Cost of communication in South Africa: Department, ICASA, Telkom, ResearchICTafrica.net, 8.ta, Cell C, Neotel submissions

This premium content has been made freely available

Communications

28 November 2012
Chairperson: Mr S Kholwane (ANC)
Share this page:

Meeting Summary

The Department of Communications (DoC) stated that the Electronic Communications Act (ECA) provided for the imposition of pro-competitive measures. South Africa lagged behind other countries when it came to providing less expensive communication. Fixed local access was expensive in the country. There was a concentrated mobile market with expensive mobile termination rates (MTR). There had been a voluntary reduction of MTR since 2009. Policy interventions were needed. The ECA had to be reviewed to create opportunities for new entrants. The revised national broadband policy had to be finalised in consultation with provincial and local government.

The Independent Communications Authority of South Africa (ICASA) stated that the cost of communications in South Africa was too high. The international voice tariff was lower than the local. Government addressed high prices through introducing competition. ICASA suggested a glide path to cost base for termination. Households with fixed line access were decreasing. There was mobile access to the internet. The briefing examined the causes of high prices. ICASA was committed to a cost model for voice value and data value chains. ICASA lacked sufficient funding for its discretionary activities.

The briefing by ResearchICTafrica.net noted that South Africa was entering into treaties that could be anti-poor in implication. The remarkable success of mobiles in the country was noted, and the fact that mobiles were increasingly used for internet access. Dominant operators defended high MTRs, saying that it would ruin them if it would be further decreased. But actual outcomes contradicted that statement. There were problems with procuring evidence. The effect of mobile and fixed termination rates in Namibia and Kenya were examined. The briefing recommended cost based termination rates, and a quick and steep glide path to lower MTR.

Telkom looked at the effect of call terminations and challenges to Telkom. There was a mobile market three times the size of the Telkom revenue base, and future growth would be in data. Telkom was rendering an unprofitable service in a competitive environment. Telkom’s regulatory burden was putting its sustainability at risk. Telkom had consistently reduced fixed-to-mobile call tariffs, thereby putting R2.1 billion back into the pockets of customers. Telkom had to contend with declining voice revenue.

Discussion by members was deferred until the afternoon session, as the Chairperson wanted different approaches to the issue presented first.

South Africa was amongst the countries with the highest cost to communicate in the world.  The Committee heard submissions from Cell C and 8.ta (the two smaller mobile phone operators) and Neotel (the second fixed line operator).

The submissions included information on the mobile termination rate charges and retail voice and data charges of the operators.  Although the introduction of new entrants in the market and a significant reduction in mobile termination rates had resulted in lower retail charges, the cost to communicate in South Africa remained high.  As late entrants to the mobile phone market in South Africa, Cell C and 8.ta found it difficult to compete against the two incumbent operators MTN and Vodacom (who had a 90% market share).  Both smaller operators advocated substantially increased and sustained asymmetrical mobile termination rates, which would allow them to improve profitability, compete more effectively and ultimately contribute to a reduction in the cost to communicate.

Members of the Committee did not ask any questions of the presenters.  The hearlings would continue on 30 November 2012.

Meeting report

Introduction by the Chairperson
The Chairperson noted that former President Mr Thabo Mbeki had already urged that government take an interest in the cost of communication, but there had been reluctance to deal with the question adequately. Cost had to be kept within limits. There were questions around interference with the market. The relation between MTR and the retail price had to be examined.

Department of Communications (DoC) on the cost of communications in South Africa
Mr Themba Phiri, Deputy Director General, ICT Policy and Strategy, noted that the Electronic Communications Act (ECA) made provision for identifying retail or wholesale ICT markets in which pro competitive measures could be imposed. It provided for monitoring of anti-competitive market behaviour. The country’s telecommunications sector lagged behind international standards for less expensive telecommunication services.

The DoC had commissioned a peer benchmarking study of Brazil, Chile, Korea, India and Malaysia.  The results of the study indicated that South Africa was expensive for fixed local access. South Africa had a more concentrated mobile market, and wholesale fixed and mobile termination rates (MTR) were expensive. Concern about South Africa’s high cost to communicate from all sectors peaked in 2009. There followed an MTR voluntary reduction from the peak rate. Pro-competitive measures were imposed on markets for mobile and fixed call termination services. A plan was developed to monitor changes in wholesale and retail prices of fixed and mobile telecommunications and their impacts on retail prices and average calling time. There had to be a review of the ECA and licensing conditions to ease barriers to entry for new entrants.

