Mobile operators stand to lose billions in revenue, should the agreed interconnect rate cut, of 36c per minute, be passed onto consumers - making such a move almost certainly financially unfeasible for the cellular providers.
The proposed cut in retail mobile costs could wipe off as much as 20% revenue from the balance sheets of SA's two main operators, translating into a loss of R9.5 billion for Vodacom and a R6.5 billion stumping for MTN, according to both companies' annual results for 2009.
SA expects to see the cost of mobile communication to come down next month, when local operators hack the costs they charge each other for termination. Pressure on the operators to pass on 100% of the rate cut to consumers has been mounting recently, with Independent Communications Authority of SA chairman Paris Mashile being the latest to join in the call.
“I will be very disappointed if the cellular operators do not pass on the interconnection rate cut to consumers,” he said on Tuesday, addressing Parliament's Portfolio Committee on Communications.
Rising mercury
According to Irnest Kaplan, MD of Kaplan Equity Analysts, the large losses that operators face will mean there is no way they will pass on a dramatic cut to retail customers. “There is no way they will let go of 20% of their revenue,” he states.
However, he says the public exposure of the interconnect debate might force a small retail rate cut. “There has been media pressure. The public thinks that the two concepts [interconnect and retail rates] are related. One of the operators will have to make a small move.”
Kaplan says he expects to see Cell C to take first advantage, primarily to make a play for the market share it has long fought for. “The other operators will have to respond, but it will be a gradual process and not very large cuts.”
Read the fine print
Telcos are expected to be looking for ways to claw back lost revenue from even the smallest retail rate cuts. Graeme Victor, CEO of local telecoms business Du Pont, says lost revenue may well be recouped from consumers through hidden costs.
According to Victor, if retail rates do come down, consumers should scrutinise contracts extensively.
Du Pont expects that, rather than reducing the cost of their existing bundles, and so reducing their turnover, when lower interconnect fees take effect, the networks will simply bundle more “free minutes” into packages.
“For example, instead of a hypothetical 'corporate500' bundle, providing 500 free minutes, a new 'corporate500' bundle could offer 600 free minutes,” explains Victor.
However, most people will not use the additional minutes and will, therefore, be paying for unused minutes.
Kaplan says the telcos may also pull back on offering “free goodies” with contracts, and bundling will become more popular. “The bundled solutions will make it hard for us market watchers to know exactly what is going on. It will become more complicated,” explains Kaplan.
Operators are expected to drop interconnect rates on 1 March, and government and the regulator hope this will keep money in consumer pockets.
As yet, the operators have given no indication as to what consumers could expect from the interconnect rate cut.
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