Asymmetric Mobile Termination Rates in South Africa

Transcription

1 RESEARCH NOTE 21 FEBRUARY 2011 Asymmetric Mobile Termination Rates in South Africa Nicola Theron & Johann van Eeden ICASA recently finalised regulations for the determination of mobile and fixed termination rates which are due to be implemented on the 1st of March In this note we will explore both current and historic regulation of termination rates in South Africa and the advantages that the new regulations may hold for the South African telecommunications sector and its consumers. 1 Introduction In October 2010 the Independent Communications Authority of South Africa (ICASA) announced the outcome of its wholesale call termination market review for the period The central outcome of this review was the publication of distinct regulations both for fixed- and mobile termination rates (MTR s) 2, although we will only deal with MTR s in Table 1: MTR glide path this note. With regards to MTR s, it was determined that these rates would be reduced by way of a glide path from the current level of 89c for peak time calls to an eventual level of 40c in March Similarly, off-peak mobile termination rates will eventually be reduced to 40c from the current level of 77c. Importantly also, the new termination regulations allowed for the possibility that smaller mobile operators (such as Cell C and 8ta) could charge higher termination rates relative to their more established competitors (MTN and Vodacom) with the aim of fostering competition in the sector (so called asymmetric termination rates). The finalisation of termination regulations was the culmination of a process that can be traced back to parliamentary hearings at the end of These hearings led to a voluntary reduction in the peak time MTR from 125c Peak Annual adjustment (%) Off-peak Annual adjustment (%) Current rate 89c 73c 1 March c -18% 65c -16% 1 March c -23% 52c -20% 1 March c -29% 40c -23% 1. Government Gazette No , 29 October Call Termination Regulations. 2. MTR s are the price that telecoms operators are required to pay to mobile operators when terminating on their networks. Termination occurs when calls are made between networks calls originate on the calling party s network and are then terminated on the receiving party s network before the receiving party receives a given voice call. Fixed terminations rates are the equivalent of MTR s, only applied to fixed telecoms networks. 1

2 to the current 89c. In June 2010 ICASA also held extensive public hearings involving all the major fixed and mobile telecoms operators. In this note we briefly look at the history of mobile termination rates in South Africa, international precedent with regards to asymmetric termination rates and also why asymmetric MTR s can foster growth and competition in the South African mobile market. 2 Regulation of Termination Rates in South Africa Prior to the regulatory process that culminated in the setting of a glide path for MTR s, these rates were determined not by regulation but rather by way of commercial agreements between the parties involved 3. At the time of Cell C s entry into the mobile telecoms market in 2001, the market was divided between the two existing mobile licensees (MTN and Vodacom) with mobile to mobile termination rates set between them. These rates were initially set quite low, as can be seen from Table 2: Before 1 July 1999 these rates were as low as 20c for peak calls to mobile phones. However, MTR s were increased quite dramatically during the course of 2001, coinciding with the entry of Cell C. Compared to the larger mobile operators, Cell C as a new entrant held very little bargaining power in these negotiations 4. In November 2001 peak time MTR s stood at 123c - a similar level to the rate of 125c that prevailed until recently before the parliamentary hearings into the level of termination rates and the subsequent regulatory process by ICASA. Apart from the substantial increase in 2001, MTR s therefore remained relatively stable, albeit at high levels throughout. It should also be mentioned that the negotiated rates did not discriminate between different mobile operators and were equally high for calls between subscribers of Vodacom and MTN as they were for calls between Cell C subscribers and the established MTN and Vodacom subscriber base. However, while the substantial increase in MTR s did not discriminate between operators, these rates acted as an effective price floor for off-net mobile to mobile calls. For a new mobile entrant without an existing subscriber base the cost of off-net calls influences whether new subscribers will sign up for their services, seeing that most other mobile subscribers reside on the networks of established players. This phenomenon is described in the academic literature as tariffmediated network externalities 5. Table 2: Changes in MTR s prior to Cell C s entry into the market Termination rates before 1 July July 1999 Rates payable from 1 July July November 2001 Peak 20c 50c 80c 119c 123c Off-Peak 10c 30c 45c 65c 73c Change over the period - peak 515% Change over the period - off-peak 630% July 1999 July 2000 July 2001 November 2001 Annual change-peak 150% 60% 48.8% 3.4% Annual change -off-peak 200% 50% 44.4% 12.3% Source: Econex calculations 3. Parties were obliged to notify negotiated rates to ICASA. 4. See Econex Research Note 4 for a complete discussion of the circumstances involved in Cell C s entry in to the South African Mobile Market. 5. See Hoernig, S. (2007) Tariff-Mediated Network Externalities: Is Regulatory Intervention any Good? CEPR, London. 2

