The introduction of lower call termination rates from next year could push down margins at least-cost routing (LCR) companies as they migrate to different models to remain viable.
Last month, communications minister Siphiwe Nyanda said the interconnect rate would drop to 89c, in February, and then to 85c a year later, and 80c in 2012.
Frost & Sullivan ICT industry analyst Protea Hirschel says the lower interconnect rate could cut down on business for the LCR sector, as it may no longer make sense for companies and consumers to redirect their fixed-to-mobile traffic.
However, this depends on whether lower termination rates result in lower call rates, she notes.
Hirschel says this could result in companies cutting costs to remain profitable, which may affect margins. She expects companies to innovate to mitigate the effects of a decrease in interconnect rates.
Vox Telecom has already started migrating its customers from a traditional LCR model.
“Vox has built a carrier-class network over the last 12 years, which we can exploit to offer a full range of voice and data services. Fortunately, that enables us to migrate voice traffic from a traditional least-cost routing technology, to a next-generation platform that provides our customers with a high-quality solution at an affordable price,” Van Marken said.
He added that Vox Orion is slowly moving its customers onto Cristal Vox, and this will result in longer-term margin gain, although the unit will be under pressure for two years. Orion accounts for the bulk of Vox's revenue, at more than half its turnover.
Evolution
Altech Autopage Cellular marketing director Justin Hume says margins at the company's LCR business could be impacted by the changes in call rates.
While the company does not disclose the size of its LCR business, Hume says it “has been a key focus of our business over the past two years and constitutes one of the fastest growth segments for our business”.
The interconnect fee on its own does not have a direct impact, but, if there is a spill-over change in retail tariffs, this could affect the business, he says.
“The LCR business model, in any event, needs to change to a cost-based model, using the interconnect as the base cost,” he says. This means the LCR business will adapt and evolve into a model where voice is carried over IP/data to a central soft switch that will connect directly to the networks through interconnect, Hume explains.
He notes that the company is moving most of its equipment to IP-enabled platforms so that it can channel traffic over IP/data when necessary.
Going up?
TeleMasters, which is only focused on LCR, says any impact will depend on whether the drop in interconnect rates will impact the prices of the packages offered by the networks to LCR groups.
CEO Mario Pretorius says the packages have been ring-fenced for some years, but “prices may even rise” if Telkom does not lower its offerings.
Pretorius says some companies in the LCR space may offer lower prices, but with the rider that the user pays the cost of connection and taking on incoming call interconnect on a voice over IP line, for example.
“Most users expect the lower price to be of the same quality, but experience of relaying VOIP on ADSL has shown great inconsistency and customer rejection,” he says. As a result, Pretorius explains, the market may fragment even more into companies offering lower price versus those offering quality.
TeleMasters' solution to interconnect is to differentiate between customers who want higher savings with a lower quality of service, and those who require perfect uptime and call quality. Pretorius says the company offers different prices, depending on customers' requirements.
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