Cut to the quick

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When announcements are made late on a Friday, it is usually because the company in question wants to mitigate the damage done to its share price. But the shock announcement last week was different, and unexpected, in many ways. First, it came from the Independent Communications Authority of SA (Icasa) and, second, is very good news for consumers, while ostensibly chastising the big cellphone operators for years of high-margin call rates.

The shares of Vodacom and MTN still fell on Monday morning as Icasa published draft regulations that will radically cut termination costs for mobile calls, but this is vastly in favour of the smaller networks, Cell C and Telkom Mobile. While termination rates – the amount network operators charge each other to make a call – have been brought down, the proposed cuts in the next two years are severe.

Currently, termination rates are 40c a call but will be shaved in half to 20c in March next year, and half again to 10c in 2015. Not surprisingly, the loudest complaints are coming from Vodacom and MTN, where you have to feel for new CEOs Shameel Joosub and Zunaid Bulbulia who are now in charge of companies with vastly diminished revenue streams.

But, like Icasa, it’s hard to feel sorry for the networks themselves, which have been able to charge these higher rates for years and earn substantial revenue as a result. Mobile is a profitable enterprise, fast-growing and highly investable. There is no other way to describe high call costs than unnecessary, and the previously high termination rates as iniquitous. The interconnect has been a rich vein of profit for the operators, but it has eroded annually since Icasa first announced cuts in 2010. It went from R1,25/minute to 89c in February 2010, then down to 65c in July. In July 2011 it dropped to 50c and 40c in July last year. This interconnect is, essentially, pure profit for the networks.

Despite this reduction, the real cost of calls never really came down. It required Alan Knott-Craig to come out of restraint-of-trade-retirement to head Cell C for the real action to happen earlier this year with a radical 99c/minute call rate. This was the real, long-awaited price war, started by the former Vodacom CEO who set up SA’s biggest network and knows the duopoly the best.

Cell C was able to drop its call costs to 99c because of Icasa’s previous rulings. Cell C was still making enough profit while attracting customers, though its network suffered; and the R200m it said it was spending on its Gauteng infrastructure pales when compared with the R7bn Vodacom spends annually to keep up with subscriber growth, especially new data use.

Friday’s announcement – as well as agreeing to the asymmetrical interconnect, where operators with less than 20% of market share pay less to the bigger Vodacom and MTN – is a tacit acknowledgment that the big players have had too much profit at ordinary consumers’ expense.

Icasa has shown real guts lately. Good for them. Though the announcement comes from the regulator, it’s clear they would not have had the confidence to do this if they didn’t have the backing of new communications minister Yunus Carrim. He has shown in the short time he’s had the post that he intends to be an active and decisive minister, which the telecom industry really needs.

Even though he may not get the same job after the elections next year, he seems willing to use his political clout (he’s been an MP since 1994) to effect real change in the telecom industry, which desperately needs real competition to drive down prices and increase customer service.

This column first appeared on Financial Mail.

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About Author

Toby Shapshak is editor-in-chief and publisher of Stuff, a Forbes contributor and a Financial Mail columnist. He has been writing about technology and the internet for 20 years and his TED Global talk on innovation in Africa has over 1,5-million views. He has written about Africa's tech and start-up ecosystem for Forbes, CNN and The Guardian in London. He was named in GQ's top 30 men in media and the Mail & Guardian newspaper's influential young South Africans. He has been featured in the New York Times. GQ said he "has become the most high-profile technology journalist in the country" while the M&G wrote: "Toby Shapshak is all things tech... he reigns supreme as the major talking head for everything and anything tech."

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