Investors have reacted aggressively to Friday’s announcement by SA’s TMT regulator that telcos will be forced to drop the termination rate fee from the current 40c to 10c over the next three years. The two biggest beneficiaries of the status quo, Vodacom and MTN, have had a combined R40bn wiped off their market values. Vodacom has lost more than R21bn with its share price falling 11% from R128 pre-announcement to this afternoon’s close of R113.37. MTN, which gets a bigger chunk of its business from outside South Africa, has lost over R18bn with a 5% price drop. One man who is delighted is Vodacom’s founder and now Cell C chief executive Alan Knott-Craig. The high call termination costs have, he says, made smaller mobile players like his uncompetitive with the big two which between them own 90% of cell phone revenues. After this news, Cell C is now guaranteed to get the $350m promised by its Saudi parent and is sure to turn up the competitive heat. It’s well worth having another look at the excellent research report by independent investment house First Avenue which warned last December that the profit margins being generated by Vodacom and MTN were unsustainable. – AH
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ALEC HOGG: Not such good news hitting the wires right now: South Africa’s Finance Minister Pravin Gordhan has said the country’s economic growth rate will not reach 2.7% that had been projected for this year. Speaking at an investment conference, Gordhan also said that despite South Africa holding elections next year, this will not lead to government spending irresponsibly.
GUGULETHU MFUPHI: Well, news came in on Friday last week, the Independent Communications Authority of South Africa has made its determinations on the future of both mobile as well as fixed termination rates for the next three years. Based on a review of industry conditions, the body has decided to lower them. Joining us now to give us the company’s reaction to the decision is Alan Knott Craig from Cell C. Alan, thank you so much for joining us. Your immediate reaction to the announcement made by ICASA on Friday, is that it will have a positive benefit for the likes of Cell C?
| Date | Termination rate |
|---|---|
| Current | 40c |
| 1 March 2014 | 20c |
| 1 March 2015 | 15c |
| 1 March 2016 | 10c |
ALAN KNOTT CRAIG: It will have a benefit for any small player in the market. It will certainly put them in a much better position to compete on a sustainable basis. I was quite surprised. The motion from ICASA was certainly aggressive, but I think they were long overdue so they had to be aggressive now, and they were. I have been pretty critical of ICASA, but this time I have to say that they’ve been pretty efficient, very constructive and they’ve done the job quickly.
GUGULETHU MFUPHI: Alan, just in the commentary that you published today in an email, you mentioned that the asymmetry was lower than what was hoped for. Let’s just touch on the asymmetry. What exactly does that mean and why was it lower than what you’d hoped for?
ALAN KNOTT CRAIG: Well, asymmetry is what small players get from big players when they start their businesses. Now Vodacom and MTN have enjoyed R1.00 symmetry for 15 years or so. So it’s not often the percentage; the percentage is aggressive right now. That’s true. 19 cents asymmetry to start with is good. We would have liked a bit more but I think that on balance the whole way that ICASA published the regulations are good, and whilst we might want to criticise this bit, I think it’s a pretty good regulation.
ALEC HOGG: Alan, when we chatted the last time you were in the studio, you told us that the decision by your parent in Saudi Arabia whether or not to release the funds that it had committed to you, was dependent on the way that regulations developed. Now is this a step in the right direction?
ALAN KNOTT CRAIG: One hundred percent a step in the right direction. I’ve been in touch with them the entire weekend, which is why we didn’t really want to make any comment before the weekend, so I think they appreciate and recognise the move by ICASA and investment-wise from them, certainly – it makes a big difference.
ALEC HOGG: So how many hundreds of millions in new funding will now be released for you?
ALAN KNOTT CRAIG: Well remember, they’re still releasing the funding there now. It’s early in the year and original funding was subject to seeing what happens from the ICASA process. So I would say it’s fair to say that that funding is certainly intact and that additional funding, depending on how we perform, might be necessary, going forward.
GUGULETHU MFUPHI: Alan, you also believe this is the first regulatory step in the South African market in order to normalise the Telecoms industry and you believe that there is a need for much more competition. How so?
ALAN KNOTT CRAIG: Well, the only way you’re ever going to get prices down is through competitors trying to get market share because the only way they can get market share is through price. And that’s why you introduce certain price plans: it’s for them to fight for market share and bring prices down, but they’re coming from a sort of a standing start and they need help like MTN needed help in 1994. So this is the first aggressive step for Cell C and for Telkom Mobile. However, I think it just gives them a much better chance to attack the market share even more fiercely and rip those prices down.
ALEC HOGG: The market reacted in a very interesting way this morning: investors pushing down the price of Vodacom by 5.5 percent. MTN is down at the moment by 3.75 percent. On the flipside, Telkom is up 4.5 percent. Are you surprised or would you have anticipated this?
ALAN KNOTT CRAIG: No. That’s part of balancing the market. Telkom is clearly undervalued and part of the reason that it’s undervalued is that it has been on the wrong side of asymmetry for too long, at least in my view. And a lot of that has just been directed… Well, it’s not final. It’s got to go through hearings and so on, but what ICASA have done is, to a large extent, directed a market which needed direction some five years ago already.
GUGULETHU MFUPHI: Alan, I guess the big question for South African consumers like myself is ‘what’s the benefit for us?’ Will there be a reduction in call rates in South Africa?
ALAN KNOTT CRAIG: Well, call rates have come down quite a lot in the last few years, we shouldn’t forget that. It’s been due to competitor activity. Nothing has happened since Cell C and Telkom Mobile aggressively started attacking prices. What these regulations from ICASA mean is that they can continue to do so on a sustainable basis, otherwise it’s not sustainable. So as they keep taking market share away from MTN and Vodacom there will be a point – and I think we’ve already seen that – that Vodacom and MTN will react and bring their prices down, so that’s how the consumer benefits.
ALEC HOGG: Just to close off, Alan: A stock that we don’t normally talk about when we’re focusing on telecoms, is Blue Label, and that share was very heavily traded today. Is there going to be an impact on a business like that as well?
ALAN KNOTT CRAIG: Well, the thing about Blue Label is that they’re one of our biggest distributors and so the more successful we are, the more successful they are or vice versa – whichever way you look at it. So putting us in a much more competitive position and a much more sustainably position is very good news for a company like Blue Label.
