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Thriving in Telkom’s shadow

South Africa’s telecommunication industry is so poorly structured that an industry worth several billion has sprung up in its shadows, offering cut-price calls.

The LCR or least-cost routing industry is saving businesses up to 40%, through implementing savings on the cellphone portion of their Telkom bill.

The average saving is between 20% and 25%, amounting to a total saving of about R500-million a year.

LCR companies are rerouting total airtime of between R2-billion to R3-billion a year.

LCR takes advantage of the difference between the rate Telkom charges for a fixed line to cellphone call (R1,61) and the rate a cellphone operator charges for a call that originates and terminates on the same cellphone network (R1,28).

An LCR plugs into a port on a company’s switchboard, automatically rerouting fixed line to cellphone calls so that they are cell-to-cell calls on the same network. The result is a saving of 41c for every minute that the call lasts.

If the call only lasts for 30 seconds the business pays for 30 seconds and not for the full minute, which is how Telkom structures its billings.

Two kinds of LCR solutions are on offer. One routes calls on-net, meaning that calls are originated and terminated on the same cellphone network. This offers savings of between 30% and 40%.

The second routes calls from fixed lines to cellphone networks. Calls are not on-net, meaning they originate on one network and can terminate on another. Savings are about 20%.

Telkom’s response so far to the establishment of the LCR industry was a costly legal attempt to shut down service providers on the basis that their licence did not allow them to offer LCR services, a case Telkom lost.

Jonathan Rousson, an LCR dealer, says Telkom’s high call charges and the fact that it charges customers in full for the first minute means that it is cheaper to route calls via an LCR.

“With Telkom you are paying for all those unused seconds,” says Rousson. “That’s the beauty of cell-to cell calls; it’s that it is billed per second.”

Telkom has the highest call rate for a fixed line to cellphone call at R1,61 for the first minute and an additional 81c for every 30 seconds thereafter.

The three mobile network operators charge R1,28 for a call that terminates on their own network while calls to other networks are billed at R1,95, R2,02 and R1,84 for MTN, Vodacom and Cell C respectively.

The LCR industry has been operating in South Africa since 1994. “Least-cost routing will be around as long as Telkom’s rates remain higher than Vodacom, MTN and Cell-C,” says Rousson.

LCR service providers buy airtime bundles from the cellphone network operators at a discount; they have a series of LCR dealers who then pitch the LCR system to a company, explaining the huge savings that can be made.

The mobile network operators give the LCR service providers 19% to 26% of the turnover generated by calls that are rerouted on to their networks via the LCR as a commission.

The LCR service provider will pay the LCR dealer between 38% and 62% of that commission, depending on the volumes and the dealer’s performance.

However, according to industry players, corporates are now becoming a lot more demanding than they were in the past. “They now say, ‘I know what your margins are, what discount are you going to offer me?'” says Orion Telecom’s marketing director Jaques du Toit.

De Beers South Africa is one of the companies that has switched to Orion Telecoms LCR. Its senior telecommunications technician Koos Wessels says the company made a full return on investment in a few months and has continued to see considerable savings every month.

Liberty group’s head of voice network operations, Rene Oosthuizen, says since Liberty switched to LCR it has been saving upward of half a million rand on cellphone calls each year.

Rousson says that because overseas countries have highly competitive telecoms markets, if someone undercuts you on price then you lower your costs, but in South Africa the situation is different because you are dealing with a fixed-line monopoly.

Instead of Telkom lowering its call rates to take the LCR industry head-on, its response was to take the industry to court, a move that proved rather costly, according to Rousson.

“They lost,” says Rousson. “The judge said it was a free market. Then they appealed and they lost again with costs. Since then they have been licking their wounds.”

Private households can forget about installing LCR systems to save on their phone bills. One source says the cellphone portion of your phone bill would have to be at least R1 500 a month to justify the costs of installing the equipment.

More savings stymied

Least-cost routing (LCR) industry stakeholders say they could offer greater savings but are being stymied by cellphone operators who will not negotiate interconnection rates.

Interconnect fees are the rate that telecommunications companies charge other operators to terminate calls on their networks.

LCR service providers claim that the interconnection regime favours cellphone operators and the operators’ refusal to negotiate costs with them is limiting the savings they can offer to their customers.

However, cellphone operators argue that providing LCR equipment is not a telecommunications service in itself and there is no need to negotiate interconnection with LCR providers as they are neither originating nor terminating calls.

At present interconnection fees account for 66% of what consumers pay for a fixed-line-to-cellphone call and 11% of a cell-to-fixed-line call.

Orion Telecoms marketing director Jaques du Toit says: “None of the network operators allow service providers to interconnect with them; they charge us R1,28.”

Vodacom and Cell C disputed the fact that interconnection rates were excessive, with Vodacom arguing that rates compared favourably with those in the European Union.

The Independent Communications Authority of South Africa (Icasa) is in the middle of a process to regulate interconnection costs, which have risen 635% in 11 years from a 1994 rate of 20c to the current rate of R1,25.

Icasa’s draft guidelines aim to make agreements more transparent and force major operators (more than a 35% market share) to offer interconnection at cost, which would cost Telkom, Vodacom and MTN billions. However, MTN and Vodacom are fighting a rearguard action, taking Icasa’s decision to declare them “major operators” to the high court. A date is currently awaited.

According to a report by Genesis Analytics, Reforming Tele-communications in South Africa, the actual cost of interconnection between cellphone operators may be 30% less than the current cost of R1,25.

An MTN spokesperson said Icasa was about to rule on the matter and it would be inappropriate for MTN to comment. — Lloyd Gedye

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Lloyd Gedye
Lloyd Gedye
Lloyd Gedye is a freelance journalist and one of the founders of The Con.

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