Why Icasa is right to favour Cell C

The telecommunications regulator's skewed call termination regime will hurt the country's two mobile incumbents in the short term, but the long-term benefits to South Africa could prove worth it. By Duncan McLeod.

Duncan-McLeod-180-profileSpare a thought for Shameel Joosub and Zunaid Bulbulia. The Vodacom and MTN chief executives must feel like they’re being unfairly picked on for running successful, profitable businesses.

This week, telecommunications industry regulator Icasa published final regulations that will govern wholesale inter-network call charges, the fees, known as “termination rates”, that licensed operators are permitted to charge one another to carry calls between their networks.

The rates have been reduced substantially in the past four years — leading, through competitive action by smaller operators (most notably Cell C), to lower retail tariffs for consumers. Icasa is now hoping the downward movement in retail rates will continue by moving to reduce termination rates much further still, from 40c/minute now to 20c/minute on 1 March this year, and to 10c by March 2016.

The rate of decline is steep, but the fact that the rates are coming down is not unique to South Africa. What’s unique is that the rates were so high — R1,25/minute in peak times — until a few years ago. Regulators across the developed and developing worlds are forcing down termination rates — in most cases not as quickly as Icasa, it must be noted — precisely to stimulate retail price competition.

Vodacom and MTN bleated when the first round of cuts were being discussed five years ago, warning that slashing termination rates could have a “waterbed effect”, pushing up retail tariffs and other prices. That didn’t happen. Cell C took full advantage of the lower tariffs, forcing Vodacom to react; MTN was slower to respond and paid the price in lost market share.

The big operators are unhappy with the size of the cuts Icasa is now forcing on them — they say a gentler decline will allow them to manage the impact better and avoid shocks to their businesses. But they’re much unhappier about the fact that an aggressive regime of “asymmetry”, which will be introduced in March, favours their smaller rivals, including Cell C.

The fact that Cell C, which was licensed more than 13 years ago, is set to benefit from a skewed termination rate regime galls the two incumbents. They argue that asymmetry — where smaller operators pay less to their bigger rivals to carry calls between their networks than the other way around — makes sense for new licensees like Telkom Mobile, but not for established businesses.

There’s no doubt that Icasa’s rate of asymmetry is high — in fact, it’s more aggressive in the final regulations than in the 2013 draft version that caused much consternation. Bulbulia even warned that if Icasa imposed the draft regulations, it could lead to the MTN group board redirecting planned capital expenditure away from South Africa to other markets. If it does, that, though, it runs the risk of losing market share to rivals that maintain or increase their spending.

Vodacom and MTN say that they are being punished unfairly for Cell C’s inability to compete effectively and both have hinted that they’re mulling legal action. Though both operators must be itching to set their lawyers on Icasa, actually doing so could prove perilous.

Phone-640

Cleverly, communications minister Yunus Carrim was quick to voice his support for Icasa’s rates move. He implied that he’ll take a dim view of any move to take the final regulations on review at the courts.

The operators will also need to consider the public relations aspect. If they sue Icasa, public sentiment could turn against them. Certainly, Cell C would use the opportunity to paint its bigger rivals as rapacious, not acting in consumers’ best interests and moving to defend a duopoly.

Although regulatory intervention in competitive markets can lead to unintended outcomes — what’s stopping Cell C from using the extra cash to settle its enormous debts rather than investing in upgrading its network? — asymmetry, provided it is short-lived, is an experiment worth conducting.

If Cell C isn’t able to use the next three years to its advantage, it should be left to sink or be swallowed. If it is able to use the advantage it’s being given to turn itself into a strong and viable third player, the long-term benefits to South Africa of this short-term intervention, and the pain it will inevitably cause to Vodacom and MTN, will be worth it.

  • McLeod is editor of TechCentral. Find him on Twitter
  • This column was first published in the Sunday Times
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  • http://www.InTheCube.co.za/ InTheCube.co.za

    Rapacious. Today I learnt an awesome new word to describe the lying, thieving, plundering, corporate bullies that Vodacon and emptyN are. This applies to Telkom as well.

    On a side note, I disagree with the reasoning provided. Cell C should be favoured because they never enjoyed the same asymmetry over the existing incumbents (Telkom, Vodacom, MTN) that Vodacom and MTN enjoyed over the existing incumbent when they launched (Telkom).

  • stevesong

    Spot on Duncan.

  • dip

    If the intention is to encourage competition and reduce prices there are better ways than forced asymmetry. Let there be comparative advertising in atleast the telecom industry. Companies will expose each other wrt to their prices and there will be good competition, and consumer will always get the best deal. Transparent , effective and not the type of competitiveness forced by regulation. Comparative advertisements like in US is the way to go.

  • Marcan

    My first thought was, when ICASA published its proposed rates with strong asymmetry that it should not really be necessary. Lower interconnection fees on its own should help the smaller players enough.
    But when you consider that Vodacon and EmptyN raised those interconnection fees on their own in 2001 from R 0.25 to R 1.25, greatly disadvantaging Cell C and other new entrants. They enjoyed those rates for 9 or 10 years, so a few years of asymmetry is still a very moderate measure to right the wrongs of the past and give Cell C, Virgin and Telkom mobile a bit of breathing space and extra cash to spend on their networks.
    Some 7 or 8 years ago Cell C had prepaid rates of R 1.50 per min, of which most went to interconnection fees and payments to VC for use of their network. No wonder they truly struggled to stay alive and competitive. And invest in their network.

  • Davebee

    Sometimes hours pass by without me worrying myself to death on behalf of Shameel and Zunaid.
    Telkom? Not so much.

  • Senorblinky

    Thank you, and my bad.

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