Lower mobile termination rates have cost Vodacom close to R400 million in revenue during the last quarter, effectively slowing the operator's service revenue growth rate by 3.8%.
Speaking this morning at Vodacom's quarterly results, CEO Pieter Uys noted that service revenue was up 4.4%, but if the negative impact of lower mobile termination rates was removed, it would have been up 8.2%.
Uys highlighted that the operator saw an overall 18.3% decline in interconnect revenue during the reporting period.
Earlier this year, pressure from the Independent Communications Authority of SA (ICASA) resulted in Vodacom, MTN and Cell C dropping interconnect rates to 89c per minute, from R1.25.
With operators still reeling from the effects of the first cut, ICASA had hoped to implement draft regulations for a further rate reduction this year, to 65c per minute, with the objective of reaching an interconnect rate of 40c, by July 2012.
In May, Uys warned that if ICASA persists with the current draft, Vodacom could face seriously slowed revenue growth in the low single digits (below 5%).
“Fortunately (or unfortunately) we can expect further reductions in the mobile termination rate (MTR) and, subsequently, overall revenue for Vodacom. Vodacom, in its position as the market leader, will definitely feel the pinch more that the other operators," explains Frost & Sullivan ICT industry analyst Spiwe Chireka.
Temporary reprieve
Predicting substantial revenue losses, the operators previously hit back, arguing that the business shock of yet another cut this year would be too great.
As a result, the Independent Communications Authority of SA (ICASA) has extended the deadline for implementing further interconnect rate cuts in favour of extra consultation with the industry.
Should the proposed rate cuts come into effect before year-end, operators would face a 50% interconnect rate reduction this year alone.
He proposes that ICASA consider a six-month gap between when the authority announces the final interconnect rate regulations, to when the cuts need to be implemented.
“We do expect mobile operators to recover from the effects of RICA faster than they can from the downside of MTR reductions, primarily because the former has less of an impact on operations,” comments Chireka.
“MTR is a significant component of operators' revenue, as can be seen by the more than R300 million drop in Vodacom's MTR revenue for the quarter. At this rate, we are looking at a billion-plus 'loss' by end of the financial year. Vodacom and the other operators will have to channel their energies into mitigating strategies,” suggests Chireka.
Get creative
Chris Gilmour, Absa Investment analyst, says it is looking more likely that the operators will use every power of persuasion in their arsenal in the hopes of finding a less aggressive solution to high termination rates.
However, he says 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.”
Gilmour explains that these concepts of driving more traffic to the network can be daunting, especially when the operators are emerging from a recession, as well as recovering from the effects of the introduction of the SIM card registration law.
However, there is still room to make some bolder package offerings to get traffic and ARPU up, he adds.
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