Expect poorer quality from Vodacom and MTN
The new call termination rates (CTRs) could lead to an erosion in service quality from South Africa’s largest mobile operators, Vodacom and MTN, according to ratings service, Moody’s.
It says that both operators could curb their future capital expenditure plans in South Africa.
Last week, the Independent Communications Authority of South Africa (Icasa) halved MTRs – the amount mobile phone companies have to pay each other to terminate calls on another network.
Starting in March 2014, MTRs will fall to 20 cents per minute from 40 cents, and will gradually decline over the next three years to 10 cents per minute.
The watchdog also introduced revised asymmetric termination rates, which will allow mobile operators with less than 20% market share (revenue based) to charge higher fees to other operators that terminate calls on their network.
Moody’s noted that the changes are credit negative for South Africa’s two largest mobile players, MTN and Vodacom.
The overall effect on MTN’s group earnings before interest, taxes, depreciation, and amortisation (ebitda) will be small because its South African operations account for just under one quarter of its total group ebitda.
“We also expect only a limited effect on margins because although revenues will fall, costs will also decline owing to the lower termination rates it pays to Vodacom,” Moody’s said.
Moody’s argues that reduced cash flows from its South African operations will increase MTN’s reliance on cash distributions from its other operations in the rest of Africa, and in particular Nigeria, which contributes approximately 50% of group ebitda.
Vodacom, however, will be harder hit than MTN, Moody’s says, because it has the largest market share of the South African mobile telecoms market at around 47% (by revenue), versus MTN’s 37%.
“Moreover, the bulk of its cash flow comes from South Africa,” Moody’s said.
“We also expect the charge changes to curb both companies’ future capital expenditure plans in South Africa, which could erode their competitive advantage in terms of service quality and result in a slower rollout of better technologies,” it said.
Cell C and Telkom
Moody’s noted that Icasa’s changes are credit positive for smaller South African mobile operators, Cell C and Telkom Mobile, both of which have less than 20% revenue market share.
They are net payers of interconnect and will benefit from the lower costs to terminate their subscribers on the networks of MTN and Vodacom.
“We expect Cell C will benefit the most given its broader network coverage and mobile market share by revenue of approximately 10%, versus Telkom’s share of circa 1.0%,” Moody’s said.
“The biggest benefit to Cell C’s mobile operations and Telkom’s mobile and fixed-line operations will be from the cost savings they will get from 50% lower charges they pay to the larger mobile operators.”
The ratings agency said that Telkom is positioned to benefit the most given it paid fees of R1.1 billion ($87 million) to other operators in the six months to 30 September 2013, or 9% of its total operating costs.
“Although this will improve ebitda margins for both Telkom and Cell C, we expect the companies to pass on most of the savings to consumers through more aggressive pricing to increase market share,” Moody’s said.
Difficult road ahead
Over the next three years, Moody’s forecasts that it will be difficult for larger operators to maintain or increase their market share and compete more aggressively on price without reducing their margins and return on investments.
“In markets such as those in Europe, we have observed that MTR cuts, combined with the macroeconomic slowdown and heightened competition, have been negative for larger mobile operators, lowering margins and reducing investments in infrastructure, which can erode service quality,” it said.
Vodacom stated that it believes that Icasa’s decision was reached without following due process.
“MTN will also have to scrutinise and consider a number of other due process concerns once the regulation is published,” said MTN SA CEO Zunaid Bulbulia.
More on MTN and Vodacom
MTN, Vodacom sink on rate cuts
Telkom to pass on CTR cuts to consumers
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