The Hindu Business Line : Lifetime worries of indefinite validity

WE ARE just past the middle of January, and the telecom regulator has been busy taking the call on one issue or the other. TRAI (Telecom Regulatory Authority of India) has issued the fourth consultation paper this year, in comparison to the ten papers that were out the whole of last year.

The latest paper, dated January 16, and available on www.trai.gov.in, is about `Tariff Plans with Lifetime Validity'. The earlier ones with the 2006 stamp were on `Differential Tariff for On-Network calls', `Next Generation Networks (NGN)', and `Convergence and Competition in Broadcasting and Telecommunications'. Of immediate relevance, though, is the `lifetime' paper.

"In the month of December 2005 several operators announced and implemented tariff schemes with lifetime validity (with free incoming calls)," narrates the 29-page document. According to these schemes, customers could receive incoming calls for lifetime in lieu of an upfront payment of about Rs 1,000.

For instance, Airtel brought in the Rs 999 tag on its scheme, assuring users `free for a lifetime' incoming calls, though recharge will be required every 6 months. MTNL, Idea, Reliance and Hutch joined in with their own versions of lifetime validity offerings. COAI (Cellular Operator Association of India) is, however, afraid that the new schemes will bring down the ARPU (average revenue per user).

It has not gone past TRAI's attention that call charges in these schemes are on the higher side. "In general, local calls are charged at Rs 1.99 per minute and STD calls are charged at Rs 2.99 per minute." Some cellular operators have introduced the lifetime concept in the post-paid plans, implying that the subscriber availing these plans need not pay compulsory fixed charges like monthly rental. "Talk time content in the range of Rs 25 to Rs 100 is also available for the subscribers," notes the Authority while discussing the general features of the schemes.

Lifetime schemes are beneficial for customers with low usage profiles, as those with more incoming than outgoing calls. The regulator is confident that the immediate result of these schemes will be `a sharp rise in acquisition of subscribers' leading to a climb in tele-density, that is, the number of telephones per 100 people. One learns that there were 4.5 million additions of mobile connections in December 2005.

"Considering the affordability angle, particularly for the low-income section of the population and for those in small towns and semi-urban areas, connectivity at such economical level should be considered as a welcome feature," reads an overly optimistic note in the consultation paper. "The proportion of incoming to the total minutes of usage may go up in mobile telephony. Concurrently, there could be a sharp rise in the generation of outgoing calls from the fixed line networks to be terminated in the mobile networks," predicts the Authority.

Worries of a lifetime

However, TRAI is worried about "long-term viability and sustainability of such tariff schemes," and also keen that precautions are in place to protect the interest of consumers who make upfront payment for lifetime offers. Its anxieties are compounded by the fact that such tariff schemes are being implemented for the first time, and so actual data on traffic, cost and revenue are not available.

The regulator wonders if problems of spectrum availability may crop up when the number of mobile users increases, in response to lifetime schemes. Another area of concern is whether lifetime offers may act as "a barrier for mobile number portability (MNP)". Service providers who are not in favour of MNP could take the position that MNP would be irrelevant once every mobile operator has acquired a huge proportion of subscribers in their lifetime tariff plans, hypothesises TRAI.

Are lifetime offers a form of predatory pricing? The consultation paper takes up this question and concedes that predatory pricing is a difficult type of conduct to prove in the telecommunications industry. It cites a definition of the phrase from `Telecommunication Regulation Handbook' — as "the practice of providing services that are low enough to drive competitors out of a market, so as to monopolise the market" — and paints the scenario of the `significant market power' charging low prices over a long enough period of time to drive out competition and then raising prices to recoup its losses. That the phrase can be bandied about freely was seen when Tata Teleservices had offered two-year validity on its prepaid card; COAI called the move predatory, but soon came the all-out war in the form of lifetime plans.

Do lifetime offers amount to `lock-in' of the customers, and if so, does it amount to an anti-competitive conduct? "Subscribers acquisition through agreements that make it difficult or uneconomical for a consumer to move to another operator/service provider or move from one package of tariff to another is one form of lock-in," explains TRAI.

`Switching cost' arises when the consumer has to pay a penalty for breaking an existing contract with a service provider, or for moving from one supplier to another. In lifetime offers, this cost is the upfront payment made by the consumer, "because the scheme does not offer any refund — full or partial — on the exit of the subscriber from the scheme," analyses the Authority.

"Switching costs combined with economies of scale or network effects can have the effect of preventing or reducing the prospects of competitive entry, because it can be harder for competitors to detach existing customers from the firm experiencing economies of scale," notes the paper, citing InfoDev (www.infodev.org).

"Whether the consumers perceive that the penalties (i.e. foregoing the upfront payment) to be incurred to move to any other tariff package on offer (i.e., break the contract) are less than the present value of `competitive prices' they are to pay otherwise over the duration of the `lifetime'?" reads a question of TRAI that may take a lifetime for many to understand. If the consumer perceives more benefits in migrating, despite foregoing the upfront payment made for the lifetime tariff plan, "then the entry cost in this lifetime offer could be considered as not `high' to deter consumers from exiting," suggests the paper.

Whose lifetime?

The regulator reiterates that no prior approval was required for the lifetime offers. However, since many subscribers have opted for such offers trusting that the schemes will continue to have validity for life, the document explores the meaning of lifetime. The word, according to www.thefreedictionary.com, cited by TRAI, means the duration of a person's life; of a thing or its usefulness; and of time during which property, an object, a process or a phenomenon exists or functions. For the telecom issue on hand, should lifetime validity mean "the validity of the current licence of the service provider", asks TRAI. In such a case, "should the operator then be asked to indicate the balance period of the license?" reads a corollary poser. On one side, it may be argued that service providers have the obligation to extend the validity as long as they have the permission to provide telecom service. On the other, subscribers are under the impression that they continue to enjoy connectivity for an indefinite period, i.e. lifetime.

"From the point of view of a consumer, the disclosures by the Service Provider need to be more transparent and the title should truly reflect the actual offer," insists TRAI. It also foresees the need to restrain service providers from changing the features or charges of the plan to the disadvantage of the subscriber even after the mandatory six-month period.

Accountants and taxmen know that lifetime revenue has to be dealt with differently from the usual operating inflow. "Life membership fees collected by a club can be spread over in accordance with Accounting Standard 9," reports www.ey.com, narrating the decision in the Treasure Island Resorts P Ltd case. "It was held that the spread-over of membership fees over five years in accordance with AS 9 was permissible in view of the continuing liability on the part of the assessee to render services in future years." However, "Life membership fees must be treated in the same way as subscription," insists the Ministry of Finance in a service tax communiqué.

"Give a man a fish and you feed him for a day. Teach him how to fish and you feed him for a lifetime," is a Lao Tzu quote. One can adapt that for telecom too: Give a subscriber a rental or recharge scheme, and he feeds you for but a month; instead, fish the subscriber pool with a lifetime offer, and they feed you for a lifetime. Only, your lifetime, that is.

ZeroBase@TheHindu.co.in

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