Secret Vodacom, MTN pricing agreement warning

Cell C CEO Jose dos Santos recently warned that approving the Vodacom-Neotel and MTN-Telkom deals would mean that we “are going to go back to where we started 20 years ago”. Let us give this warning some context.

In early 1994 Telkom was the dominant telecommunications player in South Africa, and the newly-licensed Vodacom and MTN were set to launch commercial cellular services later that year.

With only two mobile operators in the country it must have been tempting to avoid engaging in a price war, and if media reports are to be believed that is exactly what happened.

According to a 1996 Financial Mail report, Vodacom and MTN executives met in London in 1994 to discuss pricing.

The result of the meeting became known as the “London Agreement”: a memorandum where cellular tariffs for South Africa were set.

According to the Financial Mail report, citing the official document, the memorandum outlined agreements on tariff structures, airtime discounts, and connection bonuses.

At the time, Vodacom and MTN said that the agreement reached in London was “legal and not anti-competitive”.

Competition Board chairman Pierre Brooks was not convinced, and branded the alleged pricing pact as “prima facie evidence of collusion”.

The London Agreement was investigated and referred to the criminal authorities by the Competition Board, but not much progress was made.

According to Gordon Institute of Business Science Professor David Lewis, Vodacom and MTN “concocted legal stratagems designed to keep the issue out of court”.

Not the last London meeting

In a 2010 Finweek article Simon Dingle wrote that another London meeting between Vodacom and MTN took place in 1999 – this time about mobile termination rates.

When Vodacom and MTN launched mobile services in 1994 they agreed on an interconnect rate of 20c per minute. This changed before Cell C entered the market.

In July 1999 Vodacom and MTN increased the MTR to 50c, and further increased this rate to R1.25 (for peak time calls) on 1 November 2001.

These MTR increases, Dingle’s article argued, was a result of the 1999 London meeting, and a strategy to keep competition at bay.

Former Cell C CEO Lars Reichelt told Dingle that high interconnect rates were a good way of keeping a competitor out.

“If Reichelt is correct, then Cell C was resolutely and effectively stunted in its market entrance,” Dingle said.

Interconnect rates in SA
Interconnect rates in SA (Source: Lewis – Pricing and tariffs: principles)

Fresh warning about limiting competition

Dos Santos said that the planned deals between the country’s four largest telecoms players (Vodacom-Neotel and MTN-Telkom) may take South Africa back to the days of a duopoly, where price fixing and related tactics may damage the industry.

Cell C was asked about the impact of the London Agreement and higher interconnect rates on the company, but it did not provide feedback on these issues.

MTN would also not comment on the London Agreement, pricing collusion, and the decision to increase termination rates by 500% before Cell C launched.

Vodacom explains

Vodacom explained that when the first agreement was negotiated in 1994 there were very few, if any, precedents pertaining to interconnection agreements between mobile operators.

“Indeed, at this point we only expected to connect 500,000 customers within ten years. The assumption was made that the traffic between the operators would not be significant and would be more or less balanced,” Vodacom said.

“With this in mind, nominal rates of 20c/10c (peak/off-peak) were implemented, with the understanding that the rates would be reviewed and amended once traffic patterns were better established.”

However, as the industry evolved it was realised that the original assumptions on mobile to mobile traffic were incorrect, and the decision was taken to align the mobile to mobile termination rates with the fixed to mobile termination rates.

“To minimise the impact, the increase was phased in over three years, starting July 1999. Importantly, this negotiation took place in 1998, several years before Cell C’s entry into the market,” Vodacom said.

More on this issue

Cell C takes Vodacom, MTN to the Competition Commission

MTN concerned over Vodacom-Neotel deal

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Secret Vodacom, MTN pricing agreement warning