Over the month of March, Vodacom listed losses of R200 million to interconnect rate cuts, and is concerned that further rate cuts would hack its revenue growth to single digits.
Speaking at the investor presentation for its first annual results set since it listed, Vodacom CFO Rob Schuter said net interconnect revenue is down from R2 billion to R1.75 billion, a massive 10% loss in the month since the first rate cut was implemented.
Mobile operators agreed at the end of last year to cut the rates they charge each other to terminate calls on their networks to 89c per minute by March this year, which has had devastating results for Vodacom's interconnect revenue.
Schuter said that Vodacom had paid out R7 billion last year alone in interconnect fees to the other operators, including Telkom.
Hammered revenues
Uncertainty now prevails in industry, following the regulator's newest regulations governing termination rates, which could see another rate cut as early as July. Vodacom said this morning it had expected the regulator to hold off on new termination rate cuts after the operators made the voluntary cut in March.
Vodacom CEO Pieter Uys said that if the Independent Communications Authority of SA (ICASA) persists in the current draft, Vodacom could face seriously slowed revenue growth of a low single digit (below 5%).
"If the regulator goes ahead with the termination rate cut in July, it is going to have a very significant effect on revenues," said Schuter this morning.
Public hearings on ICASA's draft termination regulations process will now be held from 29 June to 30 June, and operators are clearly getting their ducks in a row to possibly find a manageable agreement with the regulator.
Vodacom expects to have its written submission to the regulator ready by the end of May, or early June.
Pressure will increase
Irnest Kaplan, MD of Kaplan Equity Analysts, says that if ICASA's plans go forward in their current form, the entire industry will be under pressure and will have to look at ways to reduce costs.
He says that it will not only affect the operators themselves, but also those companies further down the value chain, in distribution and service provision. Vodacom this morning indicated that it is already looking at cutting costs in the value chain, and hopes to spend around R500 million less in the coming financial year.
While there is a possibility that the company will scale back on the value chain, Vodacom said this morning that it will work with the channel for find efficiencies.
Other ways
Chris Gilmour, Absa Investment analyst, says that it is looking more likely that the operators will be using every power of persuasion in their arsenal, in the hopes of finding a less aggressive solution to termination rates.
However, he says that the operators should be looking at more elegant solutions to their termination rate troubles. “They are on the right track with certain products, some of them looking at getting people to use the networks more in exchange for free weekend minutes. But it's not enough, they need to be braver,” he adds.
Gilmour explains that, while these concepts of driving more traffic to the network can be daunting, especially when the operators are emerging from a recession, and an impactful RICA, there is still room to make some bolder package offerings to get traffic and ARPU up.
More concerns
Vodacom joins Cell C in its concerns around uncertainty. Two weeks ago, Cell C CEO Lars Reichelt expressed his concerns over the future of the industry and the structure of the regulator.
Reichelt explained that the operators were not engaged before the draft regulations on termination rates were published and it was not pleased that ICASA did not explain how it determined what the proposed rates should be.
With the looming change of guard at ICASA, Cell C, like its competitors, is concerned that the new leadership will implement yet another change to rates, or something similar. He says the industry now needs more predictability.
MTN has played it safe on statements around the new regulations, saying only: “Wholesale call termination is a complex issue and MTN expects that the draft regulations will contain elements that require legal interpretation and analysis of its regulatory and economic impact. Once MTN has reviewed the full set of documents, it will compile its response and file the required submission on the due date.”
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