Cell behemoths cry foul over preferential rates

THE price war in South Africa’s mobile industry is starting to take its toll, evidenced this week by declining subscriber numbers at MTN, which conceded it had been too slow in cutting rates to match those of its rivals.

Behind the scenes, though, a much more interesting battle is brewing between South Africa’s four mobile operators — one that will shape the industry for years to come.

The fight, which will come to a head before the end of the year, is over whether smaller operators Cell C and Telkom Mobile will continue to enjoy preferential wholesale rates for calls between their networks and those of their bigger rivals, MTN and Vodacom.

Cell C CEO Alan Knott-Craig is lobbying hard for this “asymmetry” in mobile termination rates (MTRs), arguing that it is only fair for smaller operators such as his to be given a helping hand by the regulator, especially because it is these companies, desperate to gain market share,

Cell C’s bigger rivals are preparing for the mother of all battles

which are forcing MTN and Vodacom to reduce their retail tariffs, thus benefiting consumers.

Cell C and Telkom Mobile have enjoyed asymmetry in recent years. This has formed part of the annual reduction in MTRs managed by the Independent Communications Authority of South Africa, which has brought them down from R1.25/minute in peak calling times four years ago to 40c/minute now. The degree of asymmetry has fallen from 20% to 10% during this period.

Knott-Craig now wants Icasa to intervene by imposing more aggressive asymmetry for players that do not have “significant market power”, defined as 25% or higher market share. Cell C has about 17% of the market as measured by sim cards in active use. Its revenue market share is about 10%.

Cell C’s newly appointed chief financial officer, Robert Pasley, told me this week that parent Oger Telecom’s decision to provide $350-million (about R3.5-billion) in new equity funding was largely predicated on the operator winning regulatory support for asymmetry. He believes the company will get this support.

But Vodacom and MTN are having none of it. They argue that Cell C was licensed 13 years ago and, because it is no longer a newcomer to the industry, it does not deserve this sort of regulatory support.

If comments by MTN South Africa CEO Zunaid Bulbulia this week are anything to go by, Cell C’s bigger rivals are preparing for the mother of all regulatory battles to ensure asymmetry is not imposed on them from next March, when Icasa will set new MTRs.

Bulbulia told me that asymmetry created “artificial floors and ceilings in the market that prohibit competition”. In addition, he argued, continuing to give Cell C asymmetry would be “bizarre” because it would mean “punishing the majority of South Africans who are on Vodacom or MTN” who, he claimed, would have to pay higher rates.

Asymmetry in MTRs would simply distort the market and have unintended consequences, he said.

Icasa will have to weigh up both sides of the argument carefully and then make a decision based on sound economics.

Both sides appear to have solid arguments. Knott-Craig is right, for example, that the smaller operators forced down mobile prices. It was Cell C that led the charge with its 99c/minute calling plans, forcing first Vodacom and then MTN to slash their tariffs. Telkom Mobile has followed suit with even lower prices, although it is far from clear whether South Africa’s fourth mobile entrant has a sustainable business model.

It is also difficult to take the bigger operators’ arguments seriously after they warned four years ago that slashing MTRs could have unintended consequences and would not necessarily lead to reductions in retail tariffs. It is clear that the cuts in MTRs have translated directly into lower retail tariffs.

But cutting MTRs was one thing; introducing aggressive asymmetry for anyone with less than 25% market share is quite another and demands proper interrogation by Icasa. I do not envy the regulator its duty.

McLeod is editor of Tech Central.co.za. Follow him on Twitter at @mcleodd