Easily the biggest story on the JSE this week has been the market’s reaction to a change in regulated termination rates for phone calls. Until the previous adjustment, the temination rate effectively put the minimum price of a mobile call in SA at a 75c. It is currently 40c. After the latest adjustment by the Regulator, in three years’ time it will be down to just 10c. Share prices of Vodacom and MTN, which get 90% of the country’s mobile phone revenue, have taken a hit. Telkom, which along with the unlisted Cell C, has continued its recent rise. In this interview, one of the country’s top telecoms analysts, IDC’s Spiwe Chireka, digs a little deeper to explain why these price movements are justified. – AH
To watch the full CNBC Africa Power Lunch interview click here. And why not make a date to join Alec and Gugu for the show from noon every day on DSTV channel 410.
GUGULETHU MFUPHI: ICASAs proposal to cut the cost of terminating a call from one network to another by 75 percent will be phased in over three years. This may be good news for the South African consumer, but not for the major mobile operators. Spiwe Chireka, IT Analyst at IDC joins us now for more. Naturally investors are taking it negatively and moving the Vodacom and MTN share prices and Telkom getting a boost. But my question is: will we see a benefit for South African consumers?
SPIWE CHIREKA: Well, not necessarily. It’s not as obvious as it might seem. Since the last termination cut it took a while before we started seeing cuts work through to prices, seeing as some of the service providers are introducing all flat tariffs throughout their offerings, which is something that we’re actually looking for. So at the moment, consumer prices have not necessarily moved in line with termination rates and we’re taking a sceptical view going forward. It will be more or less like what we’ve seen so far.
ALEC HOGG: So it’s allowing the smaller players – that’s what Alan Knott Craig was suggesting to us anyway – to become more competitive.
SPIWE CHIREKA: Ja, definitely. So the idea is to say ‘well, we’ve got the smaller players and when we look at how much they need to pay in termination rates, this is what they receive’. There’s a bit of an imbalance there because most subscribers are sitting on the competitors’ networks. So the idea is to really create a more level playing ground, to give the smaller operators a chance to compete more effectively against the bigger operators.
GUGULETHU MFUPHI: This also brings us to the topic of asymmetry where the bigger mobile operators have to contribute to helping the small guys out. My thinking is; if I’m a Vodacom shareholder or MTN, why would I want to help the competition out? It doesn’t make sense.
ALEC HOGG: Well, they aren’t…..they’re giving the smaller competition a good hiding, aren’t they, because of this unfair practice (on high termination rates)?
SPIWE CHIREKA: Yes. And that is where the Regulator comes in. If we left termination rates and tariffs to competitive forces to determine it, then definitely no-one would want to help out the competition. But this is where ICASA comes in because their role is to create an environment that creates a fair playing ground. And yes, others might be happy about it, but then you also have those that will be unhappy about it.
ALEC HOGG: Spiwe, we’ve seen the share prices react quite aggressively – MTN and Vodacom down a lot in the last day and a half. Telkom continues its rise upwards. We did mention earlier though that Telkom is so small; its market cap (R24bn) now a fraction of the bigger ones that two percent increase in the share price of MTN (market cap over R350bn) is sufficient to take care of the past year’s doubling in the share price of Telkom. But has the market got this one right?
SPIWE CHIREKA: Well, I guess with Telkom, since the entry of the new CEO, and the announcements that they’ve made, and all the plans they have to turn the company around – I think it has created a degree of confidence. We’re all hoping that everything they’ve promised will pan out. So, given what they’re trying to do, and what they’ve announced they’ll be doing, it does make sense for confidence to go up. On the MTN and Vodacom side, I think a 10c termination rate is enough to scare anybody. It does seem quite drastic that it is going down to 10c, but we have confidence that for ICASA to come up with that rate it means they’ve done the math. They know that it can work. So it is very scary to be moving from 75c termination to a 10c termination rate, because what that means is that there will now be pressure on the MTN’s and Vodacom’s to justify why they’re still charging high tariffs. So overall, they’ll have to reduce the tariffs which could affect the top line.
ALEC HOGG: And the consumers are going to benefit?
GUGULETHU MFUPHI: Exactly. Well, we hope so. But naturally the revenue industry streams will be under pressure, Alec, and I’m thinking ‘won’t that make my airtime more expensive or my call connection costs even more expensive?’ They clearly need to make up for that loss somewhere.
ALEC HOGG: Just have a look at what’s happened in the marketplace. I was paying R1 600 a month with Vodacom. I got the same service from Cell C at R699. That’s the reality – nearly R1000 difference. That’s what competition does.
SPIWE CHIREKA: Yes. So the idea is to create a situation whereby first of all, the termination rates are so low that like I said, it will put pressure on Vodacom and MTN to justify ‘why are we still charging R3/R4 per minute or R2.50?’ Even R1.50 will become difficult to justify. Which is where the consumer then benefits because now the pressure is no longer coming from the Regulator or anyone else. It is from the customers themselves to say ‘tell me why I have to pay this much?’. Then, at the same time, it also allows your Cell C’s and the smaller players to now compete on price where they can actually go in and say ‘well, we can give it to you for 30c per minute’ etcetera.
GUGULETHU MFUPHI: Well, we’s be happy with that. But Alec, you recall yesterday we mentioned some of the ancillary companies that might benefit from this – Blue Label Telecoms being one of them. Investors haven’t reacted to that news. Blue Label; they sell or transfer airtime and allow that to happen. How will they benefit…and the likes of Huge Group?
SPIWE CHIREKA: I think from the perspective of increased traffic – because if it’s cheaper then you are actually able to make more calls – and I think I just want to touch on the fact that you said ‘how will they make up for it?’ So usually the idea is, as the tariffs get lower people phone a little bit more, and therefore the traffic actually makes up for the lower tariffs and the lower revenue that’s coming in, so that is usually the scenario that you’re hoping for although a service provider has to do the math. Like ‘how much can we reduce it before it becomes an expense to us to do it?’ So I think with the airtime companies, the bottom line is people will always need to phone and therefore they will still benefit.
ALEC HOGG: And the volumes will give them the kicker that they’re hoping for. Just to close off with – Telkom: there’s a lot of promise in the share price at the moment. How high would you put the chances of it being transformed to a reality?
SPIWE CHIREKA: Like in terms of their…?
ALEC HOGG: Delivery.
SPIWE CHIREKA: Well, since there has now been a change in management and there’s been a restructure in the company, we’ve always stated that one of the things about Telkom is that they’ve got the best caller strategies, the best plans. And actually, on paper they should be doing way better than what their books reveal, so it’s always been about the implementation and the delivery offered. Now it seems that they’ve made changes to the Chief Operating Officer and around that side of things we do hope that we will start to see more.
ALEC HOGG: But they’ve made changes before.
SPIWE CHIREKA: Yes, they have, but it’s always looking out to be better every time. So again, we’re hoping that they will do better.
GUGULETHU MFUPHI: Spiwe, ten seconds to answer this one: What do you make of ICASA as a regulator in the industry? Are they doing a good job or has this been a long time coming?
ALEC HOGG: It’s been a long time coming and at the end of the day, even with the termination rates we do hope that there will be something coming out of either BOC or ICASA that will ensure that consumer rates move at the same rate as the termination rates because we don’t want a situation like last time where you’ve got a termination cut and then it’s only 12/18 months later that you see a proper, real consumer tariff cut. There are still some areas that they could intervene a bit more.
