Mobile termination rate tussle leaves users on hold

This, after a High Court ruling recently allowed contested mobile termination rates (MTR) to kick in as of 1 April, and remain under review until October – a development analysts say could lead to multiple scenarios for operators and consumers alike playing out.

But, as it stands, what the future holds for mobile consumers and the cost to communicate in South Africa is anyone’s guess.

South Africa’s mobile telecoms landscape has been in a state of rapid transition, in particular over the past two years, with the first few months of 2014 seeing some of the most significant developments in the sector’s history.

Recently, the Independent Communications Authority of South Africa’s (ICASA) attempt to lower the country’s historically high cost to communicate by introducing a new termination rate regime was partially thwarted by legal challenges from SA’s mobile duopoly.

Termination rates are the fees operators pay each other to carry calls on their networks.

ICASA’s new MTR structure, which includes a three-year glide path and steep asymmetry in favour of later mobile entrants, was – as expected – not looked upon fondly by Vodacom and MTN.

The two mobile giants reacted promptly with legal action to the regulator’s January announcement that their MTR rate of 40c would drop to 20c, while Cell C and Telkom Mobile could charge the two more than double that (44c) to terminate calls on their networks.

MTN, and shortly afterwards, Vodacom, submitted urgent applications to the High Court in Johannesburg, requesting an interdict and review of ICASA’s new rates, which they feel were not objectively reached.

While 2010 entrant Telkom Mobile, with a market share as of September of about 2.2%, may have some ground to stand on in the eyes of its larger counterparts, Cell C has been in the market for over a decade and has garnered a subscriber base of about 12 million to date.

Following the two-day court case between ICASA and SA’s two leading operators, which hold a combined 80+% of the market, South Gauteng High Court judge Haseena Mayat downed her gavel on the decision that both parties have a case.

ICASA’s new structure, which would have ended in Vodacom and MTN being charged four times the MTR rate they would have received in return in 2016 (40c to10c), now has to be revised and the mobile leaders have to accept the 2014 asymmetry rate that the authority initially proposed.

SEVERAL SCENARIOS

While there was a lot of hype and confusion following Judge Mayat’s ruling, on 31 March – with some under the impression that call rates would drop as the clock struck midnight – World Wide Worx MD Arthur Goldstuck says interconnect fees have no immediate effect on prices.

He says, however, the MTR regime that will be in place for the next six months does give all four mobile players – Telkom Mobile in particular – the opportunity to cut call costs for the consumer.

<a href=

Richard Hurst, Ovum" src="http://www.iweek.co.za/images/stories/2010/april14/richard_hurst(1).jpg" />“There are a number of scenarios that could play out now. Telkom Mobile stands to benefit most from the new MTR structure, because the company doesn’t have to worry about infrastructure, like Cell C does. So Telkom Mobile can focus their attention on aggressive pricing and I expect to see the most significant price move from them.”

Goldstuck says the new rates essentially make it possible for Telkom Mobile to bring its mobile call rates in line with its fixed-line rates. “Telkom’s up-front cost per call is now 20c and, given that the differential between the interconnect rate and the base cost of calls has typically been around 40c, the company would be able to drop their mobile rates to that of fixed-line rates (between 43c and 63c).”

This, he says, is a game changer for SA’s smallest mobile operator (holding around 2.2% market share), which now has a massive marketing opportunity, as well as a pricing edge.

“Fixed-line calls have always been much cheaper and now Telkom can go to market and say they are doing the same with mobile.”

Goldstuck says, even when the time comes that all mobile operators are “playing by the same pricing rules” in terms of a single MTR, Telkom will have the advantage of being able to market fixed-line and mobile at the same price, as a converged service.

He says it also presents Telkom with an opportunity to realise its much-trumpeted convergence plan. “Up until now [Telkom has] paid convergence lip service, but nothing has really been seen. This finally makes a converged offering of billing and services a real possibility for the company.”

This almost allows Telkom to come into its own, says Goldstuck.

Telkom has welcomed the High Court decision, saying it believes the ruling is in the best interest of the industry “and will go far in reducing the cost to communicate for consumers and stimulating competition in the industry”.

CELL C SCENARIO

Africa Analysis analyst Dobek Pater" rel=tag>Dobek Pater says the fact that Cell C still qualifies for asymmetrical MTRs is a bone of contention. “[Vodacom and MTN] question this. If the last three years of asymmetry hasn’t helped the operator compete on a higher level, what would the new asymmetry cycle do to boost the company?”

<a href=

Arthur Goldstuck, World Wide Worx" src="http://www.iweek.co.za/images/stories/2010/april14/arthur_goldstuck(1).jpg" />Pater says the two mobile leaders argue that only Telkom Mobile, which entered the arena in late 2010, should qualify.

