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Has RJio underestimated the cost overrun related to interconnect usage charge?

Motilal Oswal | 26 Sep, 2016  | Follow Author | Add to my Favourites 
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RJio’s free voice offering has shaken up the traditional voice market. The current point of interface (POI) issue may be short-lived. It is worth discussing two things: 1. Has RJio underestimated the cost overrun related to interconnect usage charge (IUC)? 2. Is IUC likely to see a sharp revision, which could hurt the incumbent operators drastically? Our view: We see IUC reduction as a potential risk over the next 1-2 years for the incumbent large telcos due to its high on net calls termination. If the current heat over IUC discussion derails, RJio’s strategy to provide free voice may not be sustainable over the long term. Has RJio underestimated the cost overrun related to IUC?


Unlimited voice could significantly increase RJio’s MOU and payout: RJio’s unlimited voice offering could result in a steep increase in its minutes of use (MOU). We expect its INR149 price plan (pseudo voice plan) offering unlimited voice usage to garner higher traction among low ARPU (average revenue per user of below INR150) voice subscribers, largely impacting marginal players. Subsequently, the current average MOU of 300-400 could cross 600-800 (implying 20-25 minutes of voice daily), due to high elasticity on low ARPU voice subscribers.


Global MOU may not be a correct reference: In the developed market, MOU are at 200-300 and do not change substantially with change in pricing. In countries where 3g/4g subscription has reached above 50% of overall subscribers, voice offerings are embedded in high ARPU price plans (like RJio price plans), making it difficult to segregate voice and data to gauge the pricing, but perceived value is largely for data. However, India could see a different scenario, since 3g/4g subscription is low, with a large voice-only market pool.


RJio’s IUC charge/subscriber/month could range from INR50 to INR100 (20- 50% of estimated ARPU): Assuming 90% on-net calls, since RJio is a new operator, at INR0.14/min termination charge, at about 400 MOU, the IUC cost/subscriber could work out to be INR50. However, if MOU goes up to 600- 800, the IUC cost/subscriber could reach INR75-100. This works out to be a high 35-45% of our estimated INR225 ARPU, leaving little room for profit. For incumbents, access cost is 8-10% of revenue, about one-fourth RJio’s cost.


Smaller operators may see steeper impact: While RJio’s free voice could also hurt existing operators, due to the absence of ARPU-based subscriber segmentation, the impact on operators could be difficult to gauge. However, since high ARPU subscribers are sticky and quality conscious, the impact could be higher for small operators that hold single-digit market share.



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About Motilal Oswal

Motilal Oswal was founded in 1987 as a small sub-broking unit, with just two people running the show. Today it has a 2000 member team with a networth of Rs7 bn and market capitalization as of March 31, 2008 at Rs19 bn.

 

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