The revised national broadband policy had to be finalised in consultation with provincial and local government. Prepaid broadband/internet subscription would be promoted. Private sector investment in rural infrastructure would be encouraged.

Mobile and call rates per minute as at 25 November 2012 were examined for Vodacom, MTN, Cell C, Virgin Mobile and 8ta. Mobile retail prices were still high for the two major network operators. The two major operators were most resistant in passing the MTR price reductions to customers. Mobile call rates were still relatively high despite the glide path termination rate reductions.

There was a need for radical policy interventions. The DoC recommended amendment to the ECA to address matters which hindered competition; the imposition of a flat rate regime on mobile voice calls in South Africa; standardization of national roaming retail prices for mobile services, and regulation of transparency in the pricing and publication of mobile retail prices.

ICASA briefing on the cost of communications
Dr Stephen Mncube, ICASA Chairperson, said that there was a cordial working relationship with the DoC. The Minister had encouraged close cooperation. Communication was a human right. ICASA was a regulator. Policy had to be creative and flexible, but had to abide by the law. There had to be appreciation for the efforts of captains of industry.

Mr William Stucke, ICASA Councillior, stated that the cost of communications was far too high in South Africa. ICASA facilitated communications in South Africa through ensuring that services could not be offered without telephone numbers; spectrum;type approval, and the review of interconnection agreements to ensure fairness.

Government policy was to address high prices through introduction of competition. The ECA could regulate prices where a licensee had dominance and the market was not competitive.

Mr Stucke took the Committee through trends in retail voice prices. ICASA’s concerns were the level of on- and off-net tariff differential by Vodacom and MTN; on-net promotions by Vodacom and MTN that could further increase on-net / off-net price differential, and that the international voice tariff was less than the national tariff.

Mr Stucke discussed the regulation of termination rates. High termination rates represented a price floor for the retail price of a new entrant. It retarded efficiency within a firm. The solution would be to establish a cost base for call termination, and to introduce a regulated glide path towards the cost base. Billing systems were the most expensive part of a call. The glide path was presented.

Mr Stucke discussed the link between wholesale and retail rates for off-net calls, and the impact of rate reduction on Telkom. Telkom’s net position had improved by 37% based on the termination rate reduction. On the future for termination rates, the question was whether further reductions would harm all stakeholders. A small reduction in retail prices had led to an increase in revenue. Any future change in rates would be evidence based.

With regard to achieving universal service it was noted that the number of households with fixed line access to communications continued to decrease. Access to the internet was growing because of mobile telephony. Private sector mobile operators had made significant progress in achieving universal service objectives. Fixed lines had become irrelevant because they cost too much for lower speeds. That was out of line with the rest of the world. Fixed lines to the home had to be the objective. There was high capital cost but very low fixed operating cost for unlimited capacity. But up to 80% of new fixed line network cost was civil construction. Efficient new network construction had to be ensured.

The causes of high prices were examined. High costs to industry were caused by infrastructure monopoly; barriers to network deployment; lack of spectrum sharing; import duties and volatile exchange rates. High costs to industry and possible monopoly in retail markets caused high costs to end-users.

ICASA was committed to a cost model for voice value and data value chains, and regulation of prices where necessary. A high demand spectrum had to be made available to new entrants, to an open access network, and to incumbents. Increased competition would lead to lower prices and better choice.

Important factors for broadcasting in the digital era were broadcasting value chain analysis and the development of local content. The challenge facing ICASA was that only R20 million was available to do all its discretionary work. One market review cost approximately R5 million, and 12 such reviews were needed. There were insufficient funds to support Parliament in all its objectives.

Research ICT Africa. net briefing on the cost of communications
Dr Alison Gillwald, Executive Director, said with regard to communication costs, that South Africa was entering into treaties that were anti-poor in implication. She remarked on the success of mobiles in the country. Mobile access was good, and more people were accessing the internet with mobiles. A new environment had been created. Late internet adopters were using cell phones.

