Hands up

It`s a debate that has been raging in SA for years, but the mobile interconnection fee question has come to the fore again, with government, opposition parties and organisations again lobbying Icasa to do something about it.

Reports indicate that industry regulator, the Independent Communications Authority of SA (Icasa), is now reconsidering whether it should step in to control the cost of mobile interconnection fees. This follows assurances by the new minister of communications, Siphiwe Nyanda, that the government will force a cut in telecoms costs if necessary, and recent lobbying by Independent Democrats leader Patricia de Lille for a cut in these costs. SA`s mobile telecoms service providers currently add R1.25 per minute for calls across networks.

It`s hoped that up to R1 a minute could be cut from these charges. Icasa has said it cannot arbitrarily order operators to cut these charges without extensive market research, but Advocate Gilbert Marcus interprets the law differently, saying in a recent report, commissioned by ECN Telecommunications, that the Electronic Communications Acts does, in fact, allow Icasa to immediately address interconnection fees. In addition, counsel advised ECN that the minister can intervene immediately to lower interconnection rates.

Adding momentum to the argument that governments can force operators to control their pricing is the recent move by Namibian regulator order the interconnect fee to be cut to 60c with immediate effect, and eventually to cut it to 30c. The SA parliament is also becoming increasingly critical of Icasa, questioning why it is taking so long to address the high costs of telecoms in this country. A recent Parliamentary Portfolio Committee on Communications meeting saw Icasa slammed as a "lazy horse" and a "dead duck" for not taking action.

De Lille says SA`s high cellphone costs are detrimental for users and the economy alike. She says the issue has dragged on for much too long, with nothing being done by regulatory bodies and authorities to "alleviate what  appears to be a major ripoff".

De Lille notes: "South Africa has some of the highest cellphone costs in the world. In fact, late last year, then deputy minister of communications Roy Padayachie disclosed that the Department of Communications had commissioned a study to benchmark South African communication costs against our "peer countries".

The study compared SA to Brazil, Chile, Korea, India and Malaysia, and found that our country has exceptionally high telecommunications prices relative to its peer group countries" and that SA has the "least competitive market".

Tim Walters, GM: product and marketing at Nashua Mobile, says that costs may be high in SA, but the country has managed to achieve a high cellphone penetration nonetheless, indicating that the prices are not out of reach of most people.

He says: "There is probably scope to bring tariffs down, but this should not be done at the expense of the industry`s long-term sustainability. The network operators still enjoy relatively high margins, although their average revenue per user (ARPU) is under pressure and most face the need to step up network capital investment over the next couple of years to alleviate congestion on their networks. The logic that created the present interconnect regime and pricing was based on the thinking that South Africa could support, at most, 500 000 cellular subscribers. But this assumption proved to be incorrect. Given the relatively low costs of building and maintaining cellular networks (compared to the fixed-line environment), coupled with the economies of scale the operators have achieved, they should be able to maintain profitability even if the interconnect fees are reduced to be more in line with those that Telkom charges. Telkom`s 30 cents/minute fee interconnect is more in line with the 20 5 cents/minute that has been benchmarked around the world."

CAN IT CHANGE?

But is this renewed pressure for price cuts likely to make a difference?

The MD of local research house World Wide Worx, Arthur Goldstuck, says: "Pressure in itself has had no impact on the interconnect fee. However, sustained pressure by a wide range of parties is likely to have a significant impact. We`ve been running a campaign to bring down the interconnect fee since 2005, and we would like to think that had some bearing on Icasa deciding to have hearings on the topic last year. However, in the absence of pressure from other entities, Icasa was then able to argue that they had indeed addressed the issue and were still deliberating on it. This meant that the issue could go on the backburner indefinitely. "

This year, Goldstuck notes that there have been several attacks against the interconnect fee, including De Lille`s raising the issue in Parliament, the Competition Commission agreeing to investigate, ECN commissioning a report on the legal implications, the Namibian interconnect cut and a growing tendency for consumers to have multiple SIM cards to take advantage of special offers on call charges.

MTN recently conceded that cellphone users were increasingly using more than one SIM card to take advantage of weekend special offers, or to call people using the same network and so avoid interconnect fees.

