised ADC rates were generally aimed at levelling the field which TRAI itself had tilted in favour of the cellular operators when it revised IUC rates in January 2003. Before the new rates came into force there was no ADC on calls made on and among cellular networks. The revised ADC rates thus mark an attempt to re-tilt the balance in favour of the landline companies (read BSNL), which have lost as a result of its earlier order. The ADC is collected on all calls regardless of type of operator, except for distances within 50 km. In particular, the new ADC rates on long-distance calls beyond 200 km made on cellular networks (Rs.0.80 a minute) have clearly tilted the balance back in favour of the fixed-line operators. Although the mobile phone companies have complained that the ADC is responsible for the tariff increase that they have announced, a comparison of their revised tariffs with the new ADC rates shows their claims to be false. Hutch, for instance, has hiked STD rates for calls made to other cell phones by one rupee. The tariff increase, justified by the company as being a result of the ADC, actually enables the company to retain 20 paise a minute for calls travelling over 200 km. In fact, the hike is 70 paise per minute higher than the ADC rate for STD calls made within 50 km. The magnitude of the tariff increase thus does not justify the Cellular Operators Association of India's (COAI) claim that the ADC is an "additional burden" on the mobile phone service companies. The fact that BSNL, which has registered the fastest growth in terms of subscriber base in the past year, has refrained from increasing its rates, has added to the perception that the tariff increase announced by the private companies are not warranted.

The cellular companies have alleged that it is unfair to ask them to pay towards an ADC fund when they are in no way connected to the landline business. However, critics allege that this argument begs the question of how the socially desirable goal of widening the reach of telecom facilities is to be addressed. TRAI has also pointed out that even developed countries, including the United States, Australia, Canada and France, implemented ADC schemes in the initial years of deregulation to provide for low-cost services.

Reacting to the increase, TRAI member D.P.S. Seth claimed that mobile phone companies enjoyed "enough margins" within the earlier tariff structure to accommodate the revised ADC, implying that the move by the phone companies was aimed at increasing their profits at the expense of the consumer. He claimed that the ADC was being used by the companies as a "lame excuse" to justify their desire to increase profits. Although TRAI officials have said mobile operators are free to set their tariff, they have said that the regulator could intervene if tariff hikes were seen to be unreasonable.

Although mobile phones have become ubiquitous, telecom experts warn that the neglect of the landline infrastructure could have serious implications for the development of telecommunication facilities in the country. They argue that the provision of landline infrastructure represents a key point in the evolution of the network. The traditional POTS line is the first step in the direction of development of telecom. Once this is achieved, other facilities, including Internet connectivity, are possible on this network. The provision of this wired architecture is thus seen as an essential perquisite for development, which can provide access to people on a mass scale at a reasonable cost. Although the mobile "revolution" has connected more people to the network, its ability to address the objective of universal low-cost access still remains seriously in doubt.

When mobile phone companies first entered the business, they wanted to ride on the larger network that was then primarily run by BSNL. TRAI's actions initially made it possible for mobile phone subscribers to gain access to the telecom network, which was then synonymous with BSNL. The TRAI-mandated IUC of 2003 made it possible for mobile operators to make deep inroads into the fixed-line subscriber base. Since then it has become clear that the landline provider is carrying a substantial burden of low-income consumers. It is evident that TRAI's effort at rebalancing tariffs through the devices of the IUC and the ADC is aimed at rectifying the situation. It is also clear that both the political establishment and TRAI recognise that without these measures it will become difficult to face the backlash when a large section of the population is unplugged from the telecom network.