Why Reliance Jio Wants Interconnect Charges To Be Zero

Reliance Jio Infocomm Ltd.’s demand to make interconnect usage charges zero will benefit the country’s youngest telecom company, according to most brokerages.

The Telecom Regulatory Authority of India may cut IUC charges from the existing 14 paise per minute to under 10 paise soon, according to a recent report by the Times of India.

Lower IUC would benefit Reliance Jio the most, while it will hurt the top three telecom companies, broking firm IDFC Securities said in a research note. The Mukesh Ambani-controlled telecom company, which offers free voice calls, will save close to Rs 900-1,000 crore annually if IUC comes down to 10 paise a minute, it said.

The note said Bharti Airtel Ltd., Idea Cellular Ltd. and Vodafone India Ltd.’s earnings before interest, tax, depreciation and amortisation will fall by 4-5 percent on IUC cuts.

Likewise, HSBC said a lower or zero IUC model suits Reliance Jio.

The IUC Math

Interconnect usage charges are payable for cross-operator calls. For example, Reliance Jio will have to pay a fee for every call its subscriber makes to a Bharti Airtel Ltd. user, and vice versa.

Which means, older operators with more subscribers and bigger networks tend to receive more calls and thus make money from the charge. A smaller rival like Reliance Jio that offers free calls becomes a net payer.

Reliance Jio, which launched its services in September 2016, has paid close to Rs 2,600 crore as IUC for seven months. The company recently launched feature phones targeting voice-heavy customers. Reliance Jio will not receive any income from its free voice calls, while a variable expense like IUC could cap the company’s margin.

Reliance Jio wants IUC to be zero, while the top three incumbents are pushing for a hike to 35 paise per minute. TRAI may lower the rates given that it has cut them twice in the past.