Vodafone begs Indian government not to screw it again

Vodafone boss Vittorio Colao has written to India’s government, pleading with ministers to stand strong under pressure from Reliance Jio to reduce Mobile Termination charges (MTC).

Executives at Reliance Jio have been seeking a reduction in the charges after it essentially accused incumbents who benefit from the charges of holding the industry to ransom. In the letter to Indian ministers, Colao seems worried they might actually be considering a change to the charges set-up, which would provide another boost for Jio.

Currently, Jio is running an unprofitable business, which competitors have argued is not sustainable for a healthy telco space. This does seem to be the argument from Vodafone protecting the MTCs.

“RJio has assumed continued growth of an implausible level of paid traffic on its network,” said Colao in the letter. “However, the present traffic levels are a result of extreme promotional activity and generated by incurring huge losses.

“RJio is also assuming that it can recover its costs many years into the future. However, continued under-pricing of services leads to a rapidly increasing cost per subscriber, recovery of which will require higher ARPUs in future, which is unfeasible/ unrealistic. It is undesirable for a critical core industry like telecom to be regulated based on the ambition of a new operator with no history of financial sustenance.”

MTCs usually balance themselves out throughout the year as, in most markets, there is an even distribution of networks and customers. Charges are exchanged between operators when a call terminates on a competitors network, but with the status quo in recent years not shifting greatly in India, there was little complain about.

With Jio’s entry, offering free phone calls, this status quo has been shifted. The majority of Jio’s customers are urban, making an increased number of phone calls out to the rural areas, most of which will terminate on competitors networks. The charges paid to competitors are essentially compensation for not having a network to support the customer in that location.

Jio will argue it is not receiving the same levels of revenues for these charges, but it also hasn’t invested anywhere near as much in rural networks as others. A reduction in the charges would certainly benefit Jio, but also place the digital footprint under risk, according to Colao:

“Even at the present MTC rates, 15-20% of our sites run at a loss,” said Colao. “Any reduction in MTC risks large scale site shut-down of already unprofitable sites in rural India and which would greatly diminish the population coverage of mobile telephony.”

Most of the time, we are in favour of disruption, but here Jio does seem to asking a lot. Essentially, Jio is asking to use competitors networks, without the prospect of having to build its own, or even pay for this usage. It’s a win-win situation for Jio, and one which would ultimately screw the incumbents, who will essentially be punished for years of investment in Indian infrastructure.

It’s a careful balancing act. The Indian government has to tread carefully to encourage Jio and other competitors to enter the market, but it does need to be fair to the incumbents. Surely ministers and regulators will be able to recognise the reduction in charges would favour Jio too greatly. The same ministers also have to take into consideration the underlying threat from Colao; make it too difficult for us and we’ll shut down the unprofitable sites in the countryside. There is a risk to the nationwide digital footprint.

Without help from the Indian government, it is unlikely there will be any new entrants to the market, though too much help and it leads to a worse position. Telenor has already packed its bags and exited India, while Idea and Vodafone will be combining powers, any more of the big players leaving and India is a worrying position.

To be honest, it is in a slightly precarious one right now. With the Telenor exit and the merger, the Indian telco market has gone from four major players to three. Revenues have also decreased at Bharti Airtel, Vodafone and Idea, largely thanks to the one-upmanship game we are seeing to capture customers with bigger and better deals. Jio is also haemorrhaging cash.

Some might point out with less money being made in the sector, and less options for the consumer to choose from, the Indian telco space is already heading downwards. The consumer might be benefiting from the arguments right now, but the longer and more bitter this bickering gets, the less profitable operations become, the less cash is invested into the network and the less rosy the future looks for Indian consumers.