The tough questions about MTR price cuts

The Independent Communications Authority of South Africa’s (Icasa) recently released its new draft call termination regulations, which propose a three year glide path to reduce mobile termination rates to 10c per minute.

MTN and Vodacom have warned that this dramatic price reduction – from 40c per minute to 10c per minute – may influence their network investments in rural areas.

They argue that low-end mobile users, who do not make many calls, are subsidized by mobile termination revenue. Removing this revenue stream will therefore limit the incentive to invest in many rural areas.

The operators further said that there is not strong evidence to suggest that lower termination rates lead to lower retail prices.

The fact that Cell C will benefit from asymmetry – where Vodacom and MTN will pay higher fees to terminate calls on Cell C’s network than the other way around – is another contentious issue. Vodacom and MTN argue that an established operator like Cell C has no right to demand asymmetry.

These arguments raise a few tough questions which MyBroadband put to MTN SA CEO Zunaid Bulbulia.

Question: When MTRs were at R1.25, MTN argued that a reduction in these rates will not result in retail price cuts. However, after the termination rates were reduced Cell C reduced their retail prices to 99c per minute. Does this not clearly show that lower MTRs result in lower retail rates?

Bulbulia believes that Cell C could have launched a 99c per minute flat rate, even if MTRs were still R1.25. He said that if Cell C invested enough in their network, they would have enjoyed more on-net traffic which would have made these lower rates possible.

When pushed on the issue, Bulbulia conceded that pricing a mobile call at well below the cost price, and hence losing money on all off-net calls to Vodacom and MTN, posed a challenge. However, he would not admit that lower mobile termination rates made it possible for Cell C to offer the lower prices.

Question: Telkom Mobile’s SIM Sonke service has a price of 29c/min on-net and 75c/min to other networks. Will lower termination rates not allow Telkom Mobile to reduce the 75c per minute to get closer to its 29c per minute on-net rates?

Bulbulia said that he does not know the economics of Telkom Mobile’s business, but there is a chance that lower MTRs can result in lower off-net call prices.

However, he added that a mobile network can never base their business on off-net calls, which is where Telkom Mobile and Cell C are struggling.

Question: Cell C CEO Alan Knott-Craig and other executives often said that lower mobile termination rates made it possible for them to cut prices. Are they lying?

Bulbulia said that Cell C’s claims that lower termination rates made it possible for them to cut their prices is merely a convenient way for them to push for a certain outcome.

He said that Cell C wants to ensure asymmetry to enjoy a net gain in mobile termination revenue to boost their business.

This money, Bulbulia argues, will not necessarily be invested into Cell C’s network. Instead it may flow out of the country to pay Cell C’s international shareholders.

Question: Are you really convinced that lower MTRs do not translate into lower retail rates?  Is it not just an argument for MTN to try and maintain higher profit margins?

Bulbulia said that there is no statistical evidence of a link between rate of MTR cuts and a reduction in retail rates.

He referenced two studies – one in Europe and one in South Africa – which substantiated his claim.

MTR cuts and retail rates
MTR cuts and retail rates

Bulbulia further said that South Africa’s margins are lower than many international countries, which are impacting negatively on the investment case in the country.

He referenced a chart which showed that MTN SA’s returns are lower than that of the MTN Group.

MTN EBITDA margins by region
MTN EBITDA margins by region

 

Question: Cell C did not enjoy any asymmetry when they entered the market. They are now enjoying some asymmetry, which ICASA is planning to increase. Is it not a fair system, which will help the smaller operators to make ends meet and increase competition?

Bulbulia said that an operator like Cell C which has been operating for 12 years should not enjoy any asymmetry.

He argued that the reason why Cell C is struggling is because of their poor network investment rather than a lack of asymmetry.

He said that Cell C’s strategy was to roam on Vodacom’s network rather than build their own, which created challenges for the company.

Bulbulia said that Cell C will not break even if they do not invest in their network, but also questioned how they will be able to convince investors to give more money after its poor financial performance over the years.

Question: Vodacom and MTN enjoyed massive termination rate asymmetry over Telkom for years. Did Telkom therefore not fund Vodacom and MTN when they were growing?

Bulbulia dismissed the notion that Vodacom and MTN were funded by Telkom through asymmetric termination rates.

He argued that their investors gave lots of money to grow their network, and that they received money from Telkom as a consequence of these investments. These investments, said Bulbulia, included network investments and handset subsidies.

Question: A few years ago MTN claimed that lowering termination rates from R1.25 will have disastrous consequences for both MTN’s business model and its network growth. A few years later and MTN SA is investing as much as ever into its network, and it is enjoying a very strong business in SA. Were you wrong then?

Bulbulia said that they had to make many changes to its business to continue to grow its network and maintain its business growth.

He added that MTN’s South African operation has a lower EBITDA (earnings before interest, tax, depreciation and amortization) margin than most other international operations in the group.

Question: MTN argued a few years ago that the termination rate of R1.25 is the absolute lowest it should be. However, not too long afterwards MTN said it was happy with 40c per minute. What changed?

Bulbulia said that, at the time, their fight not to lower mobile termination rates from R1.25 was justified because of the financial model they used at the time.

ICASA then introduced their “Chart of Accounts and Cost Allocation Manual (COA/CAM)” model, which Bulbulia said showed that a 40c per minute MTR was justified. MTN therefore adjusted their view on the matter.

More on Icasa MTRs

Mobile termination rate cuts could spook investors

Icasa announces new draft call regulations

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The tough questions about MTR price cuts