MTN’s 79c per minute changes the game
In a move that’s caught the market – especially challenger Cell C – completely off-guard, MTN has cut its prepaid call rates to 79c per minute to all networks. (This means that Cell C no longer has the “lowest guaranteed flat call rate” in the country, and that it will have to withdraw that messaging from its advertising, but I digress. Telkom Mobile’s Sim Sonke package has an on-network rate of 25c per minute, and an off-network rate of 75c per minute, but the operator remains a sub-scale business.).
Still, Monday’s announcement lacked the ‘wow’-factor that has come with previous cuts announced by Cell C – perhaps that’s indicative too. The truth is, the perception among most South Africans is that Cell C is the plucky upstart, fighting for lower prices, while the big two gouge consumers and overcharge. (All credit to Cell C for creating that perception in the market).
MTN’s move is aggressive: it’s a promotional tariff to start, and limited to one of its prepaid tariff plans (Pay Per Second). But MTN South Africa Chief Marketing Officer Brian Gouldie says the intention is to make these prices permanent, following regulatory approval (operators have to file tariff changes with Icasa).
This is not a simple cut from 99c per minute to 79c…. The previous rate for Pay Per Second was R1.20 per minute (a change that was only made two months ago (!) with the reshuffling and simplification of its prepaid packages). This means that MTN has cut retail prices by 34%, effectively overnight. Vodacom’s flat-rate on prepaid is also R1.20 per minute (billed per second). Any bets against Vodacom reacting this week?
So why would MTN cut prices?
It was caught napping by Cell C 18 months ago. It’s lacked any real innovation in either the prepaid or postpaid (contract) space until very recently. This meant that Alan Knott-Craig, who was appointed as Cell C chief executive in April 2012, could go straight for the jugular. Cell C cut call rates to 99c across all networks, all day. MTN didn’t react. Vodacom did, mostly. Fast-forward a year to early 2013 and the results of that inaction were obvious.
Vodacom lost 308 000 (net) prepaid subscribers between January and March of last year. MTN lost 470 000 prepaid customers in the same period. Vodacom recovered quickly, plus made sure that it lost (mostly) unprofitable subscribers. It took MTN the best part of last year to recover the losses, ending on 20.7 million prepaid customers (vs 20.9 million at the start of 2013).
MTN Group Chief Executive Sifiso Dabengwa admitted in August last year that the South African management team was simply caught out by Cell C’s aggressive pricing:
“It was a combination of issues, firstly it was a question of trying to make sure that we have a clear understanding of whether the market has had a structural change or it was really promotions-driven. Whilst initially it was clearly promotions-driven… it became quite clear that there had been a structural shift and that’s probably the reason why we didn’t act early enough. Although in the early stages we also did a number of promotions but clearly from a competitive point of view they were not as competitive as the competition.”
MTN took the opportunity afforded by the sudden resignation of Group CFO Nazir Patel to completely overhaul the management of its South African unit in July. The new team put in place some quick fixes and stabilised its prepaid base, but any fundamental changes were always going to only happen towards the end of the year.
Icasa’s call termination rates process, which saw final regulations published in December, meant that any changes to retail pricing would have to wait until there was certainty on termination rates (or interconnect charges).
Yes, operators can argue until they’re blue in the face that there’s no direct link between call termination rates and retail tariffs, but the bottom line is that call termination rates provide a floor for retail tariffs. Retail tariffs can’t, for example, move to below the price of termination rates – an operator would lose money for every minute of every call made to another network if that was the case! That argument, while technically true, is false in practice.
Certainty arrived – sort of – with the judgment handed down in the South Gauteng High Court on March 31 by Judge Haseena Mayat. Termination rates would drop to 20c per minute for the two big operators for a period of six months. Reading between the lines, Icasa will presumably have to retroactively prove how it arrived at that figure in six months’ time. The choice by MTN and Vodacom not to appeal the court’s decision has paved the way for this retail tariff cut.
Had Icasa regulated effectively (which it’s failed to do), prices might’ve been at 79c per minute a year ago. In 2014, prices might’ve been closer to 69c per minute.
MTN’s rolled the dice. The move was aggressive – because it needed to be.
The real question is how Cell C will react given that it’s gone from being on the front foot to now being the one caught off-guard. There’s that small matter of a $160 million (R1.6 billion) debt repayment due next year. Can Cell C react? Can it afford not to?
Again, consumers win. Prices are lower.
Now if only Icasa would do its job.
* Hilton Tarrant contributes to ‘Broadband’, a column on Moneyweb covering the ICT sector in South Africa.
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