24% Interconnect price cut by December

mikef said:
Not sure that I agree with this statement. If Cell C is currently charging R2.50/minute with the current interconnect fee and they reduce their charge to R2.20/minute when the interconnect fee goes down by 30c then they will decrease their profit margin by 30c. If one assumes that Cell C subscribers calls terminate on average on their own network in the same ratio as their market share of total subscribers and one makes the same assumption for the other networks and once again ignoring the Telkom issue then interconnect revenue and cost would cancel out and any change in the rate would have no effect on profits. Changing the price charged to customers would however have the effect of a reduction in profits equal to the change (all else staying the same).

This is why I am interested to see how these proposed changes are implemented because certainly the expectation is being created in the news reporting that customers should expect a 30c reduction in call costs – I just do not see it happening.:(
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This is sort of the point - a newcomer in the market (read CellC) terminates considerably less calls on their own network than they do on a competitors, so all they end up doing in the current structure is making profit for the existing rivals. Lower interconnect fees will decrease barriers to entry in the market.
 
Speedster said:
This is sort of the point - a newcomer in the market (read CellC) terminates considerably less calls on their own network than they do on a competitors, so all they end up doing in the current structure is making profit for the existing rivals. Lower interconnect fees will decrease barriers to entry in the market.
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Not necessarily – if you assume the newcomer has 5% of the total subscribers then yes 95% of their calls by average should terminate on their competitors networks. This equates to 4.75% of all calls made (5% x 95%). However their competitors have 95% of total subscribers and using the same logic 5% of their competitor’s calls should terminate on the newcomers network, i.e. once again 4.75% of all calls made (95% x 5%). In other words if the assumptions were correct Cell C revenue would exactly equal their costs i.r.o. interconnection.
 
mikef said:
Not necessarily – if you assume the newcomer has 5% of the total subscribers then yes 95% of their calls by average should terminate on their competitors networks. This equates to 4.75% of all calls made (5% x 95%). However their competitors have 95% of total subscribers and using the same logic 5% of their competitor’s calls should terminate on the newcomers network, i.e. once again 4.75% of all calls made (95% x 5%). In other words if the assumptions were correct Cell C revenue would exactly equal their costs i.r.o. interconnection.
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The difference is that if the "dominant" networks makes R1 billion per year profit from interconnect fees, the newcomer makes R4.75 million (using your figures). If the oligopoly consists of two dominant networks they each make R500 million per year from interconnect and the newcomer generate R4.75, this is heavily weighted against the newcomer as the dominant firms have substantially more cash on hand from interconnect fees.

From a different angle, if you use the current stat that a cost plus reasonable profit interconnect should be 25c and interconnect is currently R1.25, that means each firm is being "given" R1 per minute in bonus funds. Once again, using your stats, for every R100 the dominant firms receive in this subsidy, the newcomer only receives R4.75, a considerably smaller sum that gives the dominant firms the required capital to develop their brands / network, while the newcomer struggles to gain a foothold.
 
Speedster said:
The difference is that if the "dominant" networks makes R1 billion per year profit from interconnect fees, the newcomer makes R4.75 million (using your figures). If the oligopoly consists of two dominant networks they each make R500 million per year from interconnect and the newcomer generate R4.75, this is heavily weighted against the newcomer as the dominant firms have substantially more cash on hand from interconnect fees.

From a different angle, if you use the current stat that a cost plus reasonable profit interconnect should be 25c and interconnect is currently R1.25, that means each firm is being "given" R1 per minute in bonus funds. Once again, using your stats, for every R100 the dominant firms receive in this subsidy, the newcomer only receives R4.75, a considerably smaller sum that gives the dominant firms the required capital to develop their brands / network, while the newcomer struggles to gain a foothold.
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Once again they do not make money from interconnect fees - they make money from retail rates. Even if you pushed up the interconnect rate to R10 they would not make more profits (ignoring the disparity with Telkom interconnect rates.

refer this thread:
http://mybroadband.co.za/vb/showthread.php?t=196745
 
I gotta say I think these DoC guys are bull****ing us here. Let's follow the procedure - they wanna tell ICASA to tell the cell phone companies to cut rates. So they're assuming ICASA will listen to them, firstly. AND that Voda, MTN, Telkom will listen to ICASA. I think history shows both scenarios to be unlikely.

