Several years ago—when telecommunications markets were deregulating—an expert, when asked what it would take to ensure new entry and establish the incipient competition that was emerging, replied that three vital ingredients were necessary-interconnection, interconnection and interconnection. And, no he was not being facetious. Interconnection is widely regarded as the lifeblood of all modern communications systems. In order for communications systems to be effective, they must interconnect with other systems. Interconnection includes both the commercial and technical arrangements under which service providers connect their equipment, networks and services to enable their customers to have access to customers, services and networks of other service providers.
Circa mid-1980s, telecom had ceased to be viewed as a natural monopoly—a situation where the market can be efficiently served by just one firm. Thus, AT&T in the US was divested into seven ‘Baby Bells’, signalling the onset of competition in telecommunications markets worldwide. The US department of justice rejected AT&T’s claim of being a natural monopoly and, in doing so, altered the character of telecoms for all times to come. Even if there was some justification then of maintaining a monopoly aided by the disciplining forces of the threat of entry, today there is not an iota of doubt that telecommunications markets have benefitted immensely and immeasurably from the introduction of competition.
When new entry occurs in telecommunications markets, interconnection assumes critical importance and receives undivided attention from the regulator. In all cases, the entrant confronts an incumbent whose dominant and knee jerk reaction is to prevent that entry or alternatively to make life as difficult for it as possible. As a result, access to the incumbents network or essential facilities must be mandated by regulation. In competition law and policy, essential facilities are those facilities owned or controlled by one of the incumbent players, and whose duplication is too costly and uneconomical for new entrants. Consider for instance, ‘islands’ of telecom networks where no operator interconnects with the other. The duplication of investments on both supply and demand sides would be vast and unnecessary. Consumers would need to buy multiple subscriptions just to keep in touch with their communities of interest. Interconnection obviates that, and optimal interconnection arrangements help increase the network effect or the value of the entire communications system. Such examples abound in all industries that experience network effects. In the banking industry, for example, your ATM card can transact on rival banks ATM machines due to RBI mandated rules making it superfluous for individuals to maintain several bank accounts.
In Bangladesh, when telecommunications liberalisation was taking place, BTTB, the incumbent fixed line provider, refused to interconnect with Grameenphone, the then new mobile service provider. The regulator, Bangladesh Telecom Regulatory Commission (BRTC) was too weak to enforce its mandate on BTTB which, as the incumbent, violated the regulations with impunity and engaged in anti-competitive conduct. What followed in response to the dysfunctional interconnection regime has become a folklore in the telecom literature. Grameenphone grew with such rapidity that it was soon the largest provider in Bangladesh and BTTB was compelled to seek interconnection with the dominant mobile operator to save itself from extinction. A weak regulator, a dysfunctional interconnection regime and a dominant incumbent combined to produce an outcome that was pro-competitive eventually, but one that could not have been predicted with any degree of certainty.
Recall the early days of India’s own telecom reform. Bharat Sanchar Nigam Limited (BSNL) and its predecessor, the department of telecommunications (DoT), and their counterpart in Mumbai and Delhi, Mahanagar Telephone Nigam Limited (MTNL), decided that one way to increase the cost of operations of new entrants was to deny or delay access to interconnection. Private licenses had no option but to deal with the incumbents because private licensees were forbidden to directly interconnect among themselves. Therefore, traffic from one private network to another private network had to be routed through DoT and MTNL, and the corresponding interconnection charges were to be borne totally by the new entrants. It needed inspired action by the regulator, Telecom Regulatory Authority of India (Trai), over a number of years to impose a fair interconnect usage charge (IUC) regime. In the beginning, IUC charges were impossibly high at R1.40 per minute, but were eventually reduced. From a range that varied between 15 paise and 50 paise per minute at the start, a uniform rate of 30 paise was introduced in 2003. In 2009, it was further brought down to 20 paise and, today, it is capped at 14 paise.
The basis of the IUC regime in India has steadily moved from one where all costs, capital and operations were loaded on to the interconnection charge reflecting a regime that favoured incumbents, to one that relies on an incremental cost (IC) approach that largely ignores capital costs. The move towards a charging regime based on IC is seen as an effective means of promoting competition in the face of rapidly changing technology. The general view is that IC methods provide just enough compensation for the incumbent to provide the necessary inputs to the new entrant, including a fair return on common costs. There are cases, however, where interconnection prices can be lower than costs; e.g., when positive network externalities exist, such that lower interconnection prices are offset by higher in-network revenues.
Against the above background the current prickly, although not unexpected standoff between Reliance Jio (the new entrant) and the incumbent private mobile operators can be viewed through two related lenses. The first, whether the prevailing (14 paise per minute) IUC is sufficient for recovery of costs associated with providing interconnection to Jio. Empathy for incumbents would be on account of the enormous envisaged increase in traffic from Jio that would necessitate deployment of additional equipment and infrastructure, specifically to cater to the increased volumes. If this were indeed to be the case, it would become necessary for Trai to examine whether the current price is equitable even in the new scenario. The second lens is that of strategic entry deterrence by incumbents who could be practising time honoured manoeuvres to deny or delay interconnection so as to raise Jio’s costs of doing business. It was exactly what they were subject to when BSNL and MTNL were incumbents. It was the regulator, Trai, that intervened in the interest of promoting competition and a level playing field. And perhaps, it is exactly what the regulator must do now as well. In doing that it needs to determine the incumbents motives, whether these are strategic or genuine and then use its regulatory might and enforcement power to ensure a fair and just interconnection regime.
But that’s easier said than done. First, the current state of the Indian market is sharply different compared to when it was deregulated. Traffic congestion is the dominant narrative now, and a billion plus subscribers the irresistible truth. Telecom is intensely (or if you prefer hyper-competitive) with the major market share distributed between three or four top players. In this scenario, RJio cannot possibly do what Grameenphone did in Bangladesh several years ago, i.e., inundate the market with its own subscriptions to render interconnection superfluous, number portability notwithstanding. Entry has to be accommodated by the regulator either at the current IUC regime or by estimating a new IUC, which is the second problem. Going down this route will be time consuming, litigious and riddled with data challenges. Moreover, it is highly unlikely that the regulator will increase the IUC, given its downward trend since it was first estimated.
The current impasse needs resolution for sure and it will require copious amounts of skill and influence capital of the regulator. These are difficult times for the incumbents given their high leverage, intense competition, stretched balance sheets and impending spectrum auctions. Add to that a potentially disruptive entrant threatening the very data market that was supposed to be their panacea. On the other hand, it is a good time to be a consumer, but I am not sure you can say the same for Trai. Which is why the regulator wanted the big boys to sort the issue bilaterally. It may still be the best way forward.
The author is director & chief executive at ICRIER. Views are personal