3 The effective price floor created by the increase in termination rates at the time of Cell C s entry into the market had a definite impact on the extent to which Cell C was able to grow its subscriber base. ICASA estimated Cell C s share of the mobile market at between 9% and 14% (depending on the measure used, shown in Table 3) in June 2009 and it is reasonable to argue that this share could have been higher had it not been for the high level of termination rates since the entry of Cell C into the South African mobile market. 3 Asymmetric Termination: International Precedent The setting of asymmetric termination rates in order to foster competition and growth in the mobile telecoms market is an established practice internationally. Asymmetric termination rates consider the position of a given mobile operator relative to other operators in the market and apply individualised treatment to operators for an interim period. This follows directly from the recognition that mobile telecoms is a network industry (requiring significant upfront investment) and Table 3: Retail mobile market shares, by total customer connections, originated voice minutes, and revenues, as at June 2009 customers an industry in which incumbents have a distinct advantage because of their history in the market and established client base. Another motivation for the application of asymmetric termination rates is the differential allocation of spectrum either currently or in the past. originated voice traffic market revenues Vodacom 54% 55% 55% MTN 32% 36% 36% Cell C 14% 9% 9% Many countries, particularly in the EU, have in the past granted new entrants asymmetric termination rates for an interim period with the aim of fostering competition (see Figure 1). Rates are also often applied on more than one level, depending on such factors as the time of entry into the market. Asymmetric MTR s afford new entrants the opportunity to compete in the off-net market due to the lower price floor created by the lower termination rate payable to other mobile operators. Also, importantly, it increases the termination revenue that new entrants receive from other operators due to calls terminating on the smaller network. These factors help to overcome the barriers to entry that often exist in a network industry such as mobile telecoms and have been shown to increase competition in the sector to the benefit of the end consumer. 4 Asymmetric Termination: South Africa The call termination regulations published by ICASA at the end of make provision for asymmetric mobile termination rates for smaller operators in South Africa. While asymmetric MTR s About ECONEX ECONEX is an economics consultancy that offers in-depth economic analysis covering competition economics, international trade, strategic analysis and regulatory work. The company was co-founded by Dr. Nicola Theron and Prof. Rachel Jafta during Both these economists have a wealth of consulting experience in the fields of competition and trade economics. They also teach courses in competition economics and international trade at Stellenbosch University. Director, Cobus Venter, who joined the company during 2008, is also a Senior Economist at the Bureau for Economic Research (BER) in Stellenbosch. For more information on our services, as well as the economists and academic associates working at and with Econex, visit our website at 7. See Footnote 1. 3