Although Cell C also has the advantage of steep asymmetrical rates for the next six months, Goldstuck says the third operator’s situation is different in that it faces the challenge of investing in infrastructure to improve network quality.

“Cell C’s big challenge is they need to match the infrastructure development of the big guys and the only way to do that is through a fresh investment injection and a massive loan from Nedbank. This is what has enabled the company to match what MTN is spending on infrastructure over the past year (R5 billion to R6 billion), but it is not sustainable.”

However, he says, the MTR asymmetry does give Cell C margin to play with, and it could go one of three ways. “Firstly, Cell C could decide to invest in infrastructure and fast-track growth, while providing a better service to their customers.

“Cell C was successful in attracting a massive base away from MTN in the prepaid market, but they couldn’t match the quality. I have never heard as many complaints [around network quality] as I have against Cell C in the last year. This highlights their problem.”

A second option, says Goldstuck, would be to invest in bringing down the cost of calls – potentially making a massive impact, given the operator’s base of 12 million subscribers.

“[Cell C] could bring costs down even below 79c – to in the region of 60c – if they invest the whole asymmetry margin. That is, going by the differential we have seen is needed between interconnect fees and the cost of calls.”

Goldstuck says the third possible path is one he believes would be wisest for the company to take – a middle between the aforesaid two. “The operator could invest part in infrastructure and part in cutting call costs. This would be a combination of a competitive-edge and a better network.

At the end of the day, he says, the given scenarios fulfil what ICASA envisaged when it decided to lower termination rates and introduce asymmetry for the later entrants.

WEIGHING THE COST

Meanwhile, while Vodacom and MTN have indicated that steep asymmetry would hinder their ability to cut costs, Goldstuck says the duopoly is not entirely the loser in this situation. “The unstated truth about Vodacom and MTN, which they fail to mention in this argument, is that most of their calls are either on-net or to the other – and there is no asymmetry there.

<a href=

Dobek Pater, Africa Analysis" src="http://www.iweek.co.za/images/stories/2010/april14/dobek_pater.jpg" />“They pay 20c in both cases, so about 80% of their calls represent a benefit – regardless of the asymmetry – because 80% of the market is held by the two.”

Given this, he says, there is no reason call costs cannot come down significantly, by 20c.

“I expect Vodacom may make a move to bring prices down. The company is usually susceptible to changes in the market. MTN, on the other hand, is usually quite slow to respond, sometimes taking up to a year to do so.”

Pater notes MTN has indicated it lost half a billion rand in revenue, due to the new MTR structure, including a three-year glide path, ICASA put in place in 2010. Vodacom, he says, claims to have lost R2 billion, because of the 2010 to 2013 MTR adjustment. “This may be a lot of money, but compared to a pool of R30 billion or more, it is not a disaster.”

Acting CEO of Cell C Jose Dos Santos says the operator believes the court ruling is a step in the right direction and a positive for the consumer, as Vodacom and MTN have frustrated the long-term process envisaged by ICASA to increase competition in the market.

“The uncertainty over MTRs over the next three years will continue to make it difficult for smaller operators to confirm their business plans beyond October 2014. It also negatively impacts on the smaller operators’ ability to bring down prices to ensure all South Africans have access to affordable communications.”

Goldstuck says he suspects the six-month review period and uncertainty around what happens beyond October may also be used by networks as an excuse not to drop prices at first.

Ovum analyst Richard Hurst says while the sector is “defiantly in a state of limbo”, the High Court ruling is a step in the right direction in terms of injecting further competition into the market place.

“But the ruling does not mean that the smaller players such as Telkom Mobile and Cell C would be able to pass savings on to their customers, as they would need the decision to be final.”

RED AND YELLOW RESPONSE

Vodacom says, over the past five months, it has been busy structuring an aggressive investment plan for SA that would see capital expenditure rise from roughly R7 billion per year to around R9 billion in the new financial year. The idea behind this, says the company, is that the only sustainable route to a lower cost to communicate is by significantly increasing capacity, thereby enabling higher usage at lower prices.

“If the current growth rate is maintained, our data traffic in SA will increase tenfold in just over four years. This highlights the importance of continued investment and the need for a consistent, predictable regulatory regime.”

The red operator previously indicated the potential full-year impact of the new termination rates regime proposed by ICASA would be about R1 billion. “This should give a rough idea of the impact over the next six months. We are busy reviewing how the financial impact from the rate cuts will translate in terms of our investment plans, and how to minimise the impact on our customers.”