According to the 2009 Mobility study, backed by FNB and Research In Motion,  the SA cellular market reached 50 million connections at the end of 2008 - but only 68% of these represented individual users. Preliminary findings indicate that the average number of SIM connections per cellphone user in SA is growing steadily. It grew from an average of one SIM card per phone user in 1997 to 1.2 per user in 2003 and to 1.47 per user at the end of 2008.

Goldstuck, who is leading the Mobility 2009 project, said says the interconnect fee is driving this growth in SIMs per user.

"The single most simple method of getting around the high cost of calls is to have a SIM card for each of the two major networks," he points out.  "By using an MTN SIM card to call people on MTN and a Vodacom SIM for Vodacom customers, it is feasible to cut that R1.25 off the cost of a phone call. However, one must be aware of the tariffs that apply to the specific package one is using. Cell C users make tremendous savings when they get all members of a family to go onto Cell C, and then take advantage of the likes of the Woza friends and family packages, and Cell C`s tariff-swapping options for prepaid users."

The interconnect fee adds a significant chunk to business telecoms costs too.

Walters says that since mobile phones have become so dominant in SA`s telecoms landscape, a reduction in cellular call tariffs would help to bring down the costs of doing business significantly. "Most outbound calls from a business are made to cellular numbers these days, so the savings in a call centre or large corporate environment could be massive."

He says: "Addressing the interconnect rates that the mobile operators charge could also make certain newer services and technologies even more attractive and affordable - for example, VOIP. A significant chunk of the fee consumers are charged to make a VOIP call to a cellular number comes from the interconnect fee."

He adds: "Mobile customers would no doubt welcome further reductions in their call costs - particularly poorer prepaid subscribers who spend a significant amount of their monthly budgets on mobile phone calls."

CHEAPER CALLS WHEN EXACTLY?

While the push for cheaper call costs grows, what are the chances that mobile operators will meet these demands - and can they afford to do so?

Goldstuck says: "The evidence is overwhelming that there was little justification for pushing the interconnect fee up in the first place. In our 2006 book,  How to Buy a Cellphone in South Africa, Steven Ambrose and myself argued that the interconnect fee should be below 30c. We urged the public to write letters of protest to both Icasa and the Department of Communications, but in the absence of broader awareness efforts, it has been very difficult for the public to understand the issues behind the interconnect, even if they understand what it does to their call costs."

ECN Telecommunications, which is actively challenging the interconnect fees, says they contribute to making SA`s telecoms costs among the highest in the world. Besides costing cellphone users a great deal of money, these interconnect fees prevent new entrants (like ECN) from offering their customers better deals, the company says.

John Holdsworth, chief executive of ECN Telecommunications, says the current interconnection fees are a "crude, anti-competitive weapon to keep new entrants out of the market". He points out that interconnect fees were designed to help the mobile operators build their networks when they launched, and are not necessary now. ECN estimates that a fee of 10c to 25c would be more than adequate to cover their interconnect costs now.

"Everyone, including the incumbents, knows these fees must come down. Their battle is lost," Holdsworth says. "Overall, the impact of this would be negligible on the incumbents. When costs come down, price elasticity will kick in and people will talk more, so generating more revenue." But for cellphone users and new players, it will offer many benefits and significant savings.

Icasa, which is reported to have held meetings on the matter recently, says the issue "is high on its list of priorities". However, it is not clear how - or when - it will address the issue.

While Holdsworth thinks Icasa may spend up to the next ten months considering the issue, he expects a political solution a lot sooner. "I think government may give Icasa a directive to cut the interconnect fee to 60c by the end of this year, with a goal of cutting it to 25c over the next two years," he says.

Cuts like this would allow new players to offer more competitive packages to their customers. Overall, a dramatic drop in interconnect fees could result in telecoms costs going down by up to 50% over the next two years. With other, as yet unnamed, alliance partners soon to join ECN in fighting this cause, Holdsworth is "very optimistic" that the interconnect fees battle is almost over. "It`s very exciting," Holdsworth says.

Of course, it`s no surprise that the incumbents have maintained a stony silence, but they are unlikely to reduce interconnect rates unless there is significant regulatory or political pressure on them to do so.