Interconnect: 'the real story' - TechCentral

Interconnect: ‘the real story’

Alan Knott-Craig

[By Alan Knott-Craig] I get really pissed off when there is good reason to change something but the status quo prevails because people who should know better spout nonsense about why there should be a change. This inevitably leads to an exchange of insults, which, in turn, results in nothing happening.

So it has been with interconnect charges, or termination rates as some people call them.

First some background, though.

GSM cellular licences were granted to Vodacom and MTN on 30 September 1993. Then there were about 2m GSM users in the world. Today there are nearly 4bn users worldwide.

Two of the great advantages of GSM were that users could make calls from one mobile network to another anywhere in the world and use their cell phones on GSM networks in other countries. This is why GSM became so widely accepted as the de facto cellular standard.

Interconnect, or the practice of one network charging another for terminating calls routed to it, was therefore born. So if a Vodacom customer were to call an MTN customer, MTN would charge Vodacom since it had to bear the cost of carrying the second part of the call – an entirely justified reason for charging an interconnection fee.

There was, however, little precedent for figuring out what to charge, though it should clearly have been based on the actual cost of carrying the call plus a fair profit. At that time there was no way to calculate the cost since GSM networks had yet to be built, not only in SA, but anywhere in the world.

There was also the matter of interconnect between Telkom and the mobile operators. Now Telkom should have known its cost, but didn’t have a clue what that was, even though it had been around for some 100 years. So the interconnect rate from a mobile operator to Telkom was set at the rate Telkom charged its own customers for local calls – 21c/minute in peak times and 14c/minute in off-peak times. It could hardly charge more. And that set the tone for everything else. Hardly scientific, but a start.

Using the same principle, and in the absence of any historical costing, the mobile operators were allowed to charge their local rate for their own customers – which back then was lodged with the regulator and approved by the same – at R1,30/minute, less Telkom’s local rate of 21c/minute, or R1,09/minute for terminating a call from Telkom. In retrospect, dicey logic.

R1,09/minute was thus assumed (in the absence of any contrary evidence) to be a mobile operator’s cost of terminating another network’s call on their networks (which had yet to be built, never mind costed). But mobile operators had to start preparing COA/CAM (another stupid acronym for the cost of a call) and present these to the regulator, which they have done for some number of years already. Why? So that interconnect rates could be properly set when the regulator had a moment, between falling of his horse and snoozing on the couch.

In 1994 you could buy $1 for R3. Today, on average, you can get $1 for R9. So roughly, the rand is worth a third of what it was 15 years ago.

In 1994 Telkom charged 21c/minute for terminating a call from a mobile operator, and today it charges 29c/minute for the same privilege. That’s a  38% increase, but fair, bearing in mind that we still don’t have a clue after 115 years what it costs for Telkom to terminate a call, and few would care to find out. Anyway, the regulator approved this increase so it must have been okay.

In 1994 Vodacom and MTN charged Telkom R1,09/minute to terminate a call from Telkom, and today they charge R1,25/minute. That’s a 15% increase over 15 years during which time the rand depreciated by 200%.  Fair, as long as the starting price was correct. But since the regulator, having had sight of the mobile operator’s costs, approved this price it must have been correct. Right? Wrong. The regulator was snoozing, again.

In 1993 everyone thought that the best the mobile operators in SA could achieve together was 500 000 customers by 2003. Today there are nearly 40m customers in SA. Clearly whatever premise was used to cost the termination of a call on a mobile network in 1993 was incorrect. In everyone’s most considered opinion, there would always be more Telkom customers than mobile customers. Today Telkom has some 4m customers. So much for considered opinions.

Since Vodacom and MTN charge Telkom R1,25/minute in peak periods to terminate a call on their networks today, they should clearly charge each other the same. The cost cannot change simply because the call originates from a different source. And that is what they do, including Cell C, and anyone else who wants to terminate a call on their networks.

So what’s the controversy? Simple. In 1994 neither Vodacom nor MTN thought there would be any traffic of note between their relatively small networks and settled for a nominal 20c/minute rate for terminating each other’s traffic.

By 1998, it was clear that their customer bases were going to be large and that the same cost would have to be levied for terminating any call, regardless of where the call came from. So they agreed, with the blessing of the regulator, to increase their terminating rate to each other to that which they were charging Telkom. This they did between 1999 and 2001. Cell C was happy to participate. This was the practice the world over. Nothing wrong with that.

So, is there anything wrong?

Yes, the point of departure, and the philosophy of how to set the cost for terminating a call from another network.

The clearest philosophy is to prove what it costs to terminate a call on your network, add a fair profit, and then levy that cost to anyone who wants to terminate a call on your network.

But lets say operator A is more efficient than operator B. Does that entitle operator B to charge more for terminating a call? No, since that promotes mediocrity, and could result in higher costs for customers.

My view is that the regulator should consider the costs of all networks, and find, preferably through consensus, a rate which some would benefit from, and others could strive towards — in other words, a symmetrical tariff. All networks should charge each other the same terminating rate. It’s a compromise, but a fair one that promotes efficiency.

Where is the consumer in all this? Probably nowhere, since interconnect rates only affect the tariffs between networks, and not tariffs on the same network. So a Vodacom customer calling an MTN customer could benefit, but when he or she calls another Vodacom customer the tariff should stay the same, or will it? Logically yes, but commercially no.

Why? Because network operators prefer to offer their own customers lower tariffs when calls are made from one customer on their own network to another customer on their own network (on-net calls), since they don’t have to give any money away through interconnect to another network. However, if you drop interconnect rates, should that be the case, tariffs between networks should drop, and in order for network operators to continue to promote on-net calls, these should also drop, maybe by not as much, but nevertheless they should drop.

And the result? Well, Telkom could become deliriously happy, Vodacom, MTN and Cell C will get over it, new operators will have lower operating costs (and lower revenues), and the consumer may well get a break in lower tariffs.

How much of a break? Maybe as much as 25%.

And life will go on.

  • Knott-Craig is former CEO of Vodacom Group

8 Comments

  1. Nicely written and an excellent insight into the convoluted operations of all our telecoms operators.

    No idea of costs after 115 years? Sounds spot on.

    Thanks, looking forward to more from TechCentral of this quality.

  2. I wouldn’t exclude divine intervention Mr Walsh, just wouldn’t bank on it!

    I understand that accurately determining the fair cost of delivering a call is not trivial – any telecoms product manager will attest to that. There are a myriad of technology cost, network topology and convergent product issues to contend with to start with. I cannot believe though that there are not sufficiently smart financial minds in the MNOs to have come up with some near-as-dammit figures?

    It has obviously not been in the interest of the MNOs to do anything about it. And quite frankly, when one considers the premiums charged for SMSs (never seen as a potential revenue stream to begin with and now as high as 15% of total revenue in some cases?) and roaming (so easy to fleece someone else’s customer!) one has to be skeptical that interconnect rates as proposed and defended by MNOs are anywhere near what they should be.

    With the lion’s share of the national customer base the MNOs have the clout to raise the barrier to entry for new players whose potential customers need to call… ah yes, the MNO’s customers!

    Your comment about efficiency is very valid – there is not enough incentivising ALL the players to become more efficient. And we still sit with mobile rates where it can be more expensive to call your wife on her mobile than to call your brother in “exile” across the globe.

    I think some significant drops in interconnect rates over the next few years would be just one of a number of steps to making telecoms less of a burden and more of an economic catalyst in our economy.

    Good to see some new voices writing for Techcentral -look forward to more insights from you.

  3. AKC, your 27 paragraphs do nothing to erase the fact that you were at the helm of Vodacom when MTN and Vodacom raised interconnect rates. It’s just silly for you to pretend you now care about “making telecoms less of a burden and more of an economic catalyst in our economy”, and no-one is buying it.

  4. Indeed Mr. Knott Craig.

    Isn’t retrospect a wonderful thing. However, you have yourself personally profited very nicely from a regime that you now criticize at such an “arms length”.

    Pot. Kettle. Black.

  5. From this i can only deduce that without a regulator stading over big business, business will go on raping a nation until somebody tells them to stop.

    Vodacom and MTN had lots of time to review the cost and bring to down to resonable profit. But ya, theres no thing as resonable profit in the SA telecoms industry.

  6. In all fairness, blaming AKC is not a meaningful approach. We all should know the responsibilities CEOs have towards their so called primary shareholders. AKC position on this matter is simple, there is room to change the paradigm and the regulator must simply carry out its mandate.

    In my opinion, interconnect rates should be zero cents. Accepting traffic from another operator means one already has capacity to receive, transport and terminate it. Otherwise do not accept it in the first it and rather expand yuour network first.

    But I guess it is not as easy as this.