There is no such thing as a free lunch, unless of course someone else is picking up the tab. While Reliance Jio Infocomm Ltd’s services were entirely free for its customers until March 2017, they came at a great cost to the company.

Leave alone recovering the massive investment in the telecom project, operating expenses themselves are enormous and could be way above revenues that Reliance Jio will make based on current tariff plans.

The Telecom Regulatory Authority of India’s (Trai’s) quarterly financial report provides a glimpse of how much Reliance Jio might have spent on just interconnection charges in the March quarter. Interconnection charges of 14 paise per minute are payable by a telecom operators whose subscriber makes a call to the telco whose subscriber receives the call.

Based on Trai’s data for the March quarter, analysts at Kotak Institutional Equities estimate that Reliance Jio may have paid other services providers as much as Rs1,500 crore for calls terminating in their networks (caveats/assumptions below). For perspective, Reliance Communications Ltd, with a somewhat similar subscriber base, reported gross revenues of Rs1,653.7 crore for the March quarter to Trai, which is nearly as much as what Reliance Jio spent on only one of its many expense items.

Reliance Jio is estimated to have had an average active subscriber base of around 70 million in the quarter, which translates to an outgo of more than Rs70 per subscriber per month on just interconnection usage charges.

Note that even after the company announced that it will start charging its subscribers, its revenue per subscriber per month is only around Rs100 for its flagship plan.

So while Reliance Jio may have started charging for its services, its tariffs still appear to be way below levels where they make economic sense. Analysts at CLSA Research said in a recent note to clients that the company’s current tariffs are at a 66% discount to full tariffs.

Of course, the estimated interconnection cost is based on a number of assumptions— that Reliance Jio didn’t account for any of the revenues it received for its Prime memberships, and that the gross revenues reported by the company pertain only to revenues received for incoming calls originating from other services providers. Likewise, the other assumption is that adjusted gross revenues of Rs1,178.6 crore are arrived at after deducting only interconnection charges paid, and not any other costs (see chart).

While these seem fair assumptions—for instance, if revenues from Prime memberships had been included (Rs99 from 72 million Prime subscribers), reported revenues would have been much higher than the reported number of Rs321.5 crore—it must be noted that numbers reported to Trai by telcos do vary at times with financial results reported to investors. As such, the true picture will emerge only when Reliance Jio starts recognizing revenues and profits (it has been capitalizing expenses until the March quarter), and reports its financial results.

It’s interesting to note here that while Reliance Jio has capped data usage in its flagship plan to 1GB per day, there are no restrictions on voice calls. If, indeed, the company is bearing a cost of as much as Rs70 per subscriber on interconnect costs, it probably should consider a fair usage policy that contains costs, besides an increase in tariffs to cover other costs. But considering that it is still in the process of growing its user base, either of these moves may well backfire.

From the looks of it, some lunches will be still free for Reliance Jio’s customers; investors in parent company, Reliance Industries Ltd, need to be mindful that the tab is getting bigger by the day.

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