African Communications ICT

mobile fees

fight er s

Fe e d o m

Interconnection rates

Mobile telecoms fees recently came under the South African media spotlight after demands for an

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 propose amendments to the Electronic Communications Act in order to effect a drop in the rate.

Recent outrage regarding interconnection fees charged

by South African mobile operators has prompted swift government intervention.

Kevin Willemse investigates

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.

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mobile fees

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 history It’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

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

so doing delivering billions of dollars into the mobile industry’s coffers, spearheaded by the two incumbent

MTN SA entered the market later the same year as a private consortium,

mobile service providers (MSPs) offering their own

and both MSPs prospered immensely, investing billions into building their

network infrastructure: Vodacom and MTN.

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

Ever since mobile telecoms was launched in South Africa, these two MSPs have competed in

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

a race to expand their respective coverage foot-

and unpredictable GSM landscape. The results of their flawed formula would

prints and potential market shares. Connectivity

only be revealed over a decade later. The peak MTR was set at ZAR0.20 per

deals between the mobile operators, as well as the

minute between the MSPs, and ZAR0.21 where Telkom hosted the connection

national fixed-line provider Telkom, further expanded

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

coverage, and after a few years a national mobile

Icasa. The figure allowed a substantial gap between the service providers’

network was in place, along with MTR agreements

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

between all service providers.

operators could impose – their core profit margin.

The result was that any competitor entering the

During 1999, a third MSP appeared on the scene. Cell C’s business model

South African MSP fray would have to choose to

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

invest billions in building their own mobile services

operator (MVNO) while it grew its own coverage infrastructure. With a

infrastructure, or accept the MTRs charged by

growing market already herded into paying premium retail call rates,

the incumbents, a situation regarded as a global

the ZAR0.20 MTR Cell C would incur was viewed as acceptable.

industry norm.

So, if no irregularities, cartels or collusion could

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

clearly be established, why were the politicians

launched and had to stomach the ZAR1.23 per minute rate for every call

suddenly so concerned about the profiteering of

they connected. Despite crying foul, Cell C was largely ignored by Icasa and

a US$8-billion private industry?

government. Further confusion emerged when it was revealed that Telkom

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

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

mobile telephony an inescapable expense of

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

nearly every citizen, the profitable MSPs present

it had a massive impact on Cell C for as long as they were rolling out their

a soft target for politician. But how did they end

own network hardware.

up in this situation in the first place?

In 1994, Vodacom became South Africa’s first

This essentially strangled the profit potential of Cell C from the start. The challenges of creating a critical mass of new subscribers, while covering

mobile service provider, with a 50% shareholding

a ZAR1.23 MTR into the retail price, created a difficult market to penetrate.

by Telkom and the balance held by Vodafone

To date, Cell C has captured a mere 10% of market share, despite competi-

UK. Any profit was welcomed and shared by

tive packages and 80% independent network coverage.

Vodacom, Telkom and the state. Furthermore,

This further discouraged future competitors wanting a slice of the South

mobile calls terminated via the Telkom network

African MSP pie. While multiple global network operators were competing

were charged for by Telkom as a consumer-based

successfully just outside South Africa’s borders, the prescribed MTRs were

service, creating an additional income stream.

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

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mobile fees

Why the politics?

One of the interesting facts that came to light

In 2008, Telkom announced it would be selling its 50% stake in Vodacom.

was that since 1994, Telkom had maintained its

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

ZAR0.23 interconnection rate for the various MSPs,

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

only increasing it to ZAR0.33 in recent years. However,

services. In the same year, Neotel entered the South African market as the

Telkom had been paying the inflated fees imposed

second network operator for fixed and mobile services, while Virgin Mobile

by the MSPs for calls it bounced onto their networks.

(operating on the Cell C network) had managed to garner a 1% market

The result was that in 2009 Telkom paid US$735 million in

share since 2006.

MTR fees to the mobile operators, while only receiving

This meant that Telkom would relinquish the US$408-million revenue stream

US$124 million for returning the favour.

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

So, what does it mean?

by Vodafone UK, would be listed on the JSE during May 2009.

Icasa have been acting as mediator between the

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

various players since the issue came up, but failed to

slow to realise the financial implications of the Vodacom transaction. At the

propose a mutually acceptable solution, or table any

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

future regulations. This, despite assurances by the MSPs

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

that they are ready and willing to co-operate with

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

Icasa in reducing MTR fees, as long as they apply

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

across the industry.

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

This makes sense, since the consequences of losing

for Icasa or government protect Vodacom or any other MSPs in terms of the

MTR profits would be offset against lower MTRs when

MTR profits they were used to enjoying. Furthermore, the sudden increased

utilising competitor networks – as long as theirs applies

awareness of the deal started revealing startling facts that demanded swift

to everyone at the same time, which only Icasa can

attention and response.

orchestrate. Of course, the impact would be worse for the larger players who perform most of the terminating, and hugely beneficial to the smaller players.

operators were competing successfully just outside South Africa’s borders, the prescribed MTRs were seen

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 submitted 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

as restrictive, and hampered

forward these proposals themselves, while also risking

the creation of worthy

implementation of their mandate, this seems unlikely

competition

possible litigation for not following due process in the 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 developments have created the most powerful and feared weapon against the exorbitant profiteering of any industry – an educated market.

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photography: gallo/gettyimages; illustration: istockphoto

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