Interconnect price cuts and mobile call tariffs

[Syndyre]

Actually, there are several reasons why they may not.

I think you may be surprised as to who drops retail rates, and by how much. Certainly, this whole exercise would have been a waste of time for Telkom's shareholders if Telkom simply passes all the savings on - it would make a big dent in their revenues (making them a smaller company, basically, but with the same high overheads, number of staff etc, something no listed company should risk), and would not improve their profits. Similarly, Cell C would be foolish to pass on all the savings, since they need the additional profit margin just to keep their heads above water.

The big question is the degree of elasticity in the market - how many more calls will each of these networks get to make up the loss of revenue from lower retail rates? Again, I think you may be surprised which companies could benefit, and which not. A typical LCR provider, for example, wouldn't see any particular cost reduction, so is likely to lose customers. Similarly, the mobile operators live and die by their ARPU (average revenue per user), so, if the elasticity is less than 1 (i.e. they don't make up the missing revenue through the same value in additional calls), then they are going to be very reluctant to reduce prices at all. It guess it's a question of who gets brave soonest.

All very true. I think any reductions are likely to initially come from smaller, probably VOIP operators.

High interconnect rates favour the incumbents as obviously they have the most subscribers so they're the largest recipient of these fees and are likely to be net beneficiaries. Interconnect rates also place a floor on off-net call rates which would have an impact on call rates in general and again this benefits large incumbents who will have the most on-net calls as they have the largest subscriber base. Its a classic network effect which will be diminished by lower interconnect rates.

The advantage of significantly lower interconnect rates is that VOIP operators will be able to offer significantly lower call rates to the major plays e.g. Voda, MTN etc. and their own small subscriber base will be less of a hindrance. They're also likely to have much lower fixed costs so they can afford to do this.

 

[Syndyre]

You are also assuming that a drop in the MTR will result in some kind of saving for CellC.

CellC is only supporting a drop in the MTR that is also skewed in their favour.

Considering Cell C has relatively few subscribers they're likely to have more outgoing calls to Voda/MTN subscribers than incoming calls to their own subscribers from these networks. Of course they target lower income subscribers so you need to take this into account too.

 

[mikef]

Considering Cell C has relatively few subscribers they're likely to have more outgoing calls to Voda/MTN subscribers than incoming calls to their own subscribers from these networks. Of course they target lower income subscribers so you need to take this into account too.

As long as calls are terminated on the various networks in proportion to their percentage of market share (based on subscriber numbers) their incoming calls from competitors will cancel out with their outgoing calls to competitors. Having relatively few subscribers does not provide a benefit.

 

[marine1]

Didn't this same fool collude with MTN to raise interconnect fees before CELLC came on the scene?

That would be him.

 

[Syndyre]

Having relatively few subscribers does not provide a benefit.

I know, my point was that being one of the larger networks provided a benefit.

 

[mikef]

I know, my point was that being one of the larger networks provided a benefit.

Being a larger network also provides no direct benefit from the MTR as once again receipts are canceled by payments.

 

[Syndyre]

Being a larger network also provides no direct benefit from the MTR as once again receipts are canceled by payments.

Not necessarily. If you have more subscribers your subscribers are likely to make more on-net calls to other subscribers on your network rather than on rival networks, which means your payments are lower. Having more subscribers also means they'll receive more calls from subscribers on other networks resulting in higher receipts.

 

[mikef]

Not necessarily. If you have more subscribers your subscribers are likely to make more on-net calls to other subscribers on your network rather than on rival networks, which means your payments are lower. Having more subscribers also means they'll receive more calls from subscribers on other networks resulting in higher receipts.

I quote from an earlier post my understanding of the "zero sum game":

In the scenario where there is a single symmetrical interconnection rate between all operators in the telecommunication marketplace and on the assumption that calls get terminated on the individual operators networks in proportion to their respective subscriber market share percentage the net cash flow from interconnection charges would be zero for each operator. In other words, whether you are a small operator with one thousand subscribers or a large operator with sixty million subscribers or anything in between, your interconnect revenue due to you from your competitors for their subscribers calls terminating on your network would always exactly equal the amount you have to pay to them for your own subscribers calls terminating on their networks. At first glance this might not seem logical but it is a mathematical fact - the so called “Zero sum game”. (please do the maths if you wish to dispute this)

Also this answer to a post using an example:

You say:

Quote:
Virgin and Cell C have a much higher proportion of off network calls than on network, as most people their users call would be on Voda or MTN (naturally).
THIS is the problem.

My answer:
Not necessarily – if you assume that CellC 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 over all the networks(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 Cell C's 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.

