Are Internet Calls to Blame for Telcos’ Declining Profits?

August 22, 2016

By Reem Almasri

Today, telecommunications companies in Jordan block voice calls on internet services like Whatsapp and Signal. Jordanian telcos say that according to their financial reports, applications that provide Over the Top (OTT) internet services, such as voice calls or messages, are at the forefront of the causes of revenue decline in recent years.

Yousef Mutawe’, Chief Technology Officer at Zain, asks why service providers, both telecommunications companies and internet service companies, are not positioned on the same level. “It is not feasible for me to pay $240 million for frequency licensing and then have OTTs ride this frequency for free,” Mutawe says. In the debate on imposing additional fees on internet services, even the spokesperson of the Telecommunications Regulatory Commission (TRC), Salem Fakhoury, says that “these services are provided by companies that are not licensed in the local market. These companies have come to affect the sector and take a large share of the sector’s revenue. And they are dependent on an infrastructure that telcos invested in.”

In the first article of this two-part series, we considered the principles of regulating these services, so-called OTTs, in the context of telecommunications companies’ jurisdiction, the protection of fair competition and user rights, and the legality of regulatory mechanisms in our local setting. In this second article, we will examine the proposition that holds OTTs responsible for telecommunications companies’ revenue losses and demands that OTTs pay for the damages telecommunications companies claim they suffered.

In examining Orange and Zain’s financial reports, we notice that revenues have been in continuous decline (and for Orange more so than Zain) between 2010 and 2015. However, the decline in revenue for Zain did not necessarily mean a decrease in profits. Zain’s profits increased from $114 million to $122 million between 2014 and 2015.

Whatsapp was launched in 2010 in a beta version. It was not Whatsapp, nor applications similar to it, which caused Zain’s decline in revenue in 2013, according to the company’s financial report. The report mentions the increase in government taxes from 12% to 24% for mobile services and from 8% to 16% for mobile handsets. The report also states that profits were influenced by the rise in electricity costs, as imposed by the government on telecommunications.

Mutawe’ comments on the figures in these reports published on Zain’s website, which state that profits increased between 2014 and 2015, saying that these reports demonstrate profits as a lump sum within a single category. He stresses that “profits coming from international calls are the ones in constant decline”.

In 2014, as compared to the previous year, Zain’s revenue from voice services declined, whereas revenue from data services increased by 11%, according to the report. As voice dialing and text services moved to the Internet, television and radio broadcasting services moved too, increasing the users’ need to consume larger data packages. For Mutawe’, the greater demand for data does not mean that data profits will compensate for the losses in voice services, as the price per gigabyte in Jordan is “very cheap, especially in comparison with neighboring countries.” Mutawe’ says. “We have two solutions: either we raise the price per gigabyte, or we divide the internet into two tracks, special and regular.”

Ghazi Jbour , TRC’s Executive Director, agrees that the gigabyte price in Jordan is low. However, he attributes this low pricing to the “scorched earth policy” telcos have followed and to the unhealthy competition between companies, which disregard quality standards.  

Looking at Orange’s financial report for 2015 to analyze the cause of profit decline from $58 million to $22 million in one year, we notice that the “Depreciation, Amortization, and Impairment of Assets” item wielded the heaviest toll on the company’s budget. It went up from JD54 million ($76 million) in 2014 to JD 77.4 million ($109 million) in 2015. According to the report, “this increase was in line with the Group’s plan to replace the previous mobile network with an impairment cost of JD 16.6 million in 2015.” In addition to that, amortisation (which refers to the decrease in the value of intangible assets like licenses) went up because of the cost of renewing the 2G/900 MHz spectrum license and the 4G spectrum license.

The report also mentions the rise in electricity prices and taxes deducted by the government.   

Why don’t telecommunications companies attempt to diversify their revenue sources like other companies, also disrupted by the new economics of the Internet, have done? For Mutawe’, this may be achieved when competing applications become equivalent to telecommunications companies in terms of funding infrastructure. But don’t users finance the infrastructure when they pay for their subscription to a service? “But these applications make profits even though the cost to reach the user is zero,” Mutawe’ responds.  

For Jbour, the profit figures of any company are contingent on a number of factors, one of which is the competence with which a company manages its resources, and another is the services it provides to customers in addition to voice and data. However, in his opinion, one of the most important causes of profit decline in the sector is that immigrant workers in Jordan have transitioned from using traditional methods (regular voice calls) to internet applications to communicate with their families back home. Jbour adds that “if OTTs were not available, users will be forced to use traditional phone calls. This would be reflected in revenues, and consequently on the amount of money the government receives, which could be employed in services for the citizen.”

Earlier this year, the TRC revealed figures that show the volume of Jordanians’ annual consumption of voice calls. In its report, the TRC recorded an increase in the number of outgoing and incoming calls, which came at 35.6 billion in 2014 as compared to 34.9 billion in 2013. This increase occurred in spite of Zain and Orange’s reports of the same year which have mentioned a slight decline in the number of customers (refer to the graph below). When we asked Mutawe’ why telcos do not provide detailed financial reports revealing the extent of their spending on their networks in comparison to the revenues from the increased use of data and calls, his answer was that “this is not the appropriate time.”

The telecommunications sector’s blaming of internet applications that use its networks brings us back to a similar debate that took place in court in 2005. Fastlink, now Zain Jordan, activated the Caller ID service on mobile phones in Jordan in 1999. And that spelled the end for the pager company, Mersal.

Mersal filed a lawsuit demanding that the Jordan Telecommunications Company (JTC), now Orange Jordan, compensate for the financial damages Mersal sustained due to JTC allowing Fastlink to provide the same service, which had rendered the mobile phone a substitute for the pager. Fastlink used JTC’s network without a license, whereas Mersal had to pay in exchange for network use and share its profits with JTC. In 2007, the appeals court rejected Mersal’s claim, as it had considered the request for compensation to violate the terms of agreement between Mersal and JTC, through which Mersal obtained the license to use the network.

Orange and Zain, which currently blame their new competitors in telecommunications, are the same companies, Fastlink and JTC, that have respectively offered the Caller ID service and allowed the provision of the service without licensing fifteen years ago. Back then, these companies had adopted the openness of telecommunications networks to technology. Yet OTTs are not treated only as a threat by telcos.. Actually, to attract users, telecommunications companies’ social media accounts are rife with tweets about the latest news and features OTT applications offer.  

Ror Rakan Baybars, a lawyer specializing in telecommunications, the term “OTT” was invented by the world’s telecommunications companies to classify the content that passes their networks to OTT and non-OTT. This classification creates a gateway to fighting OTTs and reaping more profits. As we have explained in the first part of this series, user rights and the principle of Net Neutrality lie at the heart of the global debates about the regulation of these services. In 2012, the European Telecommunications Network Operators (ETNO) presented an offer in which it asked that OTT application companies pay telcos in exchange for the traffic on the latter’s networks and for the connections provided for digital calls. The Body of European Regulators of Electronic Communications (Berec) strongly rejected this offer, describing it as “totally antagonistic to the decentralized efficient routing approach to data transmission of the internet.”

For Berec, encumbering either the user or the applications with an additional cost for the transfer of data is not only incompatible with the most important principles of the network’s non-centralized and open transfer of data, but is “unrealistic, both technically and commercially”. At the same time, the consultation paper proposed by the Telecom Regulatory Authority of India (TRAI) poses the following question: who bears the brunt of the new economies imposed by the Internet and its applications on all material manufacturing? And do we sacrifice the principles of an internet open to new players and adopt anti-competitive and content discriminatory practices in order to rescue the profits of the telecommunications sector?