Mobile operator Vodacom's bottom line will be hardest hit by new mobile termination rates, while impact on its rival MTN's margins will be limited.
This is according to credit ratings firm Moody's, commenting on the Independent Communications Authority of SA's (ICASA's) recent announcement that it would halve mobile termination rates (MTRs) - the fees operators pay each other to carry calls on each other's networks, also called interconnect fees.
The cuts are effective as of 1 March, with further cuts planned in the next three years. ICASA has also introduced revised asymmetric termination rates, which will allow mobile operators with less than 20% market share (based on revenue) to charge higher fees to other operators who terminate calls on their network.
Asymmetry effect
As of next month, interconnect fees will drop from the current 40c to 20c (which the smaller players will pay Vodacom and MTN to carry calls on their networks) - while Cell C and Telkom Mobile will be able to charge their larger counterparts 44c per call terminated on their networks.
The termination rates are set on a gliding scale, which will come to an end in 2016 with an MTR of 10c for Vodacom and MTN, and 40c for Cell C and Telkom Mobile. This means the two smaller players can charge the dominating networks four times the amount the two have to pay.
Moody's says these changes, which were steeper than anticipated from ICASA's October draft of new MTRs, are credit negative for SA's mobile duopoly, Vodacom and MTN, because the two are net receivers of interconnect.
Limited impact
However, the firm says the impact is far worse for one than the other. "The overall impact on MTN's group earnings before interest, taxes, depreciation, and amortisation (EBITDA) will be small, because its South African operations account for just under a quarter of its total group EBITDA.
"We expect the impact on margins to be limited because, while revenues will fall, the costs will also decline owing to the lower termination rates it pays to Vodacom."
Moody's notes MTN's cash flow from its South African operations will increase the operator's reliance on cash distributions from its other operations in the rest of Africa, and in particular Nigeria, which contributes about half the group's EBITDA.
Hardest hit
Moody's says Vodacom is expected to be hardest hit by ICASA's new mobile rates. "[Vodacom] has the largest market share of the South African mobile telecoms market by revenue, and the bulk of its cash flow comes from SA.
As at September, Vodacom and MTN enjoy a 43% and 36% market share, respectively, while Cell C and Telkom Mobile hold 17% and 2.2% of the market, respectively.
"We also expect the charge changes will curb both companies' future capital expenditure plans in SA, which could erode their competitive advantage in terms of service quality and result in a slower rollout of better technologies."
Smiling
By bringing asymmetrical rates into play, ICASA is essentially trying to level the mobile playing field, and according to Moody's, this is what will be achieved - to a lesser or greater degree.
"The news is credit positive for smaller South African mobile operators Cell C and [Telkom's mobile arm] Telkom Mobile, which both have less than 20% revenue market share."
Being net payers of interconnect, says Moody's, the two smaller players will benefit from the reduced costs to terminate their subscribers on the networks of MTN and Vodacom. And Cell C is the big winner.
"The revised asymmetric mobile termination rates may also provide a boost to revenues. We expect Cell C will benefit the most given its broader network coverage and mobile market share compared with Telkom's mobile market share.
"The biggest benefit to Cell C and Telkom's mobile and fixed-line operations will be from the cost savings it will get from 50% lower charges it pays to the larger mobile operators."
Telkom is also positioned to benefit from the lower charges, given it paid R1.1 billion to other operators in MTR fees in the six months to 30 September - 9% of its total operating costs.
Local pundits have been sceptical as to whether or not consumers will see the benefits ICASA intended passed on to them, but Moody's says - while it expects the low MTRs will improve EBITDA margins - the majority of the costs savings will likely be passed on to the consumer through more aggressive pricing in order to increase their market share.
Altered landscape
The firm says it believes, over the next three years, the changes ICASA has introduced will alter the competitive landscape in SA's telecoms sector. "We anticipate increased competition and a gradual convergence of the four main players market shares as a result."
In more negative repercussions for the country's long-time duopoly, Moody's says it will be difficult for Vodacom and MTN to maintain or increase their market share and compete more aggressively on price, without reducing their margins and return on investments.
"Experience in other markets, in our opinion, has shown MTR cuts were a contributing factor that negatively impacted the sector. In Europe, for example, the reduction in MTR's combined with the macroeconomic slowdown and heightened competition helped consumers by forcing more competitive pricing, but it led to lower margins and in some cases reduced investment from the larger operators, which can erode service quality."
Moody's says it expects Vodacom and MTN to challenge the decision, "but it is too early to say what action they will take and the likelihood that any challenge would be successful is hard to predict".
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