Financial services group First Avenue Investment Management argues that a reduction in termination rates, as proposed by recently by Icasa, may arm the likes of Cell C and Telkom Mobile to initiate yet another price war.
Regulator Icasa announced in October 2013, that it aims 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 noted that Cell C essentially kick-started the price war in 2012 by introducing a 99c per minute tariff offering a single rate to all networks.
Cell C CEO Alan Knott-Craig pointed out recently that it has taken 18 months for the market to respond the 99c tariff, adding however, that the third mobile operator in SA has grown its base by 33% (1.8 million customers since) over this period.
“From a strategic point of view, the question may arise as to whether Cell C and Telkom Mobile have sufficient ‘firepower’ to enter into another price war. Their profits before fixed cost will increase substantially with the termination rate reduction if current tariffs are maintained,” First Avenue said.
Cell C cost structure for off-net calls (if tariff remains unchanged)
||March 2015||March 2016|
|Distribution cost per min.||26c||26c||26c||26c|
|Termination charge per min.||40c||20c||15c||10c|
|Profit before fixed cost per min.||20.8c||40.8c||45.8c||50.8c|
“They (Cell C) will also become a net recipient of interconnect/termination fees. Our view is that there is sufficient scope to pass on a large proportion of the termination rate reductions in order to gain critical market share,” First Avenue added.
The group said that asymmetry should enable both operators to pass on at least the full benefit of termination rate cuts.
|Termination rate per minute
||Vodacom / MTN||Cell C / Telkom Mobile
Cell C also recently received an equity investment of $350 million from its largest shareholder as well as a R2.2 billion long term financing package allowing it to enhance the quality of its network.
First Avenue suggests that the war may already have started, with Telkom Mobile recently introducing an enhanced Sim Sonke plan that enables calls to any network for 75c per minute even when roaming nationally on the MTN network.
Asymmetry is often awarded to a third operator at point of entry to a market in order to achieve a sustainable level of scale in their business.
First Avenue stressed that Cell C was not awarded this regulatory assistance until after a full 11 years of its operational life.
“Instead, the company lived with artificially inflated rates right up to the regulator’s first attempt to correct market failure in 2011. It is both a testament to the company’s instincts of survival and a miracle that it lived to see the day”.
Both Cell C and Telkom Mobile were provided with preferential, asymmetric tariffs of 20%, 15% and 10% in 2011, 2012 and 2013 respectively , in order to compete against larger operators.