Bain warns consumers not to expect cellular price cuts - TechCentral

Bain warns consumers not to expect cellular price cuts

Vittorio Massone

Consumers should not expect lower retail tariffs to flow from the recent reduction in mobile interconnection rates, as there is “no correlation” between the two concepts.

That’s the view of Vittorio Massone (pictured), newly appointed managing partner in SA at management consulting firm Bain & Company.

Mobile operators Vodacom, MTN and Cell C recently agreed to reduce the interconnection fee, the money they charge each other and other operators to carry calls on their networks. The rate fell from R1,25/minute to 89c/minute during peak times on 1 March.

Massone, who specialises in consulting to companies in the technology, telecommunications and media sectors, says regulators elsewhere in the world have pushed down interconnection fees to facilitate new entrants into the market rather than to bring down retail tariffs.

SA’s incumbent mobile operators have been accused by some industry players of using high interconnection fees as an crude anticompetitive club to keep new players from emerging. Because new players have few customers at first, most calls on their networks will be to networks of other operators. High interconnection fees make it difficult for them to enter the market.

In SA, the reduction in interconnection fees should help facilitate Telkom’s entry into the mobile market and could also assist Cell C in gaining market share from bigger rivals Vodacom and MTN, Massone says.

In saturated mobile markets like SA’s, where customer churn rates are also relatively high, a new entrant like Telkom could put downward pressure on retail pricing.

However, Massone says it’s unlikely the operators will engage in a price war. Rather, he says, they should focus on differentiating themselves by introducing segmented products and services designed to increase customer loyalty.

“In a country which is so complex and heterogeneous, you can find many ways to segment the customer base,” he says.

In the consumer space, for example, operators should consider introducing packages tailored to the millions of Zimbabweans working in the country. These consumers have specific needs, including the ability to transfer money electronically to their families back home and to home call relatively cheaply.

Another example on an area not well addressed by the mobile operators is small and medium enterprises, Massone says.

And experience in Europe suggests people who play videogames respond well to packages aimed at them.

Offerings aimed at specific religious groups also work well.

By introducing value-added services and offerings tailored to specific consumer segments, operators are able to increase loyalty and spend and reduce churn.

Despite political pressure for interconnection rates to come down substantially, Massone warns that industry regulator, the Independent Communications Authority of SA, should be careful not to reduce them too much.

If the cuts are too deep, the operators will stop investing in new infrastructure, he says.

“If I were the regulator, I would want the operators to build high-quality infrastructure in areas where it’s not so financially sustainable to do so,” he says. “If you cut interconnection too much, they won’t go into the rural areas.”

Turning to Telkom’s plans in the mobile market, Massone says the company should play to its strengths in the corporate and small and medium enterprise markets.

Telkom ought to offer integrated offerings to business customers, including fixed-line and mobile services, coupled with Internet access, outsourcing and network management.

He says Telkom shouldn’t be too aggressive in its retail pricing in cellular.

“Anyone can reduce prices,” he says. “The day after you do it, everyone will be out with an offer that is like yours or even slightly cheaper.

“Also, you’d be educating your customers to buy on price and telling them you don’t have anything else to offer other than price.”  — Duncan McLeod, TechCentral

7 Comments

  1. How many people will continue to push this disingenuous argument in spite of evidence to the contrary? There will always be a correlation between retail and wholesale pricing in any market where sufficient competition exists, particularly in respect of those players in the market who have smaller market share. The only time the correlation breaks down is where competition doesn’t exist.

    But don’t take my word on it. Rather, let’s look at the facts:
    Fact 1: Cell C reduced retail prepaid pricing in direct anticipation of the MTR decrease. Case in point: R1.50/min (per min billing) any time, any network.
    Fact 2: MTN have significantly reduced retail prepaid pricing just days after the MTR decrease. Case in point: R1.75/min (per sec billing), any time, any network.
    Fact 3: Telkom, Neotel and almost every major new entrant (e.g. ECN, Vox, Switch) have all reduced their retail tariffs to peak mobile.

