Termination rate fight snowballs

Johannesburg, 28 Feb 2014

As the MTR saga continues, MTN and Vodacom have been called on to drop their legal cases immediately.

The tussle over the Independent Communications Authority of SA's (ICASA's) new termination rate regime has started to snowball this week, with the Right2Know organisation now joining the fray.

This comes after Vodacom on Wednesday joined rival network MTN in launching legal action against ICASA, on the premise that the new, lower inter-network fees were not fairly and accurately derived.

Mobile termination rates (MTRs) are the fees mobile operators pay each other to carry calls on their networks. The regulator's new regime - an initiative to bolster competition and reduce communication costs - will see Vodacom and MTN pay smaller players Cell C and Telkom Mobile 44c, while the latter two will pay just 20c. The new structure is set to take effect on 1 April. The current termination rate is 40c.

In line with ICASA's new termination regulations, a three-year glide path will see MTRs reach 40c for Cell C and Telkom Mobile, and 10c for the two dominant players in 2016. The aim is to have an across-the-board MTR of 10c by 2017.

Defending rights

Civil group Right2Know yesterday called on SA's two dominant operators to drop their court cases against ICASA "immediately".

Formed in 2010, in a bid to halt the Secrecy Bill, Right2Know says ICASA's progressive pricing structure is an important step towards providing cheaper and better telecommunications to all South Africans. "But the MTN-Vodacom duopoly seems determined to continue its profiteering at the expense of the public's right to communicate."

However, Vodacom has argued its legal intervention - although not the ideal route to take - is reasonable and necessary.

In an opinion piece published in Business Day yesterday, Vodacom CEO Shameel Joosub said news coverage on the MTR issue had been largely reduced to a "handy but inaccurate" narrative of big networks being against cuts - and, therefore, being anti-consumer - while the small operators were pro-cuts.

Joosub says the issue is more complicated than that. He says regulatory best practice is to conduct a detailed cost study, which was not the case in the lead-up to ICASA announcing new MTR regulations.

"We know that this has not happened, because we have not been asked to provide the detailed information necessary to complete this type of study. We believe we are being entirely reasonable in expecting that the regulator respects this process."

The Right2Know organisation's "fact sheet" on termination rates:

* Gaining market share in the telecommunications sector is extremely difficult due to high capital start-up costs. Regulating interconnect fees is one way to encourage competition.
* When Cell C announced plans to enter the market in 1998, MTN and Vodacom manufactured high interconnect fees in order to protect their share of the market from competitors.
* MTN and Vodacom used this pricing structure as a source of income as they became net-recipients of interconnect fees and smaller competitors Cell C and Telkom became net-payers.
* ICASA's pricing structure would see a course correction to the nine years of unfair pricing manufactured by the incumbents MTN and Vodacom.
* Under the new regulations, MTN will not pay any more than it currently does; its costs will remain the same.
* The previous three years of rate costs have shown that when savings are passed on to the public, the use of phones increases and with it the revenue. In fact, previous price cuts have resulted in increased profitability.
* The difference is smaller competitors will now become the net-recipients of interconnect fees, and MTN and Vodacom will become net-payers. While the new rate structure does represent a 'subsidy' for smaller operators to build infrastructure and gain market share, it is not unlike a similar estimated R5 billion interconnection "subsidy" paid by Telkom to MTN and Vodacom as they were building their networks.

Joosub feels the larger operators will be done in by the unprecedented degree of asymmetry ICASA wants to introduce. "The telecommunications business is highly capital-intensive and the lack of investment by the smaller operators is the genesis of their present commercial position. We are being asked to correct this by paying, in effect, a subsidy of 30c a minute."

Historically hamstrung

But Right2Know is of the opinion that ICASA's pricing structure does not favour one particular network over another. "Instead [it] promotes a more diverse telecommunications sector - a reasonable request from a regulator.

"Indeed, MTN and Vodacom benefitted from a similar pricing structure when ICASA implemented a fairer interconnection structure between Telkom, MTN and Vodacom, when they were building their networks.

"It is an important step from the regulator to ensure a fairer pricing scheme that prevents a duopoly, and ultimately protect the interests of South African cellphone users."

The organisation refers to the inception of the cellphone industry in SA, saying when MTN and Vodacom hit the scene in 1994, there were no regulations guiding mobile interconnect fees, "so their duopoly emerged unfettered by competition".

According to a research note by Econex (Nicola Theron and Johann van Eeden), when Cell C was launched in 2001, MTN and Vodacom increased mobile termination rates from 20c in July 1999 to 119c in July 2001 - a hike of almost 500%.

Right2Know ways this move favoured the duopoly, because most of their subscribers' calls were on-network. The organisation believes the move was an attempt to keep Cell C out of the market.

"Whatever claims they might make, it is plain that MTN and Vodacom's legal action is not in the public interest. They are acting to protect their shareholders' advantage."

Joosub, however, says it is Vodacom's customers who will feel the brunt of asymmetrical rates. "We clearly have to take steps to protect their interests."

Chief legal officer at Cell C, Graham Mackinnon, said yesterday that if Vodacom and MTN win their legal cases against ICASA for a suspension of new MTRs and a review of the proposed regime, "it will be very difficult to impossible for us to lower our costs more".