IMC Day 2: The tussle over USO Fund between telcos and satellite players continues

Telcos and satellite communication players are eyeing for a share of the Rs 58,764 crore war chest available through the Universal Service Obligation (USO) fund.

In a speech on Wednesday, Mukesh Ambani, chairman of Reliance Industries, urged the government for the first time to use the USO fund to subsidise smart phones for select target groups.

The fund was set up by the government in 2003 to provide a subsidy for inclusive communication growth.

Nearly 300-350 million 2G users have still not shifted to 4G because of the high cost of upgrading, which includes the cost of buying a new mobile phone. Reliance Jio has been bundling phones to customers with a subsidised phone to expand the 4G customer base.

Ranged in the other corner of the ring is the association of satellite communication players, under the Indian Space Association (ISpA) which is pushing the government to do something quite different, namely, to use the USO Fund to subsidise satellite broadband services.

Sunil Mittal’s OneWeb is a member of the association, along with Hughes. Elon Musk’s Starlink, which is not a member, is also pushing for the same policy.
Some leading telcos oppose this request, saying it is against the principles of a level playing field. They point out that the USO Fund corpus was set up through contributions that they made with the aim of ensuring connectivity across rural and remote areas.

The telecom companies pay 8 per cent of their adjusted gross revenue as a licence fee out of which 5 per cent goes to the fund every year. Why, they ask, should contributions made by them from their revenues be transferred to support satellite communication players who make no contribution to the fund.
“Why should we subsidise satellite communication players who will compete with us in the same service when we are paying the bill for the fund. There has to be a level playing field,” said the executive of a telecom company.

Telcos also point out that, considering the fact that satellite companies will offer services to airlines, shipping companies and affluent customers, many of whom have pre-booked the service offers made by Starlink, they should be subsidising rural customers and customers in remote areas through their high margin business.

But ISpA points out that the government’s key target is to digitally connect people in villages and remote areas with services from healthcare to education. This can be done by using the USO fund and connecting rural areas through satellite. This would both reduce costs for the customers and also offer them services hitherto unavailable to them. Starlink has also asked the state governments and Union Territories to use the USO fund, apart from their own, to buy their terminals so that they can offer broadband in schools, police stations and health centres. The terminals, which include user equipment and monthly service charges, could be well over Rs 1 lakh according to estimates.

Jio has been the only key player which has used a bundling subsidy strategy to acquire 2G customers and then persuade them to move to 4G. By offering 4G feature phones, bundled with data, at just over Rs 1,000, the company garnered over 110 million new customers.

But other telcos including Bharti Airtel have avoided such offers as unviable because they entail giving subsidies for a long time which is not sustainable.
Reliance Jio, despite the current chip shortage, recently launched the Jio Phone Next smart phone, in an alliance with Google, at a price of Rs 6499, but with various EMI options to bring down the upfront cost.

The market had expected a price of below Rs 5,000 so its reaction was lukewarm, prompting analysts to point out that there is a limit to what a company, even Jio, can subsidise. As it happens, for this price, there are already alternatives.

Analysts say that with an estimated 300-350 million customers on 2G, the government could partly subsidise phones – both 4G feature phones at around Rs 500 at the entry level and 4G smart phones at around Rs 1500. This would make them attractive for 2G customers to upgrade.

“If the government wants to subsidise all 2G subscribers to move to 4G (assuming there are 100 million feature phone customers and 200 million smartphones), it will be a substantial Rs 35,000 crore,” said the executive of a mobile phone company. Business Standard