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India Wireless
Termination fee review – This ain’t 2009
Termination charge review – This ain’t 2009
TRAI has commenced a consultation process to review interconnect/termination rates.
The termination fee cut is likely to be lower than in 2009 given (1) rising costs and (2)
low industry RoEs.
We believe the termination cut was much more damaging in the hyper-competitive
phase in 2009. It matters less now as operators are focused more on profitability than
on market share.
An asymmetric termination rate favouring new entrants could be a risk, though.
We remain positive on the sector. Bharti’s out-performance is explained by (1) lower
impact from potential spectrum charges and (2) potential in Africa. Idea, however,
remains more leveraged to a recovery in RPM and potential consolidation.
Consultation paper on review of mobile termination rates
The TRAI released a consultation paper to review interconnect charges (incl. mobile termination
charges) to determine the revenue accruals for service providers and also how this revenue is
distributed among various service providers. While incumbents with high volumes of incoming
calls have been opposing the reduction in mobile termination charges, new entrants have been
pressing for a reduction in termination charges. Arguments for and against the reduction in
termination charges are summarized below.
2011 very different from 2009
The last cut in mobile termination rate was in Apr ’09, from 30p/min to 20p/min. However, it
coincided with the hyper-competitive phase (RCOM’s and Docomo’s launch), which encouraged
new entrants to build business plans centered on aggressive pricing. The scenario is quite
different now, with:
Operators focused on profitability rather than market share or subscriber grab (partly a
result of the subs linked spectrum allocation criteria),
Industry making single-digit RoEs (ex-Bharti) and most of them still FCF negative,
Access to credit becoming more difficult and subject to greater scrutiny by the banking
sector, and
Stretched B/S post-3G and operating losses/capex.
To assess the impact of termination rates on profitability in 2009, we track the trends in gross
margin per minute as a metric. We define gross margin per minute (GMM) as (Revenue – Access
charges)/ Total minutes.
Our analysis of Idea’s financials (only listed pure wireless company) during 4Q FY09 to 2Q FY10
indicate that GMM declined by 5p during the two quarters following the termination fee cut in
Apr ’09 while the overall RPM declined by 9p/min during the same period. We believe that the
bulk of the GMM decline was, however, on account of the hyper-competitive phase led by
acceleration of the multi-SIM phenomenon during the period. One should, however, keep in mind
that a lower termination fee would have encouraged new entrants and allowed them the flexibility
to be more aggressive, esp. on discounted/free mins. According to our estimates, the GMM
decline, which can be attributed to the termination cut induced pricing behaviour, was not more
than 1-2p/min (out of the total GMM decline of 5p).
We believe that operators are now way past their launch phase and have not only realized the
futility of the earlier exercise but are also having to manage stretched balance sheets and cope
with squeeze in funding. Therefore, they are less likely to indulge in market share or subscriber
grab this time around. Asymmetric termination rates could be a risk, though, as discussed later.
Asymmetric termination charges is a risk
Asymmetric charges refer to demand by new entrants that the termination charges applicable to
them should be different from those applicable to existing service providers. Internationally, some
regulators adopt an asymmetrical regime to compensate late entrants for the higher costs
incurred due to the differences in the spectrum allocation band and high fixed costs. In our view,
the resolution of this is likely to be controversial, especially as the incumbents are likely to use the
rural rollout costs as a defense.
Methodology for determining termination charges
While some supported TRAI’s existing methodology (cost-based approach taking relevant opex
only for interconnection charges), others supported a Bill and Keep (BAK) methodology. Some
service providers, who are in favour of the cost-based approach, are of the view that capex must
also be taken into account to estimate termination charges. However, the argument for excluding
capex has been that depreciation is already used to recover capex.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Wireless
Termination fee review – This ain’t 2009
Termination charge review – This ain’t 2009
TRAI has commenced a consultation process to review interconnect/termination rates.
The termination fee cut is likely to be lower than in 2009 given (1) rising costs and (2)
low industry RoEs.
We believe the termination cut was much more damaging in the hyper-competitive
phase in 2009. It matters less now as operators are focused more on profitability than
on market share.
An asymmetric termination rate favouring new entrants could be a risk, though.
We remain positive on the sector. Bharti’s out-performance is explained by (1) lower
impact from potential spectrum charges and (2) potential in Africa. Idea, however,
remains more leveraged to a recovery in RPM and potential consolidation.
Consultation paper on review of mobile termination rates
The TRAI released a consultation paper to review interconnect charges (incl. mobile termination
charges) to determine the revenue accruals for service providers and also how this revenue is
distributed among various service providers. While incumbents with high volumes of incoming
calls have been opposing the reduction in mobile termination charges, new entrants have been
pressing for a reduction in termination charges. Arguments for and against the reduction in
termination charges are summarized below.
2011 very different from 2009
The last cut in mobile termination rate was in Apr ’09, from 30p/min to 20p/min. However, it
coincided with the hyper-competitive phase (RCOM’s and Docomo’s launch), which encouraged
new entrants to build business plans centered on aggressive pricing. The scenario is quite
different now, with:
Operators focused on profitability rather than market share or subscriber grab (partly a
result of the subs linked spectrum allocation criteria),
Industry making single-digit RoEs (ex-Bharti) and most of them still FCF negative,
Access to credit becoming more difficult and subject to greater scrutiny by the banking
sector, and
Stretched B/S post-3G and operating losses/capex.
To assess the impact of termination rates on profitability in 2009, we track the trends in gross
margin per minute as a metric. We define gross margin per minute (GMM) as (Revenue – Access
charges)/ Total minutes.
Our analysis of Idea’s financials (only listed pure wireless company) during 4Q FY09 to 2Q FY10
indicate that GMM declined by 5p during the two quarters following the termination fee cut in
Apr ’09 while the overall RPM declined by 9p/min during the same period. We believe that the
bulk of the GMM decline was, however, on account of the hyper-competitive phase led by
acceleration of the multi-SIM phenomenon during the period. One should, however, keep in mind
that a lower termination fee would have encouraged new entrants and allowed them the flexibility
to be more aggressive, esp. on discounted/free mins. According to our estimates, the GMM
decline, which can be attributed to the termination cut induced pricing behaviour, was not more
than 1-2p/min (out of the total GMM decline of 5p).
We believe that operators are now way past their launch phase and have not only realized the
futility of the earlier exercise but are also having to manage stretched balance sheets and cope
with squeeze in funding. Therefore, they are less likely to indulge in market share or subscriber
grab this time around. Asymmetric termination rates could be a risk, though, as discussed later.
Asymmetric termination charges is a risk
Asymmetric charges refer to demand by new entrants that the termination charges applicable to
them should be different from those applicable to existing service providers. Internationally, some
regulators adopt an asymmetrical regime to compensate late entrants for the higher costs
incurred due to the differences in the spectrum allocation band and high fixed costs. In our view,
the resolution of this is likely to be controversial, especially as the incumbents are likely to use the
rural rollout costs as a defense.
Methodology for determining termination charges
While some supported TRAI’s existing methodology (cost-based approach taking relevant opex
only for interconnection charges), others supported a Bill and Keep (BAK) methodology. Some
service providers, who are in favour of the cost-based approach, are of the view that capex must
also be taken into account to estimate termination charges. However, the argument for excluding
capex has been that depreciation is already used to recover capex.
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