Vodacom and MTN play interconnect trump card
Vodacom and MTN played their interconnect trump card on Friday, basically forcing Cell C into accepting their proposal for tariff reductions.
The two largest operators, who jointly account for around 90% of the South African mobile market late on Friday announced separately that they had bilaterally agreed to cut tariffs.
Vodacom says the agreement “proposes a blended interconnection rate of 78c, which declines to 61c on a glide path”.
Cell C point-blank is opposed to this, going so far as to publish full-page adverts in Sunday newspapers to make its case, but there are doubts in the market about how long the smallest operator can stick it out.
The interconnection rate, which government maintains is too high, is currently fixed at R1.25 per minute during peak times. However, MTN and Vodacom’s statements suggest the decline to be greater than government wants, as they both refer to the “blended interconnection rate”.
The current blended rate is around 96c per minute. MTN and Vodacom say there will be an immediate 19% reduction in that number, with further reductions year-on-year for the following three years.
The move allows both operators certainty in terms of their business models and revenue mix, and allows them to plan for the reductions, something that both Vodacom Group CEO Pieter Uys and MTN SA head Karel Pienaar have been arguing for over the past few weeks.
Some commentators and stakeholders are questioning the proposed bilateral agreement, calling it “anti-competitive” and suggest collusion. But interconnect rates are, by definition, bilateral agreements.
Cell C is the loser right now, with the moves from MTN and Vodacom forcing it to retain the status quo. It now claims that the “proposals from its competitors offer no significant changes to the current regime”.
But the current regime is not under question. The specific issue raised by Parliament, the Department of Communications as well as Icasa is the high rate. Cell C’s dogged perusal of changing the entire structure of interconnect, by once again proposing a different system altogether (asymmetric interconnect) has nothing to do with the current process.
An asymmetric system would see Vodacom and MTN paying “the smaller operators a mobile termination rate of 75c per minute whilst the smaller operators, including Cell C, pay Vodacom and MTN a rate of 65c”.
Cell C is practically the only “smaller operator”. Virgin Mobile’s size is so negligible, it wasn’t even present at these negotiations.
Historically in other markets, asymmetric interconnect was introduced to benefit new entrants. On Friday, both MTN and Vodacom said that they do not see Cell C as a new entrant.
It’s clear why Cell C wants this system, and an immediate implementation. It is a net payer as Cell C subscribers make more calls to other networks, than the amount of calls made to Cell C from Vodacom and MTN users. Right now, as the smallest operator in the market, it would benefit most from asymmetric interconnect because it will make it possible for it to cut call charges more than the other operators are able to.
The problem now for Cell C is that, by not agreeing to the proposals from the two companies that account for the majority of the market, it is even more disadvantaged than before.
You can bet that MTN and Vodacom will announce decreases in their retail tariffs before the end of the year, because thanks to a 19% reduction in interconnect charges, they have scope to do so.
Consumers shouldn’t expect a 20% reduction in call prices, but even a 10% drop in certain tariffs will deflect a lot of political pressure and will help government accept the plan from the two dominant operators.
Cell C won’t be able to offer consumers those reductions in tariffs, as they’ll be stuck paying the current interconnect rate which was agreed on a bilateral basis with both Vodacom and MTN when it entered the market.
In this high stakes poker game, Cell C realistically has no other option but to fold and accept the new rules.
Vodacom and MTN proposed MTN – discussion
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