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Interconnect costs Vodacom R400m

Nicola Mawson
By Nicola Mawson, Contributor.
Johannesburg, 24 Jul 2014
Lower termination rates impacted revenue at Vodacom's local operations, says CEO Shameel Joosub.
Lower termination rates impacted revenue at Vodacom's local operations, says CEO Shameel Joosub.

Vodacom lost a hefty R409 million in revenue because of lower mobile termination rates in the first three months of the year, which translates into a whopping R1.6 billion decline on its top line for the full year.

Its figures are the first proper indication of the effect of lower termination rates since the mammoth cut in April, and the decline is expected to be mirrored in MTN's results when it next issues an update. The lower rates were vigorously opposed by the two larger operators, with Vodacom warning it may cut back on capital spending; MTN cautioning it may have to cut jobs; and both challenging the issue in court.

The lower rates translate into a 44% decline in incoming voice revenue at its local operation, which accounts for the bulk of its income. This spilled over into its top lines, which only gained 2.7% - excluding foreign exchange gains - to R18.3 billion in the three months to June.

Although it grew its local base 11% to 32.5 million, revenue from network operations dropped 2% to R11.4 billion on the back of the lower interconnect rates. Without lower termination rates, which dropped to 20c from April, Vodacom's local service revenue would have gained 2%.

Customer benefit

CEO Shameel Joosub notes it executed its strategy well locally, but revenue was impacted by the "dramatic" decrease in mobile termination rates. Both MTN and Vodacom now charge each other 44c, while Cell C and Telkom Mobile now charge the two larger players more than double that (44c) to terminate calls on their network.

These rates are only in effect until October, after a South Gauteng High Court ruled at the end of March that the Independent Communications Authority of SA's (ICASA's) rate structure was "unlawful and invalid", but suspended the order of invalidity for a period of six months. ICASA has been reviewing the rates.

World Wide Worx MD Arthur Goldstuck says the cuts have been good for the customer, if not for Vodacom, as voice charges have come down to a historical low of 68c a minute. He notes this shows the cost to communicate has come down.

Joosub says Vodacom continued with its "price transformation strategy", dropping the overall effective price per minute by 25.3%. He notes the cost of data declined 30.3%, which was more than offset by a 70.1% increase in traffic.

Under pressure

However, Goldstuck notes the heaviest use in data is among large bundles, where the margin is lower. The continued increase in the use of lower-margin data, which overall gained 23.2% to R3.6 billion, and now accounts for 24.1% of service revenue, is among one of the issues facing the sector, he adds.

Goldstuck says another factor is the high churn rate, with Vodacom seeing churn of 57% among its prepaid customers, and record low average revenue per user, which shows it grew its base, but at massive cost.

Ovum analyst Richard Hurst notes the decline in average revenue per user is directly linked to lower interconnect rates, and shows regulatory pressure is coming to bear on operators, with MTN expected to take a similar hit. He notes the sector will have to become more efficient and innovative to make back the lost income.

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