Vodacom spokesperson Richard Boorman says in terms of what steps the company takes next, “We’re looking to work with the regulator to ensure that a smooth costing process takes place within the allotted six month timeframe.

“We do, in particular, have concerns about the level of asymmetry as it is prejudicial to our customers and amounts to a subsidy for Cell C and Telkom Mobile.”

MTN SA CEO Zunaid Bulbulia has rebuffed criticism – much of it from rival operator Cell C – that the operator’s legal challenge of ICASA’s new MTRs is an attempt to keep telecoms prices in SA high.

“The telecoms industry has spent the last four years on a journey towards cost-orientation, regulatory best practice and parity. That journey must continue and MTN fully expects termination rates to go on falling. But this fall must be informed by a transparent and credible cost study that reflects the costs incurred for all players in the market, including smaller players.”

MTN’s concern, says Bulbulia, is that there is no cost basis for the new mobile termination rates. “More concerning, MTN has not been provided with any insights into the methodology or the cost data that was used by the authority to compute its new rates. With such a large impact on its business, MTN believes that it is fit and proper to question the process as a duty towards our shareholders many of whom are empowerment shareholders.”

Bulbulia says the yellow operator, SA’s second largest, has invested over R26 billion - representing 84% of its profits – in network and other infrastructure in the last five financial years. This, he says, at a time “when infrastructure investment was lagging in a wide variety of capital intensive industries”. He says this investment was driven by customer demand and the desire to provide the latest digital broadband technology to all citizens of SA. “MTN has significantly increased its network investment in its 3G and long-term evolution networks so that our customers can reap the benefits of improved coverage and capacity, thereby enabling higher data throughput speeds.”

He questions why the larger networks’ customers should face higher costs to ensure the smaller network can grow to profitability. “Isn’t this the role of risk-capital, rather than regulators?”

Bulbulia says MTN is faced with a “sustained level of regulatory attack that appears to be more about levelling out past successes than securing SA’s economic future”.

As at September, Vodacom and MTN enjoy a 43% and 36% market share, respectively, while Cell C and Telkom Mobile hold 17% and 2.2% of the market, respectively.

REGULATOR ROLE

In terms of what ICASA will come back with in October, the industry can again only surmise.

Pater says he suspects the rates for 2014 will remain in place until the end of the year. “It is now a question of how low MTRs should go over the coming years. I am sure asymmetry will still be part of ICASA’s reviewed rates, but how low the regulator will be willing to take them, we don’t know.”

He says he expects Vodacom and MTN would want to see the glide path take place over a longer period, to give them time to strategise over how they can replace revenue lost to lower MTRs.

He says the four-to-one MTR ratio (smaller players to bigger players) ICASA proposed for 2016 will need to be looked at.

“The other aspect to take into consideration is which operators should actually be given asymmetry.”

Pater says the fact that ICASA retracted the 2015 and 2016 termination rates in the middle of the March court case indicates it realised it could not win the legal fight. “According to an ICASA councillor, the regulator had good data for the 2014 rates, but not enough sound data was for the 2015 and 2016 rates it proposed.”

ICASA must now prove it has gone to greater lengths with collecting data, and that its methodology is known to the operators.

Hurst says the MTR saga is significant in that it highlights the market maturity, in terms of subscribers and services.

“Secondly, it highlights the fact that in order to grow the market we will need to look regulatory mechanisms that will unlock further potential.

I think that this will certainly create more competition in the market.”

ICASA’S STANCE

Recently, ICASA took occasion to publish an open letter in SA’s largest Sunday broadsheet, in which it thanked South Africans for their support and commented on the High Court judgement on its new termination rates.

This is what the authority had to say: “In February 2014, ICASA published regulations that reduced the wholesale termination rate. These regulations had two objectives, to reduce the cost of communications in the public interest and to improve competition in the mobile and fixed-line markets.

“The regulations set a call termination rate of 20c for calls to larger operators and a rate of 44c for calls to smaller operators.

“MTN and Vodacom challenged the regulations in court, because they considered them unlawful and ICASA opposed this application.

“Judge Mayat, who heard the application, held that the regulations – including the 20c rate set in the regulations – are unlawful. However, she exercised her discretion and held that the regulations should come into effect for six months to allow ICASA, during this period, to promulgate new regulations and set new call termination rates.”

Outlining what this means for consumers, ICASA said call charges for consumers will not necessarily come down.

“ICASA hopes that the operators will set lower call charges, because the interconnection rates that they pay each other have in some cases been reduced.

“If call charges are reduced by the operators, the operators are not required to reduce call rates by the full amount of the reduced interconnection rate. ICASA hopes, however, that the operators pass on the benefit of the new call termination rates to consumers to the greatest extent possible.”