Dr Gillwald pointed out challenges to gathering evidence. Since 2007 South Africa had sent no information to the ITU. ICASA had to set up a platform for fixed line prices. Termination was a monopoly. Dominant operators defended high MTRs, and argued that if lowered retail prices would increase, there would be fewer subscribers; the poor would be cut off, and there would be retrenchment. Evidence could not be procured. Big operators had said that MTR would ruin them, but outcomes were saying the opposite. There was sophisticated operating. A zero based rate was appropriate. There had been claims that MTN and Vodacom had lost millions over termination rates. Small termination rate reductions, still far from the cost of efficient operator, meant that South Africa had not yet seen the same dramatic price decreases as in Namibia and Kenya.

Dr Gillwald gave figures on fixed line prices in Africa. She discussed mobile and fixed termination rates in Namibia, and a case study of Kenya. A case study of South Africa looked at MTR and the glide path in South Africa. MTR was not a price but a rate. MTRs were wholesale costs and wholesale revenue at the same time. Generally net-payers paid less and net-receivers received less. However, net-receivers could also receive more, as evidenced by Vodacom.

Dr Gillwald discussed interconnection. Termination equaled monopoly. Mobile access was good but usage was suboptimal. She pointed out challenges of gathering evidence, and cautioned against unintended anti-poor outcomes of the African position at the World Conference on International Communications 2012.

Dr Gillwald concluded that traffic flows were complex. Who benefited from termination rate cuts depended on business strategies. Cost based termination rates led to more and fairer competition and thus more subscribers, traffic, investment and a bigger pie of revenues to be shared among operators. There had to be a quick and steep glide path to lower MTRs to cost of an efficient operator.

The Chairperson remarked that the former Chairperson of ICASA had told the Portfolio Committee that communications was a vicious sector, in which dog ate dog. He said that the rules of engagement had to be agreed upon with operators. Legislators had to trust them. Operators could raise critical issues for the country.

Telkom briefing
Mr Manelisa Mavuso, Managing Director: Consumer Services and Retail, said that call termination had a direct impact on the cost of communication. He discussed challenges to Telkom under the headings of economics; competition; workforce and infrastructure, and regulatory pressures. Retail end-user prices were driven by a combination of factors like internal cost structures; call termination costs; regulatory imposed costs, and the number of customers and services consumed. Due to Telkom’s specific context, more than 45% of costs were fixed and difficult to reduce further. The mobile market was three times the size of Telkom’s revenue base and the future growth was in data. Telkom depended on fixed voice but that was declining. Telkom was providing an unprofitable service in a competitive environment.

Mr Isak Coetzee, Executive: Regulatory Affairs, said that Fixed line Termination Rates (FTR) did not recognize access costs. Telkom had an ageing workforce without skills aligned to future mobile and IP needs, and 22 000 employees with inflationary wage demands. He looked at the competitive landscape, and the size of companies compared to Telkom. Telkom had historically been seen as a monopoly loaded with the most regulatory obligations. The regulatory burden put Telkom’s sustainability at risk.

Tarifica benchmarking graphs for voice calls for the fourth quarter of 2011 were examined. Lowering the cost of communication required a reduction in nominal prices; keeping price increases below inflation; new products and services, and product enhancements. Although not obliged by statute, Telkom had consistently reduced fixed-to-mobile call tariffs, putting R2.1 billion back into the pockets of its customers. Telkom had made contributions towards broadband costs, and had reduced the prices of wholesale products during 2012/13.

Telkom’s pass-through of MTR reductions was discussed, as well as product enhancements and service offerings. Telkom’s fixed termination rate was set at 21 cents in 1994. Telkom had managed to increase the FTR from 21 cents to 29 cents, which was subsequently reduced by ICASA’s glide path. Mobile cellular operators (MCOs) had profited from Telkom through high MTRs. Shortcomings of current call termination regulations were examined. Telkom believed the levels of current FTRs were unfair and discriminatory. Any further downward glide paths for FTRs would be inappropriate.

Declining voice revenue was a challenge confronting Telkom fixed-line. There was an inappropriate termination rate regime, and extensive capital investment was required to renew and expand network.

Telkom believed that the cost of communications had indeed reduced in real terms.  Telkom however believed that reduction of call termination rates had had limited success. A new call termination model was required. Call termination rates had to allow for full cost recovery. Current FTRs were set at the wrong level and were discriminatory. Telkom proposed a simplified and converged MTR/FTR. Telkom supported the principle of cost-oriented termination rates.

The Committee paused for the lunch interval.

