No winners from interconnect cuts

As revenue losses resulting from lower interconnect rates are likely to soon run into billions of rands, local telecoms operators have resorted to various cost-cutting strategies, including staff retrenchments, to offset the impact.

Meanwhile, the ultimate goal of lower retail costs for the consumer remains years away.

Today, the Independent Communication Authority of SA's (ICASA's) call termination rates come into play, marking the second cut in the rate from 89c per minute to 73c. This follows last year's rate cut in March, from R1.25 to 89c.

Despite the 52c drop to date, consumers have yet to see any significant savings as the country's two main mobile players, Vodacom and MTN, have categorically stated they would not be passing the savings on to consumers.

“Since Vodacom is a net receiver of calls, reductions in termination rates do not produce savings for Vodacom to pass on to customers - in fact, the opposite is true.

“Over time, lower termination rates do stimulate competition and experience has shown that this is the mechanism that drives a reduction in call charges,” explains Vodacom spokesperson Richard Boorman.

Robert Madzonga, chief corporate services officer at MTN SA, explains that MTN has on numerous occasions highlighted that there is no direct link between mobile termination rates and retail prices; some prices go up, some stay the same, and others decline as part of normal competitive activity, not regulatory intervention.

“MTN investigated the impact that a decline in interconnection revenues had on its operations and has made the appropriate plans to restructure its business model to reflect this. MTN will, of course, continue to offer innovative value for money products and services, while at the same time ensuring its network quality and grade of service is not detrimentally affected,” he states.

“The smaller players, such as Cell C, and the VOIP players, as well as any other providers of voice calls, can now compete more effectively with Telkom, MTN, and Vodacom, and this has already cut the cost of voice calls for many customers, mostly focusing on large corporates and bigger SMMEs, and this will trickle down to the individual consumer in time.”

Vox Telecoms, ECN, Neotel and Switch Telecoms have announced lower retail rates on the back of lower call termination rates.

But the savings are double-edged, as three of the four companies noted that calls to 8ta and Cell C will be charged at a higher rate, due to asymmetric agreements.

Meanwhile, the telecoms industry at large has suffered a huge blow from the first rate cut and is still reeling as the second cut comes into play.

On the back of the first cut, Vodacom reported a loss of R800 million in revenue, in the first half of its financial year.

Vodacom CFO Robert Shuter says the biggest effect of interconnect cuts was seen in the first half of 2010, which was when the biggest drop was made. However, Vodacom expects to see revenue drop by between R800 million and R900 million a year, until the final rate of 40c a minute is in place in 2013.

Shuter explains lower interconnect revenue also includes income the company will lose out on, as fewer people make calls between mobile handsets and fixed-lines. A drop-off in fixed-to-mobile calls cost Vodacom R90 million in the first half.

As asymmetrical rates also come into play today, Vodacom is preparing to write off between R150 million and R200 million in its earnings before interest, taxes, depreciation and amortisation, as the industry prepares for the introduction of asymmetric interconnect rates.

MTN has, to date, remained quiet regarding the financial impact interconnect cuts have had on its business.

Fixed-line incumbent Telkom, the only incumbent to cut retail rates for its consumers, reportedly lost out on R640 million in revenue, after the last rate cut. However, Telkom also benefited by paying out R616 million less to mobile operators, leaving it with a net interconnect loss of R24 million.

“The bigger networks who benefited from the high interconnect rate all these years are now losing some revenue; they are, however, still very profitable. South African call rates are still very high by comparison to many emerging market countries, and MTN and Vodacom will have to adjust to an era of greater competition and lower margins,” maintains Ambrose.

But it is not just the big players to suffer on the back of lower interconnect. Vox Telecom has written down its least-cost routing business, Orion, by R809 million on the back of lower mobile termination rates.

Nashua Mobile was forced to retrench close to 15% of its 870 staff complement at the beginning of this year, which the company explained was necessary to offset the impact of lower call termination costs.

While the industry at large is adjusting to the new landscape, consumers have yet to see any savings as mobile call rates remain among the highest in the world.

“Historically, the cellular telephony market has enjoyed profits from exceptionally high, unregulated pricing. Dominant cellphone operators increased their termination rates by 500% in 2002, for example, and they remained there for nearly a decade, while in competitive markets in Africa they plummeted with rapid and effective regulatory intervention,” notes director of Research ICT Africa Alison Gillwald.

Mobile operators across Africa are reeling from cutthroat competition that has seen call rates slashed by as much as 90% in countries such as Nigeria, Uganda, Ghana, Kenya and Tanzania. This tumble has been accelerated in recent months by the arrival of international operators.

However, delegates at the recent Next-Generation Telecoms Africa 2011 Summit pointed out that in SA, where mobile penetration is the highest in Africa, at 98%, prepaid users pay up to R2.85 per minute, or more than 33 times the Airtel Kenya rate.

Even on special packages, they added, where South African prepaid users can pay rates of as little as R1.50 per minute, the Airtel tariffs are still less than 15% of that amount.

Overall, tariffs in Kenya are now running at around 20% of the equivalent rates charged by Vodacom, MTN and Cell C in SA, and often at a lot less than that, it was also established.

Despite the bleak state of the market, Ambrose is confident the regulations will pave the way to a better outcome for business and consumers alike.

“The next rate cut will have no discernable affect immediately, but will reinforce the competitive nature of the market and allow smaller players to make more margin and still cut prices; all of this will result in a leaner, more efficient and ultimately more cost-effective industry,” he maintains.

Further cuts are expected to 56c a minute by March 2012, and to 40c by 2013. Off-peak cellphone termination rates will drop to 65c a minute by March this year and 52c a minute by March next year, with the off-peak charges also dropping to 40c a minute by March 2013.

Nonetheless, ICASA is confident that over time, the regulations will begin impacting the retail price. “The objective of reducing termination rates is to reduce the barrier to entry in the provision of off-net calls, thereby fostering competition and a dynamic reduction in retail prices over time,” concludes the authority.