The Interconnect Wars

The launch was belated because Reliance paid over $3 billion for Jio’s core – the 4G spectrum over which it runs – in 2010. Since then newspapers, telecom experts and customers have been prophesying its imminent disruption of Indian telecom.

But the launch was also unexpected because the date Ambani set for Jio’s commercial launch was December 31, a full four months away. In the interim, Jio would offer its services free of cost till then, as a free trial.

Now Reliance is not a company that telescopes its big bang launches in advance. It likes to keep its cards close to its chest till the last minute. For instance, in 2010 no one expected a little known company, Infotel Broadband, to act as a Trojan Horse on behalf of Reliance to become the sole winner of 4G spectrum across all of India for over $1 billion.

It’s possible Ambani’s hand was forced by the powerful incumbent group he was going up against – Airtel, Vodafone and Idea – the three largest telcos in India who collectively account for nearly three quarter of Indian mobile subscribers. Their weapon of choice? Points of Interconnect, or POIs.

POW to POI

At its simplest, a point of interconnect is a place where two different networks are physically connected to each other. For instance, a cable representing traffic to or from Airtel’s network with another for, say, Jio. Without these physical connections, it’s impossible for calls made by one operator’s customer to end up on another operator’s.

POIs are neither very fancy nor expensive, at least at an individual level. Sitting deep within data centers spread over the country (including multiple cities within the same state), they’re boring black boxes with numerous ports behind them, each of which takes in an “E1” cable connection.

What’s an E1? It’s a widely accepted telecom standard that translates to 2 Mbps of capacity, which in turn means 32 simultaneous voice “channels” of 64 Kbps each. At the simplest level, it means one E1 connection is capable of carrying 32 simultaneous voice calls. Because no one ever makes continuous calls through the day, each E1 can handle anywhere from 5,000 to 10,000 subscribers on average.

This is where POIs get interesting.

Telecom regulators around the world, including TRAI in India, pay special attention to POIs because of their criticality to telecom networks and competition.

“According to ITU’ surveys, Interconnection-related issues are ranked by many countries as the single most important problem in the development of a competitive marketplace for telecommunications services” [Source]

Ask Bhavin Turakhia, co-founder of Directi, a group of Internet and tech businesses that claim revenues of over $250 million a year, and a valuation of $1.4 billion. In 2014, Turakhia introduced Ringo, a mobile app that allowed users to make international calls at prices that were significantly cheaper than leading VOIP calling providers.

In January 2015, Ringo was launched in India. Fast forward nearly two years and Ringo is still a non-starter in India and has had to suspend operations. Turakhia says he has spent “several million dollars” setting it up in India, including the money spent acquiring a telecom license to legally offer his services in India.

“Since 2010, we are the only company to acquire a new telecom license in India. We did it even though the capital requirements are high. But the incumbents are clearly flouting laws to delay competition,” he says.

And how are they doing that? You guessed it – POIs

According to a letter dated October 10, 2016, to TRAI, India’s telecom regulator, VMobi, Ringo’s parent company says leading incumbent telcos were asking it to put up a “bank guarantee” of Rs 11 lakh for every E1 POI it wanted. The graph below compares the cost of an E1 port that newcomers are meant to pay incumbents for each of the first two years versus the amount demanded from Ringo as a bank guarantee.

No, we didn’t forget to plot the cost of an E1. It is Rs 4000, or 0.364% of the bank guarantee amount. So small that a normal graph won’t suffice, but only a logarithmic one.

There’s neither a precedent, regulation or financial rationale behind incumbents asking Ringo to pony up 275 times the yearly cost of an E1 (not counting the Rs 10,000 one-time set up fee that must be paid separately) as a bank guarantee. Except, of course, to stymie it.

 

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