'Gentler' call rates in offing

Johannesburg, 19 Aug 2014

ICASA's new call rate costing model favours dominant operators more than the previous fully allocated cost model.

Indications are the costing model selected by the Independent Communications Authority of SA (ICASA) to calculate new call termination rates will result in a less drastic mobile termination rate (MTR) structure and less of a leg up for third operator Cell C.

This comes as the regulator's court-ordered termination rate review, which will ultimately result in a fresh set of regulations that govern how much SA's operators charge each other to terminate calls on their networks, nears completion. The South Gauteng High Court suspended an order of invalidity at the end of March for six months, a period that is up at the end of September.

Yesterday, ICASA informed stakeholders that it would adopt a long-run incremental cost plus (LRIC+) model as the new cost standard in the top-down and bottom-up modelling for fixed and mobile operators.

The regulator's previous termination rate regime (in place for the duration of the six-month review process) included asymmetry that highly favoured smaller players Cell C and Telkom Mobile. Vodacom and MTN both instituted legal challenges against this, inciting one of the biggest battles in SA's mobile history: the MTR divide.

Fixing imbalances

The regulator says the LRIC+ model will "correct the imbalances created in 2010 wherein the 2010 call termination regulations applied different cost standards to different markets". At the time, the MTR was set at fully allocated cost, while the fixed-line termination (FTR) was set on a long-run incremental basis.

Senior BMI-TechKnowledge telecoms consultant Tim Parle says ICASA's decision to use LRIC+ makes sense, given convergence of markets and integration of the networks. "Moreover, there is an element of being forward-looking and not only retrospective."

Africa Analysis analyst Dobek Pater explains this indicates the ration of asymmetry may be smaller. "It will also provide for more balanced termination rates between the fixed-line and mobile operators."

Termination rate terms defined

Termination rates: Termination rates are the fees charged between service providers for terminating phone calls, from fixed or mobile phones, on their networks.
PURE LRIC: Pure LRIC focuses only on voice traffic and costs associated with that traffic, while the LRIC+ model considers costs that are not only directly related to voice traffic, but also used to provide other services across the network. The result is that MTR resulting from a LRIC+ model are normally higher than those resulting from a pure LRIC model.
Top-down: Top-down cost allocation means allocation of total capital expenditure and operating expenditure data to different parameters (eg, passive infrastructure, active infrastructure, network maintenance, engineering, admin, etc). This data is sourced from the operators.
Bottom-up: A bottom-up approach entails gathering such data from the market (as input into the model). For example, the cost of buying or leasing a site, the cost of putting up a tower, the cost of power supply to the site, cost of diesel, etc.
* Cost model definitions courtesy of Dobek Pater, Africa Analysis.

ICASA realised in 2010 that the termination rates that had existed up to that point gave rise to ineffective competition, because of inefficient pricing. At the time, the regulator imposed cost-oriented pricing on Vodacom and MTN for mobile termination and Telkom for fixed termination, based on a three-year sliding scale that came to an end in March last year.

The new termination rates proposed included another gliding scale that would have seen Vodacom and MTN pay their smaller rivals four times the amount they would receive in return (10c compared to the 40c payable by them) from March 2016.

More moderation

Alison Gillwald, executive director at Research ICT Africa, says LRIC+ in many jurisdictions is used as an interim measure to get to pure LRIC. "LRIC+ favours dominant operators in the sense that it allows them to recover a proportion of fixed costs common to services other than mobile voice call termination. For this reason, it is sometimes regarded as more suited to less mature markets where vertically integrated operators have internal subsidies and strategies across their network and services to extend networks and services."

Pater says the chosen costing model will likely result in a gentler MTR glide path - possible with a less drastic initial reduction. "This will allow the operators to better adjust to the declining termination rates and will have less of a negative impact on their revenues."

Vodacom and MTN have reported revenue decline attributed to lower MTRs, with Vodacom CEO Shameel Joosub cautioning the operator's intended capital spend of R9 billion this year could be affected by MTR rates.

Pater says there will be a continued decline in revenue associated with lower termination rates, but the negative impact is likely to be less dramatic. "[The effects on the big two's revenue] depends on what the new MTRs/FTRs will be. In general, we are going to see a scheduled decrease in the value of MTRs."

Parle says LRIC+ is intended to level the playing field. However, he notes, this is a modelling process and until it is executed, the outcomes are not known. "One would hope that the way forward will be determined as a result of the outcomes of the study and not before."

Cell C and Telkom Mobile, says Pater, are still likely to benefit through asymmetry, but to a lesser extent than in the previously published termination rates. "However, in the case of Cell C, this may be of a limited duration. Termination rates published earlier in 2014 stipulated that only (mobile) operators with less than 20 million subscribers qualify for asymmetry. At the rate Cell C is growing its subscriber base, it may reach 20 million in 2015."