Least cost routing gets the boot

The new proposed interconnect rates have killed the business case for least-cost routing (LCR), say local alternative telecoms providers.

At the beginning of April, the Independent Communications Authority of SA (ICSA) dropped a bombshell on the industry, proposing large-scale mobile and fixed-line termination rate cuts. The new cuts will see mobile termination drop to 40c, by 2012, and fixed-line rates are to reach 10c in the same year.

The massive proposed rates are not expected to be too heavily contested by the operators, and analysts have said all of the incumbent players are likely to implement these new rates.

Mobile operators are also starting to complain to the regulator that the LCR model is damaging their network performance. An executive at one of the large mobile operators told an ICASA councillor at the beginning of the month that placing a mass of SIMs in a single area has forced operators to erect base-stations to cope with the traffic caused by the LCR model, which was an additional cost to the company.

Meanwhile, the interconnect rate cuts have caused a stir among alternative operators, with many predicting the demise of the LCR model. While most are pessimistic about the future of LCR, at least one LCR operator is confident it still has a value proposition.

Vox Telecoms, which owns Orion, is one of the country's largest LCR players. Tony van Marken, CEO of Vox Telecom, says: “The LCR market is basically going to disappear over the next couple of years.”

The LCR model relies on discounts provided by the operators to alternative players. These discounts and bulk buys allow for operators to charge less to their customers using a premicell, or SIM farm.

Van Marken explains that savings that can be achieved by routing calls on net have now been reduced by the drop in interconnect rates. “Savings are far less than they were before and, ultimately, they will be eliminated.”

Vox plans to unwind its existing LCR business and move clients onto its own network, Cristal. So far, 28% of all the minutes it sells are from its own network, with the balance being spread across other networks.

Van Marken explains that, in time, moving customers onto Cristal will bolster margins and replace the lost revenue from LCR. “It's short-term pain for long-term gain.”

Altech CEO Craig Venter says his LCR provider, Autopage, will lose R20 million in pre-tax profit in the next financial year, because of the cut in interconnect rates. Autopage is the fourth-largest LCR player, and LCR makes up 11.9% of its income.

“In hindsight, I'm glad Autopage didn't do too good a job and become number one,” he says. The company has fully provided for the drop in profit, and has already cut R53 million in costs by trimming 217 staff, which will aid the drop off.

Autopage, the company's largest division, earned 59% of the company's revenue and 31% of its operating profit in the last financial year. Altech turned over R9.2 billion in the last year, and operating revenue of R933 million.

Chris Gilmour, Absa Investments analyst, says companies are going to have to rethink their business model and find a way of replacing the lost revenue. “You can't have your cake and eat it.”

Huge Telecom CEO James Herbst says the doom and gloom expressed by other LCR providers is nonsense. He believes the company still has a significant value proposition in the LCR market.

He says the LCR market is about providing customers with the lowest cost route. “LCR will always be en vogue. Everyone wants to pay the cheapest rates for their calls,” he adds.

According to Herbst, the LCR model has nothing to do with the interconnect rates, and everything to do with competition in the market. He says it will always be cheaper to route calls from one on-net SIM card to another. “It's ridiculous to think that calling from MTN to Vodacom will be cheaper than if a call is made from MTN to MTN,” he notes.

He points to the history of LCR, which thrived during the early 2000s, when the interconnect rate was at 50c per minute. “We had a business model then, and we have one now,” he notes.

Herbst believes VOIP providers are in bigger trouble than the LCR providers. He says many of the VOIP providers subsidised their outgoing calls with the high interconnect rate on incoming calls.

However, now VOIP providers are being classified as fixed-line services, meaning that on inbound interconnect rates, those companies will only be paid 15c for termination, while they will pay mobile operators the 65c rate expected in June.

But local VOIP provider O-Tel Telecom disagrees, saying that, with LCR out the way, VOIP can now make a decent go of the market.

CEO Mohammad Patel says, with LCR losing ground, the technology that sits in customer offices can be used to route voice traffic over an IP network. “Low interconnect rates now allow the digital telephony sector players, such as Neotel, Vox, O-Tel and ECN, to enter the market opened by the now redundant LCR routers,” he notes.

With most of the LCR players looking to exit the market over the next three years, O-Tel may well get its hands on the routing equipment in customer offices.