Interconnect cuts = cheaper mobile calls? Yeah, right!

The Independent Communications Authority of South Africa (ICASA) hurriedly published its final call termination regulations on Friday. This followed the release of draft regulations earlier this year and public hearings bizarrely squeezed in during the FIFA World Cup.

The headlines on Friday intimated that the cut in mobile interconnect to 40c per minute in three years’ time would translate into cheaper mobile tariffs.

Currently, the interconnect charge is 89c per minute for peak calls, and 77c per minute for off-peak calls. These prices follow a voluntary reduction of 30% from the interconnect rates charged in 2009 (from a peak rate of R1.25 per minute). The operators had very few options but to reduce their rates, given the pressure from the Department of Communications, ICASA, Parliament and curiously, hints of an investigation by the Competition Commission.

Back to Friday’s announcement… A drop in interconnect charges from 89c per minute to 40c per minute is a drop to less than half. Surely retail tariffs (that you and I pay per minute) would drop by an equal amount, right? Nope.

Interconnect tariffs have nothing to do with retail prices. The two are in no way directly related.

The problem is that ICASA’s only lever to try and influence pricing is interconnect tariffs. They aren’t allowed to regulate retail tariffs. And why would they ever be able to? It would be like government trying to set prices across the economy… How much is that bag of sugar? Well, government states it may only cost R7.50. Look how well price-setting worked for Zimbabwe a few years back.

What does this mean for operators?

Cell C and Telkom’s new mobile business 8ta are the big winners here. Because ICASA classifies them as smaller operators, they are able to charge the big two (Vodacom and MTN) 20% more for interconnect (this percentage also glides downward to 10% in 2013).

The smaller players have been pushing for this so-called “asymmetric” interconnect for years. It’s interesting that ICASA has finally heeded their calls.

But Vodacom and MTN are already dealing with an environment with far lower net interconnect revenue. In the year to March 31, Vodacom’s net interconnect revenue decreased by 14.7% (R1.75bn from R2.05bn). This means that interconnect as a percentage of EBITDA dropped to 9.4% (from 12.6%).

Vodacom’s chief financial officer Rob Shuter has quantified the potential loss: for every 10% reduction in peak mobile termination rates, Vodacom will see an estimated R200m loss in annualised EBITDA.

As the biggest operator (and therefore the biggest recipient of interconnect), Vodacom is busy plugging a R500m interconnect hole.

It’s going to have to do a lot more than cut costs in the next three years. More realistically, its going to have a lower revenue base in 2013 than it does today, unless it somehow manages to replace the turnover (and EBITDA).

What does this mean for consumers?

ICASA (mistakenly) believes that lower interconnect charges will translate into lower retail tariffs (ie, the price you and I pay for calls). Councillors have stated that they would hope to see lower call charges in the years ahead.

Operators have been clear that they will look to make up the “lost” interconnect revenue elsewhere. And with millions of customers, there are quite a few levers they’re able to tweak. Who wants to bet that we’ll see one or two revised charges make their appearance in the coming months? Activation fees?

That said, call charges are likely to fall, but not because of interconnect. The commoditisation of voice means that traditional call charges have been declining (with or without these interconnect changes).

In real terms, the decrease in the price of calls has been truly staggering. Mobile tariffs are one of the few (only?) set of prices that have not been increased for a number of years. Add in the impact of inflation, and suddenly even R2.50 per minute (the high end) seems fairly affordable in 2010 (versus, for example, 2004).

The operators all say they are “studying” Icasa’s regulatons, especially the “provisions for asymmetric interconnect” and will comment at a later stage.

Who will blink first?

Interconnect cuts = cheaper mobile calls? Yeah, right! << Comments and views

*Hilton Tarrant contributes to “Broadband”, a column on Moneyweb covering the ICT sector in South Africa. He thinks Icasa may be just a tad misguided in this effort to try influence retail prices.

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