First Avenue’s research analyst Nadim Mohamed has finished crunching his numbers on the impact of the sharp drop in SA’s Mobile Termination Rate. As his chart reproduced below shows, from being 6th highest of 54 countries surveyed  – generating super profits for the MTN/Vodacom duopoly – SA is now 12th lowest. Mohamed warns of significant implications for the two companies which between them hold 90% of the SA market. Particularly Vodacom which generates 89% of its EBITDA in the country (MTN gets 25% of its profit from SA). In his initial report a year ago, Mohamed reckoned the only way Vodacom and MTN had been able to ignore price cutting from Cell-C and Telkom Mobile sharp was by using “smoke and mirrors”. But consumers are seeing through the marketing hype and, aided by a Regulator determined to drop prices, are comparing apples with apples and have found their existing contracts to be rotten. Mohamed came through to the CNBC Africa Power Lunch studio today to talk us through his findings.You can download his full report by clicking here. – AH
To watch the video of the interview on CNBC Power Lunch click here
ALEC HOGG: Welcome back to Power Lunch, and welcome back also to Nadim Mohammed, investment analyst and partner at First Avenue. I say ‘welcome back’ Nadim, because it was only a few weeks ago we were talking about the changes in the Mobile Termination Rates. You’ve gone back home, crunched the numbers, and come up with some very interesting conclusions in the follow-up to your initial report which spoke about smoke and mirrors in the pricing of the cell phone companies – now you think there could be a price war.
NADIM MOHAMMED: Definitely, and if you look at just a few days ago Telkom Mobile announced a rate which is 75 cents to all networks, which is lower than even what Cell C are offering. You’re therefore already seeing some potential intent to start this price war, both by the smaller companies: Telkom Mobile and Cell C.Â
ALEC HOGG: The key point though, and the one you’ve made in your research all the way through, is that it doesn’t help if Cell C and Telkom Mobile reduce their prices if MTN and Vodacom don’t follow suit. What makes you think that this time they’re going to be forced to do so?
NADIM MOHAMMED: Let’s first go back to the first round of Mobile Termination Rate cuts, which took place between 2009 and this year – 2013. If one looks at that period, one may actually say that Vodacom and MTN navigated this very well. Their dividends hiked more than 49 percent per annum in the case of Vodacom, so they’ve done extremely well. What we tried to do in these follow-up studies, is understand why they did so well. When you aggregate their numbers, what you actually find is that usage has been flat, the prices have actually gone down by about 28 percent – so not as much as the termination rate cut, but a bit less.
However, what has saved them has been subscriber growth and interestingly, it has gone up by about 56 percent – roughly – for both operators.
That saved them, but now we know from the last two sets of results that, that subscriber growth is now lower. In fact, it has gone negative quarter-on-quarter, so if prices do follow the same trend as last time around and continue downwards, this will have a big impact on MTN and Vodacom. They have to match the prices. They can’t continuously up-rise higher than the other operators do, because a mobile minute is a mobile minute. It doesn’t change, regardless of whether offered by Cell C, by Telkom, or by Vodacom.
GUGULETHU MFUPHI: You mentioned that they managed to weather the storm with the initial MTR cuts. However, for the second time around, it seems as though they need to diversify their income streams. How are they going to do that when voice has nearly reached its peak and data is one of the only drivers left?
NADIM MOHAMMED: Well, data is still growing but at a much lower rate than in the past, so it’s less than 20 percent per annum. According to our study, we think that data would need to grow about 70-odd percent just to fill the hole that will be created by the drop in prices that may take place. That in itself is unachievable, so what you see is Vodacom pushing to get the Neotel deal done through diversifying and creating a new scheme for them. MTN is still on the lookout for opportunities in Africa and looking to grow their Nigerian and other operations, so MTN would be more reliant on Africa. I don’t think they’d be able to do much in South Africa.
Thanks @alechogg but from what I hear, Cell C's reception is even more dismal than Vodacom so a scary change for me. http://t.co/LAkpnXIN3o
— Rachelle (@CreateAStirSA) November 7, 2013
ALEC HOGG: Nadim, I think all of us now understand what the mobile termination rates are and why it’s so important, and why we’re now one of the lowest in the world, but you did explain in your report about this word ‘asymmetry’. Just unpack that for us so that we can also realise why we shouldn’t be buying Vodacom or MTN shares.
NADIM MOHAMMED: When you have a call that spans more than one network, for example Cell C to Vodacom: Vodacom will charge Cell C a termination rate to terminate the call on their network, which essentially creates a price floor in terms of what Cell C can charge. What asymmetry does is it allows Cell C to charge a higher rate to Vodacom than Vodacom would charge to Cell C, and this effectively gives Cell C a lot of ammo to be more competitive and more aggressive in what they offer to the market. It’s really stimulating competition. One doesn’t typically see asymmetry introduced ten years after a third operator is launched in the market. Normally it’s at the point of launch. Cell C were never given this benefit. In fact, Mobile Termination Rates were hiked up from somewhere around 20 cents to R1.23 two years before Cell C even launched, so they were actually given difficult and almost impossible conditions when they entered the market. It’s only now that they’re getting their asymmetry benefit, which normally would is offered to operators when they start as a third operator.
