Anthea Paelo
In a public seminar hosted by CCRED in June 2014, panelists from different telecommunications companies debated the revised call termination rates announced by the Independent Communications Authority of South Africa (ICASA), with some arguing that the severe reductions in rates overall, although necessary, would significantly reduce revenue to operators.1 In an effort to increase competition in the market given the strong position of South Africa’s major operators Vodacom and MTN, ICASA had introduced lower, asymmetric call termination rates to facilitate the growth of smaller operators, as discussed below.
In September 2014, ICASA announced new draft call termination rates. Call termination rates are the rates a telecommunications operator charges for carrying another operator’s calls.2 The announcement followed an earlier dismissal by the High Court of ICASA’s previous regulations on the matter as unlawful and invalid in March 2014.3 The rationale for the dismissal was that the regulations and pricing had been made based on publicly available information and not detailed information from the telecommunication operators themselves which was not consistent with proper procedure. ICASA was given six months to review the recommendations. ICASA had previously decided to halve call termination rates using the long-run incremental cost plus (LRIC+) method.4 The LRIC method, often applied in network industries where there are high fixed costs, is a forward-looking estimate of costs which treats all costs as variable in the long-run and assumes that incumbent firms would price at a level which covers their LRIC as an estimate of marginal costs.5 It considers the incremental cost of producing a good or service, or alternatively the cost that could be avoided by stopping production of a good or service.
Consumers have benefited considerably in recent years from increased rivalry in the sector, due at least in part to the overall decline in call termination rates and the asymmetry of rates. Recent estimates suggest that retail prices for both Vodacom and MTN dropped by 34% and 27%, respectively, between 2008 and 2012.6 Mobile network usage also grew in response to the lower rates, demonstrating the positive role that regulating for competition can play in improving market outcomes to the benefit of consumers and the development of markets even where there are powerful incumbent firms.
The tables below show the old and new call termination rates for both fixed and mobile lines, indicating the significant decline in prices charged. The asymmetric rates allow the smaller operators to charge their larger competitors a higher price for termination while the small operators pay a lesser fee for termination.7 In order to qualify for asymmetry, the operator must have less than 20% share of terminated minutes in either the fixed or mobile market. Cell C and Telkom Mobile benefit from this arrangement in line with the objectives of increasing competition in the sector through supporting their growth.
While the new regulations resulted in a significant reduction in the call termination rates overall, they have also significantly reduced the rates that Cell C and Telkom Mobile can charge Vodacom and MTN as shown in table 2. For instance, the smaller operators can only charge the majors R0.31 down from the R0.44 suggested in April for mobile call termination, to which Cell C has objected.10 Other operators have claimed that the reduction in call termination rates overall as an important source of revenue for mobile operators would affect investment, and reduce profitability, coverage, access to mobile networks and eventually employment.11
The LRIC model is widely applied, including by the European Commission, although some critics have claimed that it is likely to raise retail prices due to the “waterbed effect”.12 The waterbed effect arises when prices are pushed down on one side of the market, possibly due to regulation, causing prices in another part of the market to rise.13 However, experience of call termination rates in other African countries such as Botswana, Kenya, Namibia and Nigeria has shown that retail prices have declined while operators’ subscriber base and the profitability of incumbents has increased.14 Kenya which makes use of the LRIC model has had the highest regulated decrease and also had the greatest decrease in retail prices. Retail prices dropped by as much as 68% while Safaricom, Kenya’s biggest operator, had an increased subscriber base of 59%.15
Despite the mobile operators’ concerns about ICASA’s intervention in setting asymmetric call termination rates, the regulation appears to have had a less damaging effect on the market. Instead, consumers have benefitted from the lower rates, while subscriber numbers and operator profitability have also increased.
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Notes
CCRED. Public Platform: Call Termination Debate (04 June 2014).
- OECD. (2012). ‘Developments in Mobile Termination‘. OECD Digital Economy Papers, No. 193.
- Mochiko, T. ‘Icasa proposes new termination rates for mobile, fixed operators’ (05 September 2014). BDlive.
- See note 3.
- Royal Mail. (2010). ‘The Development of Long Run Incremental Cost Estimates in the Postal Sector by Royal Mail‘. Discussion document by Royal Mail.
- Hawthorne, R. (2014). ‘Review of economic regulation of the telecommunications sector‘. Centre for Competition Regulation and Economic Development Working Paper No. 2014/7.
- Mochiko, T. ‘Vodacom criticises call for asymmetric termination rates’ (16 July 2013). BizCommunity.com.
- Vermeulen, J. (2014). ‘New Call Termination Rates Finalised’ (29 September 2014). MyBroadband.
- See note 8.
- BusinessTech. ‘Cell C to challenge termination rates’ (30 September 2014). BusinessTech.
- See note 7.
- Genakos, C. and Valleti, T. (2011). ‘Testing the waterbed effect in mobile telephony’, in Journal of the European Economic Association, 9(6):1114-1142.
- Financial Times. (nd). ‘Definition of waterbed effect‘. ft.com/lexicon.
- See note 12.
- See note 12.