mobile wholesale and retail price interplay: the somewhat ......mobile wholesale and retail price...

Mobile wholesale and retail price interplay: the somewhat contrary case of South Africa in AfricaAlison Gillwald & Christoph Stork

Thursday, 7 March 13

Termination = MonopolyMonopolies require price regulation Termination rates at cost of efficient operator

Provide incentive to invest in new technologies to reduce costsPromote competition and economic efficiencyPromote universal service through low retail prices


Dominant operators often argue that if MTRs are lowered:

Retail prices will increaseThere will be less subscribersIn particular the poor will be cut offOperators will invest less


Waterbed Effects


Waterbed Effect is based Two-sided market argument

Previous paper we have shown that wholesale and retail prices do not form a two sided market

Retail and wholesale prices are not interdependentThere is cost causation


Two-sided market argument is difficult to explain to media

- hence a new strategy:

Revenue replacement


Revenue ReplacementDominant operators claim that due to lower termination revenues they have to:

Increase retail pricesRetrench staffInvest less


Businesses are run based on profits, ie revenues - cost, not just revenues

If operators could increase prices without loosing customers or traffic...If profits could be increased by increasing prices...Why have operators not done so already?

Revenue Replacement a suitable business strategy?


Above cost MTR = transfers within the sector

No funds from outside the sectorLower MTR = net payers pay less and net receiver receive less, in generalNet interconnect payments depend on many factors including the pricing strategies of competitors


Case Study South Africa


Mobile Termination glide Path in South African cents

Peak Off Peak CommentSince 2001 125c 89c

March 2010 89c 77c political intervention

March 2011 73c 65c Gazette No. 33698, 29 October 2010

March 2012 56c 52cGazette No. 33698, 29 October 2010March 2013 40c 40c

Gazette No. 33698, 29 October 2010


15 April 2010

Loosing BillionsThursday, 7 March 13

10% loss or 10% less revenue? There is a big difference

17 May 2010


400 million

less revenue in one

quarter

22 July 2010


17 November 2010


Staff retrenchment to offset impactVodacom: R800 million loss in revenue

1 March 2011


17 May 2011

Vodacom: R1.5 billion loss in revenue

R500 million net interconnect lossThursday, 7 March 13

17 May 2011

MTN: ZAR 2.5 billion lost in revenuesTelkom interconnect revenue dropped 37.4%


28 March 2012

“I know that it is counter intuitive, but it is what happens,” said

Knott-Craig.


January 2012 OECD Low User Basket costs in USD (FX= average 2010)January 2012 OECD Low User Basket costs in USD (FX= average 2010)January 2012 OECD Low User Basket costs in USD (FX= average 2010)January 2012 OECD Low User Basket costs in USD (FX= average 2010)January 2012 OECD Low User Basket costs in USD (FX= average 2010)January 2012 OECD Low User Basket costs in USD (FX= average 2010)

Country Name Cheapest product from Dominant OperatorCheapest product from Dominant Operator Cheapest product in countryCheapest product in country % cheaper than dominant Country Name Rank US$ Rank US$ % cheaper than dominant

Mauritius 1 2.39 5 2.39 Dominant is cheapestEthiopia 2 2.61 7 2.61 naNamibia 3 2.74 8 2.74 Dominant is cheapestKenya 4 2.85 1 1.90 33.4%Egypt 5 2.91 9 2.91 Dominant is cheapestSudan 6 3.53 6 2.46 30.5%Ghana 7 3.87 11 3.28 15.1%Libya 8 3.90 14 3.90 Dominant is cheapestRwanda 9 4.28 3 2.16 49.4%Guinea 10 4.62 2 1.93 58.1%Sierra Leone 11 5.04 13 3.88 23.1%Uganda 12 5.51 10 2.94 46.6%Congo Brazaville 13 5.63 17 5.63 Dominant is cheapestTanzania 14 5.82 12 3.75 35.7%Algeria 15 6.21 4 2.28 63.3%Tunisia 16 7.24 18 6.46 10.9%Senegal 17 8.11 24 8.11 Dominant is cheapestBotswana 18 8.16 20 7.66 6.0%Sao Tome &Principe 19 8.21 25 8.21 Dominant is cheapestNigeria 20 8.40 16 5.22 37.8%Madagascar 21 8.45 27 8.45 Dominant is cheapestMali 22 8.78 29 8.78 Dominant is cheapestBurkina Faso 23 8.88 28 8.53 4.0%Benin 24 9.10 22 7.92 13.0%Mozambique 25 10.00 33 10.00 Dominant is cheapestChad 26 10.14 34 10.14 Dominant is cheapestD.R. Congo 27 10.37 19 7.62 26.5%Côte d’Ivoire 28 10.41 36 10.41 Dominant is cheapestCameroon 29 10.44 35 10.28 1.5%South Africa 30 11.07 32 9.83 11.2%Togo 31 11.18 38 11.18 Dominant is cheapestZambia 32 12.05 26 8.22 31.8%Niger 33 12.30 31 9.77 20.6%Central African Republic 34 12.33 39 12.33 Dominant is cheapestAngola 35 12.50 41 12.50 Dominant is cheapestSwaziland 36 12.87 44 12.87 naMalawi 37 13.01 45 13.01 Dominant is cheapestZimbabwe 38 13.48 43 12.67 6.0%Morocco 39 13.56 42 12.53 7.6%Gabon 40 16.11 30 9.09 43.5%Lesotho 41 16.51 40 12.43 24.7%Cape Verde 42 18.15 46 18.15 Dominant is cheapestGambia 43 na 15 4.33 naMauritania 44 na 21 7.77 naLiberia 45 na 23 8.09 naSeychelles 46 na 37 11.04 naSource: Research ICT Africa Mobile Pricing Report 2012Source: Research ICT Africa Mobile Pricing Report 2012Source: Research ICT Africa Mobile Pricing Report 2012Source: Research ICT Africa Mobile Pricing Report 2012Source: Research ICT Africa Mobile Pricing Report 2012Source: Research ICT Africa Mobile Pricing Report 2012


