Vodacom and MTN’s rude awakening

Financial services group First Avenue Investment Management warns that MTN and Vodacom will need to grow data revenue between 65% and 70% over the next three years in order to absorb the impact of Mobile Termination Rates on earnings before interest, taxes, depreciation, and amortisation.

Icasa announced in October 2013, that it wants to cut the costs of terminating a call on a mobile network to R0.10 over the next three years.

A termination rate is the money networks pay to each other for connecting a call. MTRs have declined from R1.25 in 2009 to a current price of 40 cents.

In a research noted entitled: SA Mobile Telecoms – A Price War Part II, First Avenue said that conservative analysis points to an effective tariff decline from R1.06 – R1.14 per minute to 88c (19% reduction) by 2014 and 75c (29% reduction) by 2016.

Termination rate per minute
Vodacom / MTN Cell C / Telkom Mobile
% Reduction
% Asymmetry
March, 2013 40c 40c 29% 10%
March, 2014 20c 39c 50% 95%
March, 2015 15c 33c 25% 120%
March, 2016 10c 26c 33% 160%
March, 2017 10c 20c 100%
March, 2018 10c 14c 40%
March, 2019 10c 10c

“We feel that this could be an even steeper decline if smaller operators such as Cell C and Telkom Mobile are aggressive with pricing and pass on the full asymmetry and termination rate reductions to consumers.”

“In fact, Telkom Mobile has recently introduced an enhanced Sim Sonke plan that enables calls to any network for 75c per minute even when roaming nationally on the MTN network,” First Avenue said.

Assuming flat subscriber growth and increase in usage, the net impact of these reductions will be a reduction in airtime revenue of R6 billion and R8.5 billion for MTN SA and Vodacom SA, respectively.

“This impact could be worse if these operators lose market share or need to lower tariffs further than forecast,” the analytic group said.

“To put these reductions in perspective, data revenue would have to grow between 65% and 70% over the next three years in order to absorb this impact on ebitda. However, this is unlikely, given that SA data revenue growth has already slowed to 16%-20% p.a. as competition has intensified over the past year,” First Avenue said.

Effective Tariffs and Termination Rates
Effective Tariffs and Termination Rates

It pointed out that given recent capex and opex growth of approx. 5%-11%, “we expect that ebitda will decline over the next 3 years as a result. Asymmetry will also move Vodacom and MTN SA from being net receivers of interconnect to net payers of interconnect which will further impair margins”.

“The level of ebitda decline will depend on efficiency gains achieved through cost cutting; we anticipate an ebitda decline of more than 15%,” First Avenue said.

The group said that Vodacom SA is most exposed with 89% of ebitda generated in SA. In contrast, MTN has 25% of its ebitda generated in SA.

“Furthermore, MTN is spending R 6.4 billion p.a. and Vodacom is spending ~R7 billion p.a. on capex. Our view is that this level capital expenditure will not be rewarded with a return above cost of capital given the changing industry dynamics.”

“As a result, the next few years will be challenging for both operators and there will be greater reliance on foreign operations and / or new operations to compensate for the lack of growth in South Africa,” First Avenue said.

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Vodacom and MTN’s rude awakening