Interconnect rates: The numbers
The Department of Communications (DoC) recently announced that it wants to see the current mobile wholesale termination rate cut from the current R 1.25 per minute to R0.95 per minute by the end of November. Over the next year the Department would like to see the interconnection fee cut to 60c.
“The discussion [with operators] has been taking place for quite a while and there hasn’t been any movement,” said DoC spokesman Tiyani Rikhotso. “Hence we as a department would like to see this issue resolved as soon as possible.”
Interconnect rates are often blamed for the high mobile costs in the country and for creating an artificially high floor for call charges to mobile phones. ECN Telecoms CEO John Holdsworth recently said that the current mobile termination rates cost consumers up to 80% of the price per minute from a landline to a cell phone, and that “removing over-inflated mobile interconnection charges would enable new entrants like ECN to offer its customers groundbreaking deals the kind of which have never been seen before in South Africa.”
Vodacom CEO Pieter Uys however disputes that high interconnect costs result in high mobile prices, saying that the single biggest cost of a cellular phone call is not the mobile termination rate, but the cost of transmission lines which mobile operators have been obliged to hire from Telkom.
“Only since industry liberalisation in the past few years have we been in a position to build our own transmission infrastructure. We are investing billions of rands to do this and customers will see a cost benefit in the future,” said Uys.
Zero sum game
Wholesale termination is a zero sum game where one operator’s gain is at the direct expense of another operator. This begs the question why wholesale termination rates should not be made as low as possible.
There are even suggestions about a zero interconnect rate. Bill and Keep, which is also known as Net Payment Zero, is a well know pricing agreement between two telecoms operators under which the reciprocal call termination rate is zero. This basically means that each network terminates the calls from the other network free of charge.
The reason why there is resistance to very low – or even zero – termination rates from some operators is simple: they will lose money. This is because there are costs involved in terminating a call on a network and the current asymmetric interconnect rates mean that the fixed line operator pays the mobile providers more.
Lower interconnect rates will change the business models of the mobile operators, and they will most likely have to realign their current pricing and revenue models to fill the gap left by less interconnect revenue.
The winners and losers
The reluctance of some of the operators to drastically reduce interconnect rates is most likely an indication that they are making a profit – or at least they show a net gain – through the current interconnect regime.
To find the exact figures related to interconnect rates in South Africa is not an easy task, but the annual reports from Telkom, Vodacom and MTN provide a rough idea about the winners and losers in the wholesale termination rate game.
It should be noted that Vodacom’s interconnect revenue of R8.6 billion quoted below includes revenue from Cell C for national roaming services. Vodacom would also not disclose the exact figure paid to other operators, and an approximation was therefore used. It should also be noted that MTN’s payment to other operators includes roaming charges.
The following table provides an overview of the net gains and losses by South Africa’s three largest telecoms operators.
| Termination rates | Peak | Off-Peak |
| Fixed termination rates | R 0.29 | R 0.16 |
| Mobile termination rates | R 1.25 | R 0.77 |
| Mobile to mobile | R 1.25 | R 0.77 |
| Mobile Community Service Telephones | R 0.06 | R 0.06 |
| Revenue | Paid to other operators | Net interconnect revenue | |
| Vodacom SA | R 8 632 000 000 | R 6 126 000 000 (approximation) | R 2 506 000 000 |
| MTN SA | R 6 951 000 000 | R 5 140 000 000 (includes roaming) | R 1 811 000 000 |
| Telkom | R 916 000 000 | R 5 432 000 000 | – R 4 516 000000 |
From the figures in the table it is clear that Vodacom and MTN are the biggest winners of interconnect rates while Telkom foots the bill for their profits. This scenario is not surprising considering the significant difference in fixed line and mobile termination rates in the country.
Some industry commentators suggested that the sudden urgency to reduce interconnect rates may be related to Government’s stake in Telkom while its shares in Vodacom disappeared with the Vodacom-Telkom-Vodafone deal. It is therefore in Telkom’s – and Government’s – financial interest to lower interconnect rates.
While lower mobile interconnect rates will benefit the fixed line operator and new entrants in the telecoms market, Vodacom and MTN will most probably put up a fight when forced to drop rates to levels which do not suit them.
The DoC is set to provide Parliament’s Communications Portfolio Committee with the policy directive to reduce wholesale mobile termination rates on Tuesday.
Interconnect rate cut – comments and views
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