The connection price war

2014-03-23 14:01

Open letters, sarcastic jabs and regulation all serve to fuel the war raging among telecoms operators over interconnection charges. Lloyd Gedye reports

This week, the fight over interconnection fees burst on to the pages of weekly media as mobile giant MTN published an advertisement, disputing claims it had been profiting at the expense of consumers over the last two decades.

These claims had been made by smaller operator Cell C.

The MTN double-spread advertisement was loaded with sarcasm, claiming it was “guilty” of reinvesting billions in profits back into its national network, of inventing prepaid cellphone telephony and of being a major taxpayer that “contributes to the creation of employment for thousands of South Africans”.

Then Cell C fought back with an edited version of the advertisement, with large whited-out bits of the text changing the message to state that MTN was guilty of making billions in profit and protecting its wealth at the expense of consumers.

This recent spat between MTN and Cell C follows the open letter to MTN and Vodacom from Telkom CEO Sipho Maseko, who accused them of “standing in the way of South Africa’s future” by taking communications regulator Icasa to court over the proposed changes to the interconnect rates.

CEOs in the telecoms industry are clearly at war with the regulator and each other over how quickly interconnection rates will be dropped.

In one corner are Telkom and Cell C; in the other, MTN and Vodacom.

Communications Minister Yunus Carrim supports Icasa and has criticised MTN and Vodacom’s legal challenge, while Icasa has responded to the court challenge by delaying the implementation of the new regulations from the beginning of March to the beginning of April.

MTN and Vodacom

MTN has called the level of asymmetrical interconnect rates proposed in this year’s regulations “startling”, “unlawful” and “irregular”.

Vodacom joined the legal action against Icasa a few weeks after MTN, with its CEO Shameel Joosub criticising Icasa’s regulations for similar reasons to MTN, including the level of asymmetry and the cost data and modelling used to calculate the rates.

Asymmetrical rates mean smaller players like Cell C and Telkom Mobile charge larger players like MTN and Vodacom a higher interconnect rate than they pay to the mobile giants.

MTN SA chief executive Zunaid Bulbulia has asked the South Gauteng High Court to review Icasa’s regulations and set aside any parts of the regulations that are “irregular”.

“MTN believes the decline in mobile termination rates must be driven by a fair process and an appropriate costing study ensuring mobile termination rates are reflective of the costs incurred by all players in the market, including smaller players.

“MTN is of the view the regulations do not meet these requirements,” said Bulbulia.

In its affidavit, MTN says it will be paying more interconnect revenue than it receives within a year of the new regulations being implemented and that this position will continue to deteriorate.

MTN also states the last set of interconnect regulations, which introduced asymmetrical interconnection for the first time in 2010, resulted in MTN’s interconnect revenue dropping from R1.4?billion in 2010 to R769?million in 2012.

It is currently R275?million.

At the same time, MTN estimates Cell C received an additional R816?million in interconnect revenue from its competitors between 2011 and 2014, and Telkom Mobile benefited to the tune of R35?million due to the asymmetrical interconnection.

MTN’s legal papers suggest it intends fighting the regulations on a wide range of grounds, including that there was “procedural unfairness” in drawing them up.

Joosub has said publicly Icasa is required by law to conduct a detailed cost study before introducing lower call termination rates.

“We know that this hasn’t happened because we’ve not been asked to provide the detailed information necessary to complete this type of study. On top of this, we were not given sight of whatever model may have been constructed, nor given the chance to comment on it. That we ought to have been consulted is a fundamental requirement under the law,” he said.

Responding to claims from Cell C that Vodacom and MTN had conspired to keep interconnect costs high for many years, to the disadvantage of smaller operators, Vodacom spokesperson Richard Boorman said the cost of this infrastructure was very high in the early years of mobile and has come down considerably since then.

“The R1.23 rate was based on the understanding of costs at that time,” he said, adding: “At that point, the vast majority of traffic was from fixed to mobile, so all mobile operators including Cell C were beneficiaries.”

Cell C and Telkom

Cell C’s acting CEO, Joe dos Santos, through various public letters, adverts and statements, accused MTN of “profiteering” for the last 20 years on the back of interconnect revenue, which is now under threat.

Dos Santos told City Press the new regulations are just “correcting the wrongs of the past” and says MTN does not want real competition and call rates to be reduced.

He said since its first year of business in 2002, Cell C has been attempting to get the interconnect rate reduced but the regulator only came on board in 2010.

Dos Santos says Vodacom and MTN increased the interconnect cost significantly before Cell C entered the market in November 2001, which gave the mobile giants an advantage.

MTN’s affidavit confirms this with a table showing the interconnect rate in 1994 was 20c a minute, increasing to R1.19 by July 2001 and to R1.23 by November the same year.

Dos Santos said: “Not content to make ‘supernormal profits’ for nearly 15 years, MTN wants to choke the consumer further by refusing to accept regulatory intervention under law by sector regulator Icasa.”

Maseko also waded into the public spat with an open letter published in national newspapers. He blasted Bulbulia and Joosub, accusing them of “standing in the way of South Africa’s future” by taking Icasa to court.

“Today, we stand at the crossroads — you can hide behind regulations to protect profits, or we can all continue to expand access and lower costs,” he wrote.

“The extent of the Telkom subsidy to MTN and Vodacom has amounted to over R50?billion, which results from the disparity between the high cost of mobile termination rates that we pay you and the low rate that you pay for the same service on our fixed-line network.”

FAQs

Why the fight matters I’m a consumer. Does this big fight matter to me? Will my phone bill go down?

Icasa is of the view that lower interconnect rates will lead to greater competition in the market, which in theory could result in lower cellphone rates. But this depends on the will of smaller players like Cell?C and Telkom Mobile to pass these discounts on to consumers.

What is interconnection?

When a consumer for instance on the MTN network calls someone on the Vodacom network, the call starts on the MTN network and terminates on the Vodacom network.

MTN can charge its customer for the call, while Vodacom charges MTN an interconnect fee for every minute of use of the Vodacom network to facilitate the call.

Will lower interconnect rates improve the network or improve the dropped-call rate?

Higher revenue for companies like Telkom and Cell?C can be used to expand their networks (in which case the answer is “yes”), reduce retail call rates or give dividends to shareholders.

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