4 are common worldwide, it is uncommon to introduce asymmetry more than a decade after mobile licenses were granted. However, given the disparity in the SA mobile market, this appears to be a prudent move by ICASA. Licensees other than MTN and Vodacom in the mobile telecoms market are granted the possibility of charging termination rates on their own network in excess of the standard glide path as set out in Table 1. Appropriateness of asymmetric rates for a licensee will be assessed by ICASA on a case by case basis depending on two factors: 1) A licensee must justify why it has been adversely affected by current spectrum allocation or 2) A licensee qualifies for an asymmetric termination rate if it has less than 25 per cent of total terminated minutes in the relevant market as of June Market share is used to indicate a lack of economies of scale and scope for the operator in question. If a licensee can prove to ICASA that either or both of the preceding factors are applicable to their business, they Figure 1: Low, medium and high MTRs in some EU countries, October 2009 MTR in cents can charge asymmetric termination rates up to a maximum of the percentages shown in Table 4. The maximum level of asymmetry for a mobile licensee is set at 20% for 1 March 2011 and reduces on a glide path to 10% on 1 March Belgium Ireland Italy Poland Romania United Kingdom Lowest MTR Medium MTR Highest MTR Of the current mobile licensees, only Cell C and 8ta had less than 25% market share based on minutes terminated at June 2009 and are indeed the only other mobile licensees apart from MTN and Vodacom at present. It is, therefore, likely that either or both Cell C and 8ta will qualify for asymmetric rates relative to MTN and Vodacom that coincide with the inception of the glide path on the 1st of March While Cell C has been present in the South African mobile market since 2001, compared to the very recent entry of 8ta (October 2010), Cell C should still has a strong case for asymmetric treatment given the regulatory environment faced by them since Source: EU Commission 6 (2010) ECONEX Services Econex has extensive experience in competition economics, international trade and regulatory analysis. Strategic analysis was recently added as practice area. We have an established reputation for providing expert economic advice for high profile mergers and complaints that appear before the competition authorities. Some of the more recent highlights include the complaint against British American Tobacco, the merger between MTN and italk, the complaint against Senwes and the acquisition of KayaFM by Primedia. Apart from competition work we have also been involved in trade matters which included analyses of the effects of tariffs, export taxes and anti-dumping tariffs. As a result of our work in competition analysis we also have invaluable experience in some of the sectors of the South African economy where regulation continues to play a role, e.g. the telecommunications, health and energy sectors. We use economic knowledge of these sectors to analyse specific problems for some of the larger telecommunications, health and energy companies. 6. COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS PROGRESS REPORT ON THE SINGLE EUROPEAN ELECTRONIC COMMUNICATIONS MARKET (15th REPORT) {COM(2010) 253}, 25 May

5 their entry. A lack of distinct regulations governing termination rates to date did not afford Cell C the necessary regulatory support that is appropriate for a late entrant into a mobile telecoms market that was already occupied by two entrenched incumbents at the time of the Cell C s entry. This not only inhibited the growth of Cell C as a mobile Table 4: Boundaries for allowable asymmetric termination rates Maximum percentage above rate set for identified licensees 8 Current - 1 March % 1 March % 1 March % operator, but was to the detriment of competition in the South African mobile telecoms market to date. 5 Concluding Comments This note looked at the determination of MTR s in South Africa both past and present. Historically, the level of MTR s in South Africa was not explicitly regulated and these rates were determined by way of commercial agreement between parties involved. The absence of explicit MTR regulations meant that a late entrant such as Cell C was faced with additional barriers to entry by way of very high symmetrical MTR s in addition to factors such as a lack of scale and scope relative to incumbent operators. This is in contrast to international precedent in a number of jurisdictions where MTR s have been explicitly regulated and provision made for temporary asymmetry in the case of late entrants to compensate for such factors such as lack of economies of scale and scope and differential spectrum allocation. Asymmetry played an important role in fostering competition in these countries. However, South Africa recently concluded regulations that make explicit provision for temporary asymmetric MTR s with the aim of improving the extent of competition in the mobile telecoms market. We see this as a positive development in the South African context as the increase in competition should hopefully contribute to both a better service offering and lower prices for South African consumers. More Information ECONEX regularly publishes Research Notes on various relevant issues in South African competition, trade and applied economics. For access to previous editions of Research Notes, or other research reports and published articles, go to: If you want to add your name to our mailing list, please send an to iris@econex.co.za 8. MTN and Vodacom may not charge higher termination rates than those set out in Table 1. 5