Interconnect rate cuts have dominated the news over the last few days, with Parliament, the Independent Communications Authority of South Africa (ICASA), the Department of Communications (DoC), smaller telecoms players and even political parties suggesting urgent and significant price cuts.<\/p>\n
Parliament suggested an immediate peak-time rate cut of 65c per minute, with a further 15c cut per year for the next three years. This will bring the eventual mobile interconnect rate down to 15c per minute from the current R 1.25 per minute. ICASA and the DoC suggested an immediate 30c rate cut, with another reduction before the end of 2010 to bring the peak mobile termination rate to 60c. <\/p>\n
Vodacom and MTN warned against a drastic interconnect rate cut, saying that it will harm the local telecommunications industry and may even result in an increase in mobile phone call costs. <\/p>\n
MTN SA’s Managing Director, Karel Pienaar said that local developments within the telecommunications market – especially mobile broadband infrastructure – would be severely hampered if interconnect rates are cut to the extent at which the Department of Communications and ICASA are proposing.<\/p>\n
Vodacom CEO Pieter Uys in turn argued that he is in favour of mobile terminate rate reductions, but wants this to be achieved through a well designed process to ensure that the local telecoms industry will not be harmed. <\/p>\n
To change the current business models will take time, and Uys urged all stakeholders to avoid harming the good work done in the local telecoms market by forcing drastic and disruptive interconnect rate cuts on Vodacom, MTN and Cell C. Uys would not reveal exactly what interconnect rate cut Vodacom will be happy with, but did say that a 60c interconnect rate will definitely hurt the company.<\/p>\n
Cell C is however keen to see significant mobile termination rate price cuts despite the fact that they stand to lose earnings in the short term. “The mobile termination rates in South Africa are unjustifiably high and this has led to high price levels which damage the entire economy and the poor disproportionately,” said Lars Reichelt, CEO of Cell C.<\/p>\n
Cell C proposed that Vodacom and MTN pay the smaller operators a mobile termination rate of R0.75 per minute whilst the smaller operators, including Cell C, pay Vodacom and MTN a rate of R0.65. Also, that fixed termination rates be reduced concomitantly to R0.15.<\/p>\n
Reduced profits<\/strong><\/p>\n Former Vodacom CEO Alan Knott-Craig recently said that only a fool would argue that interconnect is not too high. “Clearly it’s too high,” said Knott-Craig. “You cannot have a tariff set 16 years ago, when you based that tariff on a market size of 500 000, a million people, and when you have a market size of around 40 million people and try and maintain that this is [fair].”<\/p>\n Knott-Craig further argued that the suggested interconnect rate will not have a material effect on the profits of Vodacom and MTN. “So I’m not sure why the heck people are fighting this. It’s not going to have any impact on profits, it’s not going to have a hell of a impact on tariffs either,” said Knott-Craig.<\/p>\n Uys however disputes Knott-Craig’s argument, saying that Vodacom stands to lose over R 1billion in profit should interconnect rates be reduced to 60c as suggested. “Maybe a billion rand is not much to Alan [Knott-Craig], but to me it is a lot,” said Uys.<\/p>\n When quizzed about the fact that Vodacom is making significant profits and should be able to absorb a R 1-billion reduction in earnings, Uys said that it is not as simple as it may sound. The Vodacom CEO pointed out that Vodacom’s EBITDA margins are already far lower than international norms, and further cuts may well reduce the interest in investing in South Africa’s mobile industry.<\/p>\n Uys highlighted that local cellular providers decreased the cost of access to telephony services to negligible amounts – like 99c for a SIM card and free network access – something which is made possible by the current interconnect regime. He added that universal Internet access is the next big step, and significant investments will be needed to ensure that this is achieved.<\/p>\n Price cuts<\/strong><\/p>\n Many industry experts have expressed doubts about call rates immediately dropping due to interconnect rate cuts. It was even suggested that prepaid call rates may increase to compensate for lost revenue.<\/p>\n Du Pont Telecoms CEO Graeme Victor said that a reduction in the mobile wholesale termination rate will not do much to reduce the cost of mobile calls. Victor warned that prepaid cellular customers may even find themselves paying more for calls.<\/p>\n Triple-W Strategy analyst Steven Ambrose agrees, saying that it is important to keep in mind that there will, in all likelihood, not be an automatic cut in cellular tariffs that is equivalent to the cut in interconnect rates. “There will not be immediate cost savings from the big networks – the price reductions will start from the smaller players who will be more competitive and flexible in their pricing, and this competition will result in a overall re-balancing of cellular costs over the next year.”<\/p>\n Knott-Craig said that he thinks that “as inevitable as cutting interconnect rates is, it’s as inevitable that people will be disappointed at the result in the tariffs.” He further said that lower interconnect rates are unlikely to have any significant difference in the bill mobile subscribers receive at the end of the day.<\/p>\n These views are substantiated by Vox Orion’s Jacques du Toit who recently said that despite the significant cut in interconnect rates in Namibia a few months ago, consumers have yet to see any price reduction in call rates.<\/p>\n Vodacom’s Uys is however more optimistic, saying that he expects price reductions for fixed line to mobile calls in line with interconnect rate cuts, good news for Telkom and Neotel subscribers. Neotel CEO Ajay Pandey supported the suggested interconnect price cuts, but made it clear that the reduction in interconnect fees must be visible to customers through tangible cost savings.<\/p>\n “It is to be expected that there will be arguments for both sides of the case,” said Pandey. “As an industry, however, we must ensure that we do not get caught up in the fight and lose sight of the real issue at hand here – affordable telecommunications for South African citizens.”<\/p>\n