SA mobile price war part II?

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)

Current March 2014
March 2015 March 2016
Tariff 99c 99c 99c 99c
VAT 12.2c 12.2c 12.2c 12.2c
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
% 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

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

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.

More on SA operators

Vodacom and MTN’s rude awakening

MTR price cuts: how it will affect Vodacom and MTN

MTR cuts would cost us R1 billion: MTN

Vodacom bemoans asymmetry plans

Operators mull action on termination rate cuts

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SA mobile price war part II?