BTW, in terms of how interconnect rates affect profits / pricing. My take on this is that the cell operators are using high interconnect rates to keep their own on-network pricing up. If you're used to paying say R 2.75 / min for a call to another network, then you're not gonna think R2.50 / min on your own network is expensive.
But if calls to another network are suddenly only R2 / min maybe, then look at the drop in profits, since your on-network calls must be cheaper.
This is the real reason those so-and-so's don't wanna drop Interconnect prices
 
mikef said:
Once again they do not make money from interconnect fees - they make money from retail rates. Even if you pushed up the interconnect rate to R10 they would not make more profits (ignoring the disparity with Telkom interconnect rates.

refer this thread:
http://mybroadband.co.za/vb/showthread.php?t=196745
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The link doesn't say anything about CellC - which is very relevant to this discussuion. Telkom's low interconnect income result from the shoddy deal they agreed with ICASA relative to the deals MTN & Vodacom have. If Telkom's interconnect rate was the same as the mobile operators they would also have close to a zero net interconnect transfer.

You're missing the point - any fee received above cost is profit. If these profits are distributed relative to company size, the newcomer is at a considerable disadvantage!

Even if you pushed up the interconnect rate to R10 they would not make more profits
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This statement shows a complete lack of understanding of the dynamics involved. If interconnect fees went up to R10/m (and assuming we didn't call any less), the companies would make CONSIDERABLY higher profit because, although MTN might not pay the fee across to Vodacom because the fees cancel out, they have each raked in R10/m more on the call from the consumer. Higher interconnect translates to higher retail fee. The retail fee comprises a home-network component and a termination component. If the termination fee is increased (decreased) the retail fee should be increase (decreased) accordingly - that is assuming ICASA does its job for once.
 
Speedster said:
The link doesn't say anything about CellC - which is very relevant to this discussuion. Telkom's low interconnect income result from the shoddy deal they agreed with ICASA relative to the deals MTN & Vodacom have. If Telkom's interconnect rate was the same as the mobile operators they would also have close to a zero net interconnect transfer.

You're missing the point - any fee received above cost is profit. If these profits are distributed relative to company size, the newcomer is at a considerable disadvantage!



This statement shows a complete lack of understanding of the dynamics involved. If interconnect fees went up to R10/m (and assuming we didn't call any less), the companies would make CONSIDERABLY higher profit because, although MTN might not pay the fee across to Vodacom because the fees cancel out, they have each raked in R10/m more on the call from the consumer. Higher interconnect translates to higher retail fee. The retail fee comprises a home-network component and a termination component. If the termination fee is increased (decreased) the retail fee should be increase (decreased) accordingly - that is assuming ICASA does its job for once.
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No - you are missing the point. The interconnect fee is not charged to the customer - it is an charge between operators. The retail rate is charged to the customer. If you were right that this comprises a home-network component and a termination component then please explain why the on net calls are not the interconnect rate cheaper than the off net calls.

Consider VC- they made R8 bil revenue from interconnect fees which was not paid by customers but by their competitors. However they only made R2 bil profit after deducting interconnect costs of R6 bil. The reason for this profit is primarily due to the lower interconnect fees paid to Telkom.

The R10 interconnect fee would only effect profits if the operators recovered it from their customers and was only used to illustrate the point.
 
mikef said:
No - you are missing the point. The interconnect fee is not charged to the customer - it is an charge between operators. The retail rate is charged to the customer. If you were right that this comprises a home-network component and a termination component then please explain why the on net calls are not the interconnect rate cheaper than the off net calls.

Consider VC- they made R8 bil revenue from interconnect fees which was not paid by customers but by their competitors. However they only made R2 bil profit after deducting interconnect costs of R6 bil. The reason for this profit is primarily due to the lower interconnect fees paid to Telkom.

The R10 interconnect fee would only effect profits if the operators recovered it from their customers and was only used to illustrate the point.
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As stated above:
The retail fee comprises a home-network component and a termination component. If the termination fee is increased (decreased) the retail fee should be increase (decreased) accordingly - that is assuming ICASA does its job for once.
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Of course the network recovers the cost from the consumer - that is the whole motivation why off-network calls are more expensive than on-network. The networks then price their on network calls at a couple of cents below off-network calls to look good - they are not cost based at all. In other words these charges are in economic terms "rent-seeking".

The second point is the one of competition - high interconnect fees place a new entrant at considerable disadvantage as it effectively subsidises the larger companies for being large and thereby unfairly discriminates against the newcomer.
 
