Not so! Alan Knott-Craig responds to his critics

First of all, I am not sure who these industry players or analysts are, or what they know about telecommunications, but if they indeed made these comments, then I am afraid they are either mischievous or do not properly understand telecommunications. Probably both.

Read Lloyd Gedye’s article, “Hypocrite?”

Certainly no one has made these comments to me.

Actually, I have not been vocal at all, or at least no more so than before.

From time to time people ask me for my opinion, and I give it, for what it’s worth. Lately they seem to publish some of my responses verbatim.

In the event that you may have forgotten, when I ran Vodacom my duty was to my shareholders, and part of that duty was to maximise shareholder value in a responