The dirty history of call termination rates in South Africa
For more than ten years, Cell C has been struggling to make enough money to repay the billions of rands it owes to creditors.
Talk of selling Cell C to Telkom dates back as far as 2007. Former Cell C CEO Jeffrey Hedberg also said in 2009 that he would like to see the company sold to Telkom.
Complicating matters further was that back then, all of Cell C’s debt was denominated in dollar and euro. The repayments alone were hundreds of millions of rand per year.
While the exact amount of debt was never disclosed, former Cell C CEO Jose Dos Santos once said that it was “in the high double-digit figures, and all in foreign currency”.
In July 2014, Cell C asked bondholders for permission to extend the repayment term of €77.4 million of its debt by three years.
Just under a year later, in June 2015, Standard & Poor’s issued a warning over unsecured debt at Cell C of R2 billion.
After more than a decade of trying, finding a buyer willing to put up enough money to satisfy Cell C’s shareholders and take over all its debt has proven impossible.
Dos Santos did manage to secure a deal with Blue Label Telecoms that included a recapitalisation of Cell C’s debt in rand terms. When the deal was finalised in 2017, Blue Label put up R5.5 billion for a 45% stake in Cell C.
In 2019, Standard & Poor’s downgraded Cell C’s secured bonds to “Default”, stating that there was an increased likelihood that Cell C will be unable to repay its debts when they become due.
In January 2020, Cell C defaulted on the payment of a $184-million loan, which was due in December 2019. It also defaulted on interest and capital repayments related to bilateral loan facilities with Nedbank, China Development Bank, Development Bank of Southern Africa, and the Industrial and Commercial Bank of China — all of which were due in January.
Cell C has said that this default is the result of an informal debt standstill, and payments have been suspended while the company’s recapitalisation is being negotiated.
Cell C is now going through yet another recapitalisation deal, along with a massive restructuring that will see it close 128 retail stores and cut 546 jobs.
This raises the question: how did Cell C land in this position?
The dirty history of call termination rates in South Africa
One of the factors that hobbled Cell C from the beginning is the issue of call termination rates.
Finweek reported in 2010 that Vodacom and MTN got together in London in 1999 to discuss how much they would charge each other, and other networks, for connecting calls to their subscribers.
This is called the interconnect or call termination rate — the cost of terminating a call on a competitor’s network.
As the chart below shows, between 1994 and 1999, Vodacom and MTN charged the same as Telkom to terminate calls on their networks: 10c per minute for off-peak calls and 20c per minute for on-peak calls.
In the years leading up to the launch of Cell C in 2001, Vodacom and MTN hiked their call termination rates by over 500% for off-peak calls and over 1,100% for on-peak calls.
Call termination rates in SA (Source: Lewis – Pricing and tariffs: principles)
Cell C has argued that this placed it at a massive disadvantage from the outset.
The high call termination rate meant that Cell C had to pay over a substantial chunk of its revenue from voice calls to Vodacom and MTN.
Vodacom has said that the increase of mobile to mobile call termination rates in 1999 had nothing to do with Cell C’s entry into the market, which only happened in 2001.
It said that the initial termination rates of 20c for peak calls and 10c for off-peak calls were implemented with the understanding that the rates would be reviewed once traffic patterns were better established.
Telkom has also criticised Vodacom and MTN in recent years regarding the issue of call termination. It argued that Vodacom and MTN used high call termination rates to get Telkom subscribers to subsidise the expansion of their cellular networks.
It should be noted that Telkom was a 50% shareholder in Vodacom until 2008.
The Independent Communications Authority of South Africa (ICASA) finally stepped in to regulate call termination rates in 2010.
This included asymmetric rates for smaller networks, like Cell C, allowing them to charge a higher rate for terminating calls on their networks than Vodacom and MTN were allowed to charge.
Lack of foresight
While the substantial hike in mobile call termination rates between 1999 and 2001 put Cell C at a disadvantage, it was not the only reason for Cell C’s financial challenges today.
Another major problem was the lack of foresight from management.
One infamous example is former Cell C CEO Jeffrey Hedberg declaring in 2008 that “3G is hype and we won’t fall prey to hype“.
While Vodacom and MTN were evolving their networks and investing in new technology, Cell C said that 3G was becoming an obsolete technology as overseas operators were already talking about 4G.
The first LTE networks were only commercially launched in South Africa in 2012.
As a result of Cell C’s lack of foresight, it lost many customers who wanted access to the latest mobile data services to Vodacom and MTN.
Former Cell C CEO Lars Reichelt corrected this blunder in 2010, but Cell C had already given Vodacom and MTN a two-year head start on 3G.
The recapitalisation of Cell C
Blue Label Telecoms joint CEO Brett Levy recently stated that Cell C’s recapitalisation is progressing well and is expected to be finalised by the end of the year, despite the complexity of the deal.
Once the deal is done, Cell C has stated that it plans to migrate all of its cellular traffic onto MTN’s radio access network over the course of several years.
Current Cell C CEO Douglas Craigie Stevenson emphasised that the company was not becoming a mobile virtual network operator (MVNO) like Virgin Mobile or FNB Connect.
“We have got our own spectrum, licence, number range, brand, customers, and core billing,” Craigie Stevenson said.
The move to relying entirely on its roaming agreement with MTN for the radio access portion of its network is part of a strategic move to get Cell C out of needing to invest in its own infrastructure.
“Cell C can’t be in capital expenditure, we never could have been,” Craigie Stevenson said.
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