Cell C-0, consumer-1 in MTR fight

Cell C is no longer the winner in ICASA's new termination rate regime.

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Consumer champion Cell C is in for the biggest blow should the regulator's new inter-network mobile termination (MTR) rates be cemented, while consumers can look forward to simpler, cheaper call costs.

This comes after the Independent Communications Authority of SA (ICASA) unveiled new proposed termination rate regulations late yesterday, with just under a month to go until the contentious issue is done and dusted with the release of a new rate regime.

At the end of March, the South Gauteng High Court ruled the regulator's previously mooted and subsequently contested termination rates were invalid, but could be implemented for a period of six months - up at the end of this month - while ICASA reviewed the rates, which heavily favoured smaller players Cell C and Telkom Mobile.

As of 1 April, MTRs for Vodacom and MTN dropped to 20c - half the previous rate - while Cell C and Telkom Mobile have been able to charge the two larger players more than double that (44c) to terminate calls on their network. Now, rates will drop 4c a year from next March, until reaching an all-time low of 8c in 2017. While the new rates only differ from the previously proposed ones by a maximum of 2c, the new asymmetry is considerably lower - with Cell C and Telkom Mobile losing up to 24c of the asymmetry advantage.

Also, as of March next year, there will be no disparity in fixed and mobile termination rates, which speaks to the industry trend towards convergence. Lastly, the qualifying criteria for benefitting from asymmetry will no longer be market share-based; instead operators with less than 20% share of total minutes terminated to a mobile location will now qualify.

Industry observers say the new proposed rates take the wind out of Cell C's sails. The operator has been SA's biggest advocate of asymmetry in mobile rates. Consumers, however, are likely to end up winning in the long run as new rates allow for simpler, cheaper call rates.

Dominic Cull, owner of Ellipsis Regulatory Solutions, says Cell C may not find its business model sustainable because of the reduction in the asymmetry benefit. He notes the company is in debt and its strategy has been to compete on pricing, and it is likely to have developed its business model based on the March figures. He says it would be to Cell C's advantage to launch an application to delay implementation.

Telkom Mobile, says Cull, will not be as hard hit because it has a mitigation strategy through its plan to ink reciprocal roaming agreements with MTN, and have MTN take over financial and operational responsibility for the roll-out and operation of its radio access network. Telkom Mobile has been battling financially, but has a plan to resolve the situation, he adds.

BMI-TechKnowledge director Brian Neilson notes although Cell C still benefits with asymmetry, the degree is substantially lower, which will have put a dent in its business plan. Under the previous rates, Cell C was "the cat that got the cream," he adds.

Neilson says the draft may elicit a comeback from Cell C, although he does not see a dramatic change because ICASA has done its homework properly this time by studying the sector, and if its study is defensible, the likelihood of a challenge is lower.

Cell C lacks the financial muscle of Telkom, which can use its mobile arm to benefit its convergence strategy; an option Cell C lacks, says Neilson. He notes there have been questions as to how long Cell C's shareholders can keep bailing Cell C out and lending it money.

Cell C currently has 18 million customers, and - around a year ago - received a cash boost of R4.7 billion, most of which was set to go into growing capacity and customers. The bulk of the injection came from majority shareholder, Oger Telecom, with the rest being in the form of a loan. The operator also recently rolled over the maturity date of EUR160 million in senior debt, saying this would aid it in investing heavily in its network.

Independent telecoms researcher Samantha Perry says the changes will hamper Cell C from a revenue point of view as it has been competing by cutting prices. "I imagine it will hit Cell C quite badly." The mobile duopoly will also see their net termination income affected, but will also be paying out less in revenue, she adds.

Perry says termination should not be seen as a profit enhancer, but rather MTR income should go into either cutting costs or improving service. "I'm hoping customers see either a quality benefit or a cost benefit. Both would be fantastic, but we need to be realistic."

Cull says the new rates will put continued pressure on operators to bring end-user rates down, while many of the promotions introduced over the last six months are likely to be made permanent. "All in all, this is good news for consumer. There is always scope for simplifying tariffs and [the new rates] certainly help."

World Wide Worx MD Arthur Goldstuck says the new MTR levels spell good news in the long term, as they confirm a long-held belief that the true cost of terminating calls on another network is negligible.

"From 2017, with an interconnect fee of only 8c, it is feasible for the cost of calls between networks to drop below 50c. We're likely to see such pricing from the smaller networks even before then. Ultimately, there will be little cost difference between using landlines and mobile connections. Margins will obviously be slashed for the networks, but call volumes are likely to rise significantly."

Vodacom, MTN and Telkom Mobile say they will review ICASA's new proposed regulations before commenting. Cell C had not responded to requests for comment by the time of publication.

NOW: ICASA's revised proposed MTRs (September 2014)

THEN: ICASA's initial proposed MTRs (January 2014)