  2. “Consumers should not expect lower retail tariffs to flow from the recent reduction in mobile interconnection rates, as there is “no correlation” between the two concepts.” Well, that certainly sounds plausible. Oh wait, it would except for the fact that mobile operators have claimed that they would have to raise prices if interconnect fees were regulated downward. You can’t have it both ways.

  3. So why have the networks not invested more in the rural areas up till now. They have had nearly 2 decades of artificially high interconnect rates and prefer to spend their enormous profits and efforts elsewhere in Africa, the Middle East and Asia. The comment on interconnect rates sounds like a lobbying plea to ICASA.

  4. What hogwash! I don’t think that Mr. Massone’s comments are doing any good for Bain. They are either patently incorrect or such general truisms that it dos the consulting industry a disservice. Interconnection pricing is not a new field and the price models that exist (there are many of them) would probably yield a mobile termination rate much lower than the current rates agreed by the operators and regulator – which leaves plenty of room for further reductions and plenty of return for reinvestment in the network. And the way to get rural investment is not to create superprofits elsewhere in the network which can cross-subsidise those investments. Try a minimum subsidy auction for those areas that are truly not accessible by the market alone, but first ake the market competitive. Are we surprised that when we limit competition, prices are higher than they should be and consumers suffer? Ghana has six mobile operators and a population of 20 million. Panama has four mobile operators and a population of 3 million. In Panama, two new operators were license after mobile penetration reached 100%. South Africa needs to wake up!

  5. Brian Neilson on

    I tend to agree with Greg Massel. One nuance to this is that not all prices need come down equally. Even if the general list price moves very little, we will certainly see deep discounting for selected customer groups, packages along with the existing ‘zone/4less/woza’ types of discounting, much of this spurred by competition from Telkom and niche voice players offerings in respect of calls terminating on mobile networks.

  6. Richard Morse on

    I agree Vittorio Massone 100% expect that we forget that 4 spectrum blocks in the DCS1800 spectrum range are under used for GSM or not used at all, Neotel, WBS, USAL1 and USAL2 which combined are equivalent to MTN, Cell-C and Vodacom’s DCS1800 spectrum allocation = 180 ARFCN’s.

    Government should investigate the better use of some or all of this spectrum, then watch the big operators complain when it is used on ERF related, social and rural and government precincts and projects.

    Nationalize and deregulate some or all of this spectrum, as in no licensing fees, and allow companies to put forward proposals to government for approval that use this spectrum for the betterment of the country as a whole, does this sound too naive, yes definitively.

    It could be separated into 10 blocks of 18 ARFCN for this purpose which is enough for low power, low density GSM applications, any high density application would need more licensing scrutiny.

    The spectrum should be allocated on a per project basis as opposed to a per company or per operator basis, e.g. private GSM for the FIFA World Cup stadia, a Higher education GSM network covering major Universities etc..

    If the big mobile companies know that people can self provide GSM, this will bring down prices for sure. It is quite a scandal that this spectrum is so under used at the moment.

    Ministerial directives clarifying existing regulations on VoIP/VANS interconnect will definately help by enforcing GSM operators to allow VoIP providers to send GSM frequency originated and terminated calls into and out of the GSM operators as VoIP.

    If we allow ERF owners, rural communities an government agencies to decide on which low power GSM provider they use, then we don’t have a problem with high costs anymore as we are not forced to use the existing Mobile operators.

  7. “Consumers should not expect lower retail tariffs to flow from the recent reduction in mobile interconnection rates, as there is “no correlation” between the two concepts.”

    But strangely it is never explained why this should be so, as if somehow asserting something makes it true.

    Its elementary economics that the cost of a final product reflects the cost of the various inputs plus a profit. If cost of one of those inputs goes down, then in a competitive market the price of the final product should go down. If it does not then that suggests anti-competitive behaviour.

    Its also rather strange to suggest that consumers expectations should have no influence on prices.

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