Vodacom, MTN put profits before people

I often wonder if certain captains of industries are entirely disconnected from reality. It’s the only thing that can explain the breathtaking gall of Vodacom chief executive Shameel Joosub, who complained publicly that new regulations would cost his company R1-billion in 2015, threatening to sue as a result.

His threat relates to the upcoming changes in mobile termination rates enforced by the Independent Communications Authority of South Africa (Icasa). These are the fees that our cellphone networks are allowed to charge each other when customers call numbers outside of their own network.

After years of squabbling, Icasa has finally managed to force the larger operators to gradually reduce these fees from 56 cents per minute in 2012 to 20 cents starting in March this year, and down to 10 cents by 2016.

Let’s be clear: we are not talking about Vodacom or MTN suddenly being unfairly fined or taxed. These termination fees are built into the cost of the phone calls we make. By forcing the operators to lower them, Icasa is acting on behalf of ordinary consumers because lowering these fees will stimulate competition and drive down call charges across the industry.

So what Joosub is effectively saying is: “Vodacom looked at the numbers and these lower call rates will hurt profits. We like profits, so we’re probably suing Icasa.” Were Vodacom some kind of struggling nongovernmental organisation – a scheme to dig wells for the impoverished in South Sudan, say – we might have some sympathy. But Vodacom is a spectacularly profitable giant with over 50% of the South African market in its grasp.

In the year ending December 2013, Vodacom declared over R13.2-billion in pure profit – a rise of nearly 30% on the previous year. So the amount Joosub is complaining about does not even equal 10% of last year’s profits. By 2015, it will probably be closer to 5%. Shame.

One of the things that is most vexing to Joosub and his compatriots at MTN (who control a healthy 33% of the market) is that Icasa has decided to treat the smaller networks – Cell C and Telkom Mobile – differently. They will receive much higher termination fees from Vodacom and MTN than they pay in return.

The logic behind this decision is that the larger players, left unchecked, might exercise their market power to squeeze the smaller players out completely. I’m normally not a fan of such blatant market manipulation by a regulator, but given the alternative – a predatory duopoly – I’m comfortable with the idea.

And it is pleasingly ironic to watch Telkom argue that it needs special treatment to help it defeat mean old Vodacom, in which it owned a 50% stake until mid-2009. The spectacle of one rapacious monopolist stabbing another former comrade-in-monopoly in the back is grimly amusing. The fact that consumers may benefit as a result is purely coincidental, but with Telkom’s history I suppose we’ll take what scraps we can get.

You could argue that Joosub and Zunaid Bulbulia – MTN’s chief executive – are just doing their jobs. They are protecting their shareholders – many of them ordinary South Africans – against a regulator that blatantly seeks to make their companies less profitable.

But let’s look at their profit margins in comparison to international norms. In its last financial year, Vodacom’s net profit margin was 22.2% and the MTN group’s was 17.8%. In the previous year, the figures were 17.5% and 19.5% respectively. International averages for the industry hover around 10%, and 15% is considered very high.

Profit margins are meant to reflect risk. Supermarkets make lower margins than many riskier businesses because the chance of people not needing food regularly is zero. But they make up for this in volumes.

I’d argue that mature telecoms operators are much more like supermarkets than riskier businesses such as software or construction. They have huge, established customer bases and provide a daily service to even the poorest people. They simply do not deserve the large risk premium they are currently extracting from the market. So bitching about giving 5% of your enormous profits back to your customers will only come across as tin-eared and out of touch.

Oscar Wilde once said: “One should always play fairly when one has the winning cards.” If I were Joosub or Bulbulia, I would take that to heart and shut my mouth.

Update: A representative of Vodacom contacted me to voice the company’s concerns about some of the facts in my column. The company insists that it is not against lower mobile terminate rates, or even the asymmetry in those rates. It is only seeking to challenge the method Icasa used to determine the scale of that asymmetry, which it claims is unprecedented. It also feels that characterising Joosub’s statements about the R1-billion loss as a “complaint” is unfair. He stated the amount as a fact in response to a question during a call to analysts, not as a comment on the fairness of MTRs.

Source: Mail & Guardian

More on mobile termination rates

Vodacom, MTN’s fears now a reality

New call termination cuts announced

Icasa playing with fire with MTRs: MTN CEO

The tough questions about MTR price cuts

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Vodacom, MTN put profits before people