Tonic for Telkom and consumers
Lower call connection costs if Icasa gets its way
TELKOM STANDS TO BENEFIT from regulator Icasa imposing a cost-based interconnection regime on the telecoms industry. But consumers should also benefit, as should smaller operators such as Cell C, and Voice over Internet Protocol (VoIP) service providers wanting to interconnect with the major operators.
These are the views of various industry commentators on the outcome of a review by Icasa into the wholesale cost of terminating calls on the networks of the telecoms operators – fixed and mobile. Interconnect refers to the cost of transferring a call from one network to another, a cost – as in other parts of the world – the caller bears.
In South Africa, Telkom pays the mobile operators roughly four times what they pay it to terminate calls on each other’s networks; 125c against 31c (plus VAT). This was designed to give the mobile industry a leg up when it was thought subscriber numbers would only reach 500 000 in 10 years. But the gap hasn’t closed.
Interconnect rates have, until now, been set by the industry, and filed with Icasa for the sake of transparency. Between May 1999 and October 2001, mobile termination rates rose 515% from 20c to R1,23, and are now R1,25, according to Icasa. Fixed-line termination rates increased by 47%, from 21c to 31c, between December 2001 and January 2005.
The regulator now proposes imposing price controls on the big operators based on the actual cost of making the connection.
Cell C said lower cost of interconnection with the dominant players would enable it, as a late entrant, to compete effectively, “something it was denied on licensing”.
Telkom would benefit because it would pay lower interconnect costs to the mobile operators, though this would balance out to some extent given that it’s a 50% shareholder in Vodacom (which would in turn receive lower interconnect fees). In the six months to September last year, Telkom paid over R3bn in interconnect fees to other operators, while it received just R781m in fees from them. Vodacom earned R3,7bn in interconnect fees and paid out R2,7bn (net interconnect revenue was just over R1bn).
The recent run in Telkom’s share price – up from R148 in late January to R161,50 in early February – might in part be attributable to the realisation that it could benefit. But it might also be because some investors believe the market has been undervaluing the company.
Key to the outcome of the process will be the reaction of the operators, says Africa Analysis telecoms analyst Dobek Pater.
World Wide Worx managing director Arthur Goldstuck says the high cost of mobile interconnect is testament to how powerful the networks are as a lobby group. These prices exist “because the networks have been allowed to get away with it for so long”. Goldstuck says interconnect is one of the biggest portions of the cost of a cellular call, “and one of the easiest to rectify”.
Despite mobile operators paying Telkom far less to interconnect with its network than they pay other mobile networks, they generally charge subscribers a flat “off-net” rate, which means they rake in super profits every time a fixed line is called from a mobile phone.
The networks and other industry players have until end-March to comment on Icasa’s report and can participate in oral hearings. The review is part of a process under the new Electronic Communications Act whereby the regulator will define specific markets to determine how competitive they are and impose specific pro-competitive remedies where necessary. In other words, it will step in and prevent big players with significant market clout from abusing this power.
An overhaul of the interconnection regime is seen as a key part of making the SA market more competitive.
But, it won’t be the panacea to change the overall cost of the cellular industry, says Nashua Mobile CEO Mark Taylor. He says interconnect costs are one factor among many.
Taylor says if interconnect costs come down by 15% to 20%, he’d expect all the networks to drop their tariffs by a similar margin. His concern, however, is that if Icasa forces rates down too much, this could discourage further investment by the mobile networks and the country won’t remain at the forefront of technology.
Goldstuck says if the networks are transparent about their true costs in the process of supplying this information to Icasa, the biggest beneficiary will be the consumer.
Pater, however, says any gains that could be passed down to consumers are theoretical because interconnect payments are made between operators in a ratio that’s determined by traffic. He believes the way for operators to pass on benefits to the consumer is rather to obtain greater efficiencies in their networks.
Operator reaction is key. Dobek Pater