8.ta briefing
Mr Hasnain Motlekar, Executive: Business Performance and Risk and Mr Izaak Coetzee, Executive: Regulatory Economics, 8.ta presented the submission to the Committee (see attached document).

Telkom’s 8.ta service was a relatively late entry to the cellular phone market in South Africa.  The presentation summarised the progress that was being made in building infrastructure, acquiring customers and decreasing the cost of communication.  Information on 8.ta’s call charges and data packages was provided. 

A graph illustrated the mobile termination rates (MTR) applicable since 1994.  The relatively high MTR’s had contributed to the profitability of cellular (mobile) phone operators over the previous 15 years.  Consumers had benefited from lower retail call charges but the impact of lower MTR’s on retail prices was not clear.  The current MTR’s were below the 8.ta per minute cost.  The operator did not have access to the greater than 1 gigahertz (<1Ghz) spectrum and found it difficult to be competitive. 

Higher asymmetrical MTR’s would benefit new entrants to the mobile phone market.  Government’s objective to reduce consumer prices by increasing competition could be achieved by introducing asymmetrical MTR’s or by eliminating MTR’s and allowing the calling party’s network to retain the billed revenue.  The duration of asymmetrical MTR’s was the decision of the Regulator.  Examples of countries where asymmetrical MTR’s were introduced were provided.  Call termination rates should allow operators to recover their costs.

Cell C briefing
Mr Alan Knott-Craig, Chief Executive Officer, Cell C presented the submission to the Committee (see attached document).

The submission included the historical background to the mobile industry in South Africa and the current status.  Almost 90% of households had mobile handsets, giving over 99% of population coverage.  There were two fixed line and four mobile operators.  The role of the third (Cell C) and fourth (8.ta) operators was to reduce the cost of communication.  The smaller operators faced substantial competition from MTN and Vodacom, who had approximately 90% revenue market share.  The 2012 International Telecommunications Union (ITU) price review indicated that South African communication prices remained high (77 out of 82 countries rated).  A graph illustrated the rapid growth in the telecommunications market since 2012 and the impact of the implementation of the Regulation of Interception of Communications and Provision of Communication Related Information Act (RICA) in 2009.

A comparison of the asymmetry afforded to MTN/Vodacom and Cell C and 8.ta highlighted the relatively insignificant benefits to the smaller operators.  A comparison of the market share enjoyed by the four mobile operators indicated that the smaller operators had not made significant inroads into the mobile market.  However, the increased competition had resulted in significant reductions in voice and data prices since 2009.  All operators offered free or discounted prices during off-peak periods but the cost to communicate should be measured against real demand to be realistic.  The cost to communicate would remain high because of the lack of effective communication and was unlikely to be lowered without active policy and regulatory intervention.

The reduction in MTR’s (from R1.25 in 2007 to R0.56 in 2012) had the effect of significantly improving the profit margins of the larger operators.  Cell C’s current pricing structure was not sustainable unless MTR’s are reduced significantly and the smaller operators were granted substantial and sustained MTR asymmetry.  It was also necessary for the smaller operators to increase their market share substantially.  It MTR’s were reduced to zero, the retail price would not necessarily be reduced and the smaller operators would not survive.  Market analysts did not foresee any significant change to the current market dynamics over the following five years.

Cell C suggested four solutions to increase competition and reduce the cost to communicate: reducing the MTR to R0.15; a 4:1 MTR asymmetry ratio for smaller operators and new entrants; regulations prohibiting on-net/off-net price discrimination and a national broadband network company that was privately managed with a public/private funding model.

Neotel briefing
Mr Peter Zimri, Senior Specialist: Regulatory, Neotel presented the submission to the Committee (see attached document).

Neotel supported the endeavours to reduce the cost of communication and to increase competition in the telecommunication sector.  The submission included information on the reduction in call charges by Neotel since 2010.  The rates charged by all the telecommunications operators were compared.

Discussion
Members of the Committee did not make any comment nor asked any questions.

The Chairperson observed that the cost to communicate was too high in South Africa.  Consumers were becoming more sophisticated and knowledgeable and wanted to know why they had to pay so much for services.  The Committee was interested in hearing how the cost could be reduced.  The Independent Communications Authority of South Africa (ICASA) could possibly ensure that there was transparency on the pricing structure of operators.

The Chairperson thanked the presenters for their attendance.  The Committee would hear submissions from MTN and Vodacom on the following day.

The meeting was adjourned.



Share this page: