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    Home»Opinion»Duncan McLeod»All eyes on Icasa as rates call looms

    All eyes on Icasa as rates call looms

    Duncan McLeod By Duncan McLeod24 August 2014
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    Duncan-McLeod-180-profileExpect high drama in South Africa’s mobile industry in coming weeks as Icasa readies new regulations governing call termination rates.

    What the communications regulator decides will have a big impact not only on the financial health of the country’s mobile operators, but on jobs in the sector, on future investments in network infrastructure and on retail prices.

    The authority has until the end of September to publish new call termination rate regulations, which will determine how much both fixed and mobile telecoms operators may charge each other to carry calls between their networks.

    Icasa botched its last attempt earlier this year to craft new rules on the rates, with the high court in Johannesburg finding that its regulations were both unlawful and invalid.

    Surprisingly, the court implemented the new rates anyway, deeming that doing so was in the public interest, and giving a red-faced Icasa six months to come up with new regulations.

    MTN and Vodacom, which had challenged Icasa’s regulations at the high court, have argued that it must consider the actual costs of terminating (making) phone calls in setting new wholesale inter-network call rates.

    So, a statement by Icasa this week that it has adopted a new cost-based model for determining the rates must have brought some measure of cheer to South Africa’s two big mobile operators. Certainly, investors welcomed the news, pushing up their share prices.

    Icasa will use an evolution of what regulatory wonks call the “long-run incremental cost model”. The is a model employed by regulators in Europe and elsewhere that takes into account costs that a company can (somewhat) foresee in determining how prices should be regulated. It’s a complex regulatory process and requires the operators to furnish detailed and correct data to be effective. A concern is whether Icasa has the resources to police them adequately; to interrogate that the information supplied has not been carefully massaged.

    Cell C, South Africa’s third mobile network operator, has more riding on the outcome of Icasa’s process than arguably anyone else. The company has used lower termination rates to fight an aggressive price war with its bigger rivals. Based on its share of active Sim cards in the market, it’s winning handsomely, having taken significant market share from MTN. Its share of revenue has grown, too, but this has lagged behind the growth in Sim market share. Vodacom has proved nimbler than MTN, reacting earlier to Cell C’s aggressive pricing moves.

    But it’s not the headline termination rate that Icasa eventually settles on that will be exercising Cell C CEO Jose Dos Santos’s mind as much as it is what the regulator decides regarding so-called “asymmetry” in those rates.

    Since March, the rates have been skewed heavily in favour of Cell C and Telkom Mobile to the disadvantage of their two bigger rivals. It’s a calculated move by Icasa to encourage erosion in retail prices.

    It’s a strategy that at face value has worked well. Prices — at least at the headline level — have fallen to historic lows and may have reached a base below which future network investment could be harmed.

    Cell C has much riding on Icasa's decision
    Cell C has much riding on Icasa’s decision

    For Icasa, knowing when to end this asymmetry is as important as introducing it in the first place as a tool to bring down prices. Keep it for too long, and it will distort the market in unintended ways — possibly severely so.

    Should Icasa call time on Cell C’s asymmetry in the new regulations? The operator will argue it needs more time to become sufficiently sustainable to be a meaningful competitor in the long term, something that would benefit consumers and prevent a slide back to a cosy duopoly situation. MTN and Vodacom will say Cell C shouldn’t have enjoyed the skewed regime in the first place and that it’s high time it’s terminated before it causes long-term damage.

    The stakes are enormous. If Icasa cuts asymmetry too soon, it will inflict a painful — possibly even fatal — wound on Cell C, and that would certainly not benefit consumers. If it ends the regime too late, there’s the risk that Vodacom and MTN will scale back investment in their networks, again harming consumers.

    • Duncan McLeod is editor of TechCentral. Find him on Twitter
    • This column was first published in the Sunday Times
    Duncan McLeod Icasa Jose dos Santos MTN Telkom Telkom Mobile Vodacom
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