african communications ict
DESCRIPTION
Termination Fees Expose for HSM/ACTRANSCRIPT
InterconnectIon rates
Fee
do
m
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