Media response to RIA Policy brief from April 2012Media response to RIA Policy brief from April 2012Media response to RIA Policy brief from April 2012Date Website/email/Speech Title

12 April 2012 Mybroadband South Africa’s mobile prices compared12 April 2012 TechCentral SA mobile prices among the highest in Africa13 April 2012 BusinessDay SA prepaid rates ‘near highest’13 April 2012 Mail&Guardian Icasa fails consumers, report says16 April 2012 TechCentral Icasa tackles critics over telecoms prices16 April 2012 ITWeb ICASA to investigate telecoms prices19 April 2012 News24 Weak regulation 'drives up SA mobile prices'19 April 2012 Keynote address by the

Minister of Communications, Ms Dina Pule

Keynote address by the Minister of Communications, Ms Dina Pule, at the National integrated ICT policy colloquium, Johannesburg

19 April 2012 Research ICT Africa Myth buster on reasons for SA high prepaid mobile pricing

19 April 2012 TechCentral How ANC is squandering SA’s digital future20 April 2012 TechCentral Busting myths about SA’s high mobile prices16 May 2012 Research ICT Africa Some technical questions from the media16 May 2012 TechCentral Knott-Craig drops price bomb on rivals16 May 2012 TechCentral Price war erupts in SA mobile17 May 2012 TechCentral Gloves off in mobile price war6 June 2012 TechCentral Cell C plays its contract hand


40

55

70

85

100

Jan 11 Mar 11 May 11 Jul 11 Sept 11 Nov 11 Jan 12 Mar 12 May 12

8ta Cell CMTN South Africa Vodacom South AfricaVirgin Mobile


January 2012 May 2012

2732

2430

Cheapest prepaid product from Dominant OperatorCheapest prepaid product in country

Ranking of South Africa among 46 African countries - prepaid mobile for OECD low user basket


Prices did not go up

neither after 1st nor 2nd MTR cut


Telkom Fixed-line operating revenues and expenses in ZAR million (Telkom 2011, Telkom 2012, FY ending March)





2011 2012 Change

Interconnection Revenues

Total Revenues 1,679 1,757 78


Mobile Domestic 498 375 -123Interconnection Revenues Mobile International 186 630 444Interconnection Revenues

Fixed 328 262 -66


International 667 490 -177

Interconnection Expenses

Total Expenditure 5,193 4,839 -354

Interconnection Expenses

Mobile network operators 3,704 3,218 -486Interconnection

Expenses Fixed 404 306 -98Interconnection Expenses

International network operators 792 1,029 237

Interconnection Loss TotalInterconnection Loss Total -3,514 -3,082 432Interconnection Loss Mobile onlyInterconnection Loss Mobile only -3,206 -2,843 363

Interconnect revenue up, expenses down, net improved by ZAR432 million

Telkom past on MTR cuts 100% to customersThursday, 7 March 13

Revenue up 7.8%, profits up 27.9% Thursday, 7 March 13

Interconnect revenue down 10.3%, expenses down 13.4%, net interconnect profit up 6.2% in South

Africa, additional ZAR 66 million

10.2% increase in traffic from Telkom due to

pass through of MTR cuts


MTN South Africa

Revenue up 7.7%

EBITDA

margin up by 1.2%

CAPEX up 5%


MTN South Africa: ZAR millionFinancial year ending December

2010 2011 changeRevenueExpense: interconnection and roamingNet Interconnect

6,568 5,924 -644

5,483 5,183 -300

1,085 741 -344

Still a net receiver of ZAR 741 million netOverall higher profits in 2011 compared to 2010


MTN and Vodacom: profits upVodacom: R66 million more after cuts

Vodacom: net profit from termination R1.14 billionMTN: net profit from termination: R741 million

Increase prices? Invest less?

Retrench staff?


ConclusionTraffic flows are complex and who benefits from termination rate cuts depends on business strategies and the competitive interactions of all operatorsCost based termination rates lead to more and fairer competition an thus more subscriber, traffic, investment and a bigger pie of revenues to be shared among operatorsQuick and steep glide path to lower MTRs to cost of an efficient operator


mobile wholesale and retail price interplay: the somewhat ......mobile wholesale and retail price...

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