Consider VC- they made R8 bil revenue from interconnect fees which was not paid by customers but by their competitors. However they only made R2 bil profit after deducting interconnect costs of R6 bil. The reason for this profit is primarily due to the lower interconnect fees paid to Telkom.
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The R8bil Vodacom received was not paid by their competitors, it was paid by their competitors customers. Vodacom's customers paid R4bil to the other networks in interconnect fees (vodacom simply collected the funds from their customers and paid it over on the customers' behalf.) In other words there was R12billion extra funds generated due to interconnect fees. If the interconnect fee was R0.60 instead of R1.25 the R12b would have been R5.76billion, in other words a saving of R6.24billion to the customers of Vodacom and their competitors networks. Otherwise put, R5.76billion less in (unwarranted) profit to these networks.
 
Speedster said:
The R8bil Vodacom received was not paid by their competitors, it was paid by their competitors customers. Vodacom's customers paid R4bil to the other networks in interconnect fees (vodacom simply collected the funds from their customers and paid it over on the customers' behalf.) In other words there was R12billion extra funds generated due to interconnect fees. If the interconnect fee was R0.60 instead of R1.25 the R12b would have been R5.76billion, in other words a saving of R6.24billion to the customers of Vodacom and their competitors networks. Otherwise put, R5.76billion less in (unwarranted) profit to these networks.
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Lets agree to disagree:)
 
U can't agree to disagree about money. Somebody earned that money, somebody spent it and somebody showed it as a profit. Regardless of what you may think, something actually happened to the money.
Incidentally, as public companies, their financial statements are available. You don't have to speculate about what happens to interconnect fees, you can solve this argument just by studying those.
 
K3NS31 said:
U can't agree to disagree about money. Somebody earned that money, somebody spent it and somebody showed it as a profit. Regardless of what you may think, something actually happened to the money.
Incidentally, as public companies, their financial statements are available. You don't have to speculate about what happens to interconnect fees, you can solve this argument just by studying those.
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Enlighten me please:cool:

To my mind this article indicates the effect of the interconnect debate reasonably clearly. I am however open to correction if someone can show me where these massive profits from interconnect fees are.

Do not get me wrong - I believe the interconnect rates are to high and should be reduced by regulation - however I do not see that automatically reducing retail rates as they are two different animals:)
 
mikef said:
Enlighten me please:cool:
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No fear. I was merely pointing out that your argument can be resolved. I'm not gonna spend hours pouring over Vodacom and Mtn's financial statements. Honestly, I'm not really qualified to anyway.
 
He way I see it is this. If I am a small provider and I pay 10 in interconnect fees, and only receive 4; it means I have to find a way to fund the shortfall of 6. If my customer base stays the same and lower interconnect fees means the 6 falls to 4, all else being equal I should be able to pass through some cost reduction to my clients.
 
milomak said:
He way I see it is this. If I am a small provider and I pay 10 in interconnect fees, and only receive 4; it means I have to find a way to fund the shortfall of 6. If my customer base stays the same and lower interconnect fees means the 6 falls to 4, all else being equal I should be able to pass through some cost reduction to my clients.
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Would be true if you paid 10 and only received 4 in interconnect fees. The more likely scenario would be that you would pay 10 and receive 10 in interconnect fees. This would be true if calls were terminated on networks in proportion to the operators market share which is what I tried to illustrate above with the Cell C example.
 
mikef said:
Would be true if you paid 10 and only received 4 in interconnect fees. The more likely scenario would be that you would pay 10 and receive 10 in interconnect fees. This would be true if calls were terminated on networks in proportion to the operators market share which is what I tried to illustrate above with the Cell C example.
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But the operator still receives 10 from the customer fees that he needn't pay across to its competitor (because his net balance with the competitor is 0) and so, magically, he has an additional 10 in his back pocket. Surely he can pass this on to the consumer in lower call charges?
 
Speedster said:
But the operator still receives 10 from the customer fees that he needn't pay across to its competitor (because his net balance with the competitor is 0) and so, magically, he has an additional 10 in his back pocket. Surely he can pass this on to the consumer in lower call charges?
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Yes he receives whatever the retail rate was that he charged the customer which would obviously be something more than 10 - lets say it is 20.

From this he needs to deduct the cost of providing the service to his customers on his network plus the cost of providing the termination service to his competitors customers for which he effectively receives nothing.
 
!CASA is going to force a price cut of 24% and the cell providers are going to use the excuse that electricity is going up 45% and are going to charge us more for the same services.

Then again, perhaps I'm just being cynical.
 
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