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ICASA’s asymmetric rates “overly aggressive”

Yesterday ICASA announced the final version of the draft call termination rates that it originally presented last year. The new rates call for massive cuts, ultimately ending with a rate of 10c per minute in 2017. Critically, ICASA has also mandated that smaller companies – essentially Cell C and Telkom – should pay lower ‘mobile terminate rates’ (MTRs) when they connect their customers to a call recipient on one of the big two networks that dominate the mobile industry. The same model has been used overseas to boost competition in mobile call rates by lowering prices, and has been broadly welcomed in South Africa. But one leading local analyst has cautioned that the asymmetry which favours the smaller operators may be “overly agressive” at this stage and that the effects won’t be felt for several years.

By yesterday afternoon, Vodacom and MTN had weighed in. As expected, they weren’t exactly supportive of the new rates which would see them paying more than double what Cell C and Telkom Mobile would be paying, when terminating calls on the networks of others. A not-insignificant portion of revenue is generated from interconnect fees, which are charged to Network A when one of its users phone somebody on Network B.

The current rate of 40c per minute applies to all providers, and on the 1st of March it’ll drop to 20c. Vodacom or Cell C will pay MTN 20c when a Vodacom or Cell C customer calls an MTN customer. But if a Vodacom or MTN customer calls somebody on Cell C’s network, Vodacom or MTN has to pay Cell C 44c.

Shameel Joosub, CEO of Vodacom, said, “I wish I could say this is a victory for the consumer, but it is far from it.”

Vodacom says that it is in favour of lower mobile termination rates, but the asymmetric rates, which favour its two smallest competitors, is unjustified. It considers the asymmetric rates a subsidy for the smaller operators. It also has reservations about due process having been followed by ICASA, when it comes to the actual rates that have been decided on.

MTN feels the same. CEO Zundaid Bulbulia says, “We have previously stated our willingness to co-operate with the Authority to work towards reducing the cost of communication.” However, MTN also considers the asymmetric rates to be subsidies, and finds the pricing to be unsubstantiated.

Cell C, naturally, is elated. It welcomed ICASA’s new call termination rates, saying that they will “promote and foster a more balanced and competitive mobile industry to the benefit of consumers”.

Acting CEO Jose Dos Santos said, “This comes as a relief to Cell C as we have over the last 18 months committed ourselves to leading price competition even at the expense of our own margins, while motivating to ICASA for pro-competitive relief.”

In recent months, Cell C has been extremely aggressive with its pricing for mobile calls, being first to introduce a 99c/minute fee for both local and international calls. Those have since dropped, and it’s now possible to make international calls at rates as low as 65c/minute.

“Without this intervention it was likely that the South African market would have continued to have been an effective duopoly to the detriment of the consumer, industry and the South African economy,” says Dos Santos.

Except it’s not quite that simple.

Arthur Goldstuck, MD of World Wide Worx, says, “It’s a mixed blessing. The ultimate effect felt four years down the line will be positive.”

Goldstuck says that consumers will likely not see an immediate benefit, in the form of lower prices for call rates, and that any price reductions would be marginal. When ICASA first started addressing mobile termination rates the fees were R1.25 per minute. Most of the price drops, for per-minute call rates, were seen in the time when they fell from R1.25 to the current 40c.

He goes on to explain that there are two issues that’ll prevent price reductions in the immediate future.

“One is that the large networks aren’t able to pass on savings, because they’re still paying hefty interconnect fees,” he says. Networks have already instituted rates where on-net minutes are vastly cheaper, or even unlimited. But these calls – to their own networks – don’t attract termination fees. If Vodacom and MTN were to lower pricing it would eat into their margins. And they’d lose again, simply because there would be much less revenue from interconnect fees paid by the smaller networks.

“The other issue,” he continues, “[is that] the big challenge for the networks is infrastructure. Cell C will be using the savings to grow its infrastructure, and is not likely to cut costs.”

This is noteworthy since, as Goldstuck points out, Telkom Mobile and Cell are now in a position to cut costs. 80% or more of the calls on their networks is to one of the larger networks, but were they to offer lower costs they’d have less revenue for investing in their network infrastructure.

As Goldstuck puts it, “Part of the problem is that the asymmetry is overly aggressive. It doesn’t benefit the consumers nearly as much as the smaller operators.”

But the real benefit, for consumers, will visible in 2017. That’s the year the rates drop to 10c, where Goldstuck says they should be. And there’s a good chance Cell C, the most vocal proponent of asymmetry, would exceed the 20% market share maximum to qualify for the asymmetric rates. It currently has a respectable 3rd place in the mobile market, with a 17% share.

Four years from now, though, pricing for voice calls might not be as relevant. In last year’s Mobile Consumer Report (compiled by World Wide Worx) the numbers showed that people are choosing to increase the mobile data component of their monthly spend, while spending less on voice calls.

Goldstuck says now that the cost of calls has been addressed, the next big challenge will be data. Here, poorer consumers who are not locked into expensive contracts, are paying the highest rates. A significant reduction from the current price of around R2 per MB, for ad-hoc data, will be far more important for developing our internet economy.

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