 

[Syndyre]

I quote from an earlier post my understanding of the "zero sum game":

A zero sum game isn't when everything ends up equal and nobody gains or loses its when my winning necessitates you losing but I know what you mean.

Not necessarily – if you assume that CellC 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 over all the networks(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 Cell C's 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.

True. I suppose in reality it comes down to a number of more complicated factors like the profile of the networks' individual subscribers. For instance, contract subscribers would presumably be more likely to make outgoing calls than prepaid users, as would more affluent subscribers, urban users etc. I'm presuming anyway. But in a general scenario your post makes sense.

The other problem is that interconnect rates aren't symmetrical at the moment, which at least partially explains why the cell networks have benefited.

 

[mikef]

A zero sum game isn't when everything ends up equal and nobody gains or loses its when my winning necessitates you losing but I know what you mean.

The term "zero sum game" is not of my choosing - seems to be an industry term referring to interconnects.

True. I suppose in reality it comes down to a number of more complicated factors like the profile of the networks' individual subscribers. For instance, contract subscribers would presumably be more likely to make outgoing calls than prepaid users, as would more affluent subscribers, urban users etc. I'm presuming anyway. But in a general scenario your post makes sense.

The other problem is that interconnect rates aren't symmetrical at the moment, which at least partially explains why the cell networks have benefited.

Agreed fully - that is why the main beneficiaries of a reduction in the MTR will be the landline operators and in specific Telkom - also why I am suspicious of the DoC and parliaments motives in suddenly driving the MTR decrease.

 

[Syndyre]

The term "zero sum game" is not of my choosing - seems to be an industry term referring to interconnects.

Oh ok, I hadn't seen it in that context before.

Agreed fully - that is why the main beneficiaries of a reduction in the MTR will be the landline operators and in specific Telkom - also why I am suspicious of the DoC and parliaments motives in suddenly driving the MTR decrease.

Me too.

 

[Abe]

"Clearly it's too high,” said Knott-Craig

So why the F didn't you drop it while you were in charge. I have already started canceling my MTN contract and will do the same with the extra VC contract I have. They won't get my business again.

 

[krycor]

they seem to forget when they increased rates from 25c to 125c to make it difficult for cell c when they entered the market. Now that Telkom wants to enter the market now the gov does something about it. Double standards as usual

Even if it remained exactly the same, telkom would rule as indicated by mtr balances(more telkom-to-cell? calls, companies will shift for convenience + number portability stops none) and Telkom being the current net loser. Like i said before, cell operators are getting hit hard on all fronts, rica(messing their prepaid ease), mtr, mnp and then saturation of market + possibility that their inflated numbers are gonna take a drop due(rica, mnp, mtr)

 

[Zone]

A predictable reply. They didn't seem to have any problem disrupting the public (and making it difficult for the competition) when the suddenly raised the interconnect fee in the past. Why didn't they do it incrementally then seeing as they seem to be in favour of doing it this way now?

 

[mikef]

A predictable reply. They didn't seem to have any problem disrupting the public (and making it difficult for the competition) when the suddenly raised the interconnect fee in the past. Why didn't they do it incrementally then seeing as they seem to be in favour of doing it this way now?

Are you sure they increased retail tariffs when they increased the interconnect fee prior to CellC entering the market. I was a subscriber at the time and I certainly do not remember an increase - although I have not researched this.

 

[Lightscribe]

Some background... http://www.techcentral.co.za/interconnect-the-real-story-2/555/

 

[SaiyanZ]

What international company's profits did Pieter Uys compare Vodacom's profits to? What does the international company charge for calls and what are the interconnect rates there?

 

[Rosaudio]

Some UK company I think. Vodafone?

 

[SaiyanZ]

Some UK company I think. Vodafone?

He should be comparing apples to apples. If he wants the same profits as overseas, start charging the same for calls and set the interconnect rate the same as well and see where that gets him. Otherwise, don't compare Vodacom's profits to overseas profits.

 

[apogeeza]

Former Vodacom CEO Alan Knott-Craig recently said that only a fool would argue that interconnect is not too high. “Clearly it's too high,” said Knott-Craig. “You cannot have a tariff set 16 years ago, when you based that tariff on a market size of 500 000, a million people, and when you have a market size of around 40 million people and try and maintain that this is [fair].”

Since freeking when has Cell-C been operating for 16 years !!!

Alan Knott-Brained himself colluded and hiked the rates to "stick it" to Cell-C, and they only launched 17 November 2001. That's 8 year's ago you hiked the interconnect rates, not 16 years. Looks like Alan Knott-Brained is the actual fool here, for arguing.