Changes to the Mobile Termination Rates in South Africa

Changes to the Mobile Termination Rates in South Africa

Investment case

Following a few weeks of interesting debates in the public domain, presentations from selected industry groups to the portfolio committee on communications at parliament, policy direction on Mobile Termination Rates (MTRs) from the Department of Communications (DoC) and even the Competition Commission with its investigation into suspected price-fixing, it is now time to examine how other industry players, excluding the telecoms operators, are likely to be affected if changes to (wholesale) Mobile Termination Rates (MTRs) are introduced.

Who wants what?

The cut to MTRs has a few dimensions, with very different demands from role players:

  • Parliament: Immediate cut of 65c per minute to 60c per minute, with a further cut of 15c per minute
  • for the next three years;
  • Department of Communications (Doc): As per the Government Gazette of 13 October 2009, lower interconnection rates, specifically the mobile termination rate to a cost-based rate;
  • Independent Communications Authority of South Africa (ICASA): “60c per minute is a likely interconnection fee, and may well be reached by two cuts of around 30c per minute each”;
  • DoC (again): “… wanted to see interconnection rates … drop by 30c, from R1.25 to R0.95 by the end of November 2009.

How did it all start?

One could argue that inefficiencies and excessive pricing in any industry would, in most cases, result in exploitation of these aspects in a capitalist system, even in regulated industries such as telecommunications.  Consider low-cost airlines competing in many cases against state-owned airlines.  South Africa is a prime example of opportunistic exploitation of a sub-par airline industry.

In telecommunications, Least-Cost Routing (LCR) is one such system; it exploits inefficiencies in pricing and offers arbitrage opportunities.  In Cellular Least-Cost Routing (CLCR), how are savings achieved by calling a mobile number from a fixed-line phone?  At Telkom’s current tariff of 166c per minute (all figures are stated excluding VAT), compared to a Mobile-to-Mobile (MtM) tariff of say 130c per minute, the saving is 36c per minute (here we assume a call at peak time).  Let us, for argument’s sake, assume a reduction in the Telkom charge of 166c per minute to 101c per minute, primarily due to a cut in the MTR from the current 125c per minute to 60c per minute.  If the MtM tariff changed to 90c per minute, then the saving is 11c per minute; still a saving, so one could argue there is still a business case for LCR, or then CLCR.

The voice market in South Africa

The total voice market in South Africa is worth about R92bn per annum.  Vodacom is the leading voice network operator, with market share of 38.9%, followed by MTN at 27.3% and Telkom SA at 26.0%.  In our exercise, we have excluded Neotel (the second network operator or SNO) and emerging voice players that recently received I-ECNS licences to provide voice services.  The reason is simple: we do not have sufficient operational or financial information to make an objective assessment of the market share of these emerging players, including Neotel.  The only company for which we have adequate information is Vox Telecom (Vox) as it is listed and discloses limited voice-related information.

We make the following observations:

  • In voice services, both Vodacom and MTN have higher market share than Telkom;
  • We also note that Fixed-to-Mobile (FtM) revenue is the single-largest line item in Telkom’s revenue;
  • Please note interconnection revenue is defined as receipts by Telkom for:
    • MtF calls and
    • calls from other fixed-line operators that terminate on the Telkom network;
  • If we assume Telkom accounts for 90% of total (call charges) revenue in South Africa, then the other fixed-line operators have a combined revenue base of less than R1.5bn, including Neotel.  For Neotel, we estimate two-thirds of its annual revenue (currently) is derived from data services.

Report Author:

Johan Snyman
Nedgroup Securities
October 28, 2009