InterconnectIon rates

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Recent outRage RegaRding inteRconnection fees chaRged

by south afRican mobile opeRatoRs has pRompted swift

goveRnment inteRvention. Kevin willemse investigates

south african media spotlight after demands for an

Mobile telecoms fees recently came under the

investigation into inflated costs – more specifically,

mobile terminating rates, the fees one network

operator charges another to switch and host a

competitor’s phone call on their infrastructure.

what happened?for the south african public, the reaction of icasa

(independent communications authority of south

africa) was encouraging, if not bewildering. Regarded

as somewhat toothless, icasa immediately announced

that it regarded the existing mobile termination rate

(mtR) of ZaR1.25 per peak minute as disproportionately

high, and added that they would go so far as to pro-

pose amendments to the electronic communications

act in order to effect a drop in the rate.

in line with popular global models, and almost

mirroring recent changes in namibia, icasa proposed

that the mtR be reduced to ZaR0.60 by november

2009, with further reductions of ZaR0.15 per annum up

to 2012.

growing political interest supported these proposals,

and soon ministries, officials and government at large

were voicing their support for the proposed changes.

popular opinion was that any result could only prove

to be beneficial for the country’s 40 million mobile

phone users.

figh

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MobIle Fees

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MobIle Fees

In line with popular global

models Icasa proposed that

the Mtr should be reduced to

Zar0.60 by november 2009,

with further reductions of

Zar0.15 per annum up to 2012

however, instead of icasa simply getting on with

taking the mobile operators to task, the public, media

and politicians began to investigate and reveal the

mystery around the sudden decisiveness regarding

an issue which had received very limited attention in

the past.

a brief historyit’s not headline news that south africa’s telecoms

rates are among the world’s highest – peer reviews

with similar markets have revealed this for years.

what is more surprising though is that this situation

has been tolerated by the market for so long and in

so doing delivering billions of dollars into the mobile

industry’s coffers, spearheaded by the two incumbent

mobile service providers (msps) offering their own

network infrastructure: vodacom and mtn.

ever since mobile telecoms was launched in

south africa, these two msps have competed in

a race to expand their respective coverage foot-

prints and potential market shares. connectivity

deals between the mobile operators, as well as the

national fixed-line provider telkom, further expanded

coverage, and after a few years a national mobile

network was in place, along with mtR agreements

between all service providers.

the result was that any competitor entering the

south african msp fray would have to choose to

invest billions in building their own mobile services

infrastructure, or accept the mtRs charged by

the incumbents, a situation regarded as a global

industry norm.

so, if no irregularities, cartels or collusion could

clearly be established, why were the politicians

suddenly so concerned about the profiteering of

a us$8-billion private industry?

a cynic’s point of view may be that they were

simply trying to drum up support by attacking an

issue affecting almost the entire population. with

mobile telephony an inescapable expense of

nearly every citizen, the profitable msps present

a soft target for politician. but how did they end

up in this situation in the first place?

in 1994, vodacom became south africa’s first

mobile service provider, with a 50% shareholding

by telkom and the balance held by vodafone

uK. any profit was welcomed and shared by

vodacom, telkom and the state. furthermore,

mobile calls terminated via the telkom network

were charged for by telkom as a consumer-based

service, creating an additional income stream.

mtn sa entered the market later the same year as a private consortium,

and both msps prospered immensely, investing billions into building their

respective networks to service and grow their customer base, and put mtR

deals in place to host traffic across any network ... at a cost.

these costs were calculated 15 years ago in what was then a very young

and unpredictable gsm landscape. the results of their flawed formula would

only be revealed over a decade later. the peak mtR was set at ZaR0.20 per

minute between the msps, and ZaR0.21 where telkom hosted the connection

– rates that were acceptable to the various operators and approved by

icasa. the figure allowed a substantial gap between the service providers’

inherent costs of hosting the call, and the potential retail charge the

operators could impose – their core profit margin.

during 1999, a third msp appeared on the scene. cell c’s business model

was to piggyback off the vodacom network as a mobile virtual network

operator (mvno) while it grew its own coverage infrastructure. with a

growing market already herded into paying premium retail call rates,

the ZaR0.20 mtR cell c would incur was viewed as acceptable.

but this was before icasa endorsed a 515% increase in mtRs by vodacom

and mtn between 1998 and november 2001, when cell c was officially

launched and had to stomach the ZaR1.23 per minute rate for every call

they connected. despite crying foul, cell c was largely ignored by icasa and

government. further confusion emerged when it was revealed that telkom

had been paying the msps ZaR1.09 per minute in mtR since 1994 (currently

ZaR1.25), and this was the basis for the escalation.

one can understand how the huge increases actually play off and to

some extent negate one another between the two large incumbents, but

it had a massive impact on cell c for as long as they were rolling out their

own network hardware.

this essentially strangled the profit potential of cell c from the start. the

challenges of creating a critical mass of new subscribers, while covering

a ZaR1.23 mtR into the retail price, created a difficult market to penetrate.

to date, cell c has captured a mere 10% of market share, despite competi-

tive packages and 80% independent network coverage.

this further discouraged future competitors wanting a slice of the south

african msp pie. while multiple global network operators were competing

successfully just outside south africa’s borders, the prescribed mtRs were

seen as restrictive, and hampered the creation of worthy competition.

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MobIle Fees

why the politics?in 2008, telkom announced it would be selling its 50% stake in vodacom.

the move was lauded as a step towards reducing state interest in telecoms

costs, and also allowed telkom to forge ahead with its plans to offer mobile

services. in the same year, neotel entered the south african market as the

second network operator for fixed and mobile services, while virgin mobile

(operating on the cell c network) had managed to garner a 1% market

share since 2006.

this meant that telkom would relinquish the us$408-million revenue stream

it enjoyed through its vodacom interest, in exchange for freedom to enter

the market as a competitor. it also meant that vodacom, now 65% owned

by vodafone uK, would be listed on the Jse during may 2009.

if certain reports around these events are to be believed, government was

slow to realise the financial implications of the vodacom transaction. at the

last minute, labour union cosatu opposed the sale, citing a flimsy call against

job losses, while icasa was roped in to determine whether or not they had the

authority to reject the deal. however, the deal was already watertight, the

sale went through, and government lost the vodacom cash cow.

continuing the cynical viewpoint, it now seemed there was no motivation

for icasa or government protect vodacom or any other msps in terms of the

mtR profits they were used to enjoying. furthermore, the sudden increased

awareness of the deal started revealing startling facts that demanded swift

attention and response.

one of the interesting facts that came to light

was that since 1994, telkom had maintained its

ZaR0.23 interconnection rate for the various msps,

only increasing it to ZaR0.33 in recent years. however,

telkom had been paying the inflated fees imposed

by the msps for calls it bounced onto their networks.

the result was that in 2009 telkom paid us$735 million in

mtR fees to the mobile operators, while only receiving

us$124 million for returning the favour.

so, what does it mean?icasa have been acting as mediator between the

various players since the issue came up, but failed to

propose a mutually acceptable solution, or table any

future regulations. this, despite assurances by the msps

that they are ready and willing to co-operate with

icasa in reducing mtR fees, as long as they apply

across the industry.

this makes sense, since the consequences of losing

mtR profits would be offset against lower mtRs when

utilising competitor networks – as long as theirs applies

to everyone at the same time, which only icasa can

orchestrate. of course, the impact would be worse for

the larger players who perform most of the terminat-

ing, and hugely beneficial to the smaller players.

after a breakdown in discussions between the

department of communications and network

operators, government took a hard line approach

and demanded mtRs be reduced to the absolute

minimum, based on actual mtR cost statistics submit-

ted by the msps (currently estimated at around

ZaR0.35).

with a policy directive issued, icasa has been tasked

with planning how the rate cut will be implemented

before the end of 2009.

however, given that icasa was unable to put

forward these proposals themselves, while also risking

possible litigation for not following due process in the

implementation of their mandate, this seems unlikely

to result in any notable consumer benefit before 2010.

the good news is that, one way or another, retail

mobile costs should be reduced next year. however,

one should not assume the reduction would be a

direct correlation to whatever icasa determines the

new mtR to be, as the msps will most certainly perform

some pretty fancy footwork in order to offset this

against retail costs and package options.

perhaps most telling of all, is that these develop-

ments have created the most powerful and feared

weapon against the exorbitant profiteering of any

industry – an educated market.

While multiple global network

operators were competing

successfully just outside south

africa’s borders, the

prescribed Mtrs were seen

as restrictive, and hampered

the creation of worthy

competition