Telkom rakes in cash thanks to MTRs, while Vodacom, MTN suffer

In recent Telkom trading statement, the operator said its normalised earnings for the year ended 31 March 2015 will be up significantly.

This is thanks, in part, to lower payments to mobile operators – due to a reduction in termination rates – which resulted in a benefit R743 million.

Call termination rates are the fees networks pay one another to connect voice calls to one another’s networks, and was the subject of a court battle between Vodacom, MTN, Cell C, and Icasa during 2014.

Cell C was fighting for greater asymmetry, while Vodacom and MTN were against the move.

Asymmetry means that smaller operators such as Telkom’s mobile arm and Cell C are able to charge more to connect calls to their networks than Vodacom and MTN are allowed to charge in return.

MTN and Vodacom warned they would lose out on R1 billion each in revenue if Icasa went ahead with a proposed increase in asymmetry (and decrease in termination rates) for Cell C and Telkom.

In September 2014 Icasa announced its final termination rates which lowered asymmetry from the levels Icasa had previously proposed, but stated that for an operator to qualify for asymmetry it must have less than 20% of the share of total terminated minutes in either the fixed or mobile market.

Previously, an operator qualified based on market share – which had to be under 25%.

Following the decision by Icasa on termination rates, which still benefited Cell C and Telkom, the latter reported the R743 million benefit.

“Our performance for the full year to 31 March 2015 continued the trend experienced and reported on in our interim results where a challenging operating environment was once again compounded by competitive pressures and regulatory interventions,” said Telkom.

In recent trading updates from MTN and Vodacom, both operators reported losses in revenue based on the termination rates.

“Service revenue in SA declined 5.8% due to [termination rates] in April 2014 and by increased competition and weaker consumer spending,” said Vodacom’s in its Q3 2014 report.

“The impact of the lower [termination rates] was to reduce service revenue by almost a billion rand,”said Vodacom CEO Shameel Joosub in November 2014.

MTN, meanwhile, saw local revenue decline 3.9% according to its latest full-year results, mainly due to a 36% decline in interconnect revenue due to lower mobile termination rates.

Prices meant to drop

Icasa said that while a reduction in wholesale rates such as call termination will not necessarily mean consumers will see an immediate reduction in retail prices, rates have come down almost immediately when the previous call termination rate cuts were announced.

“The extent to which retail rates drop is operator-dependent,” Icasa added.

What has happened, however, is that both MTN and Vodacom increased their prices – which the operators warned would happen following Icasa’s decision.

Mobile networks warned that an unfavourable outcome could result in “catastrophic” consequences, including price hikes, while Vodacom said the impact on revenue “means less money for Vodacom to invest in network upgrades and bringing overall call costs down”.

Cell C also recently hiked its contract prices, which came into effect on 1 February 2015, along with Telkom which unexpectedly increased its line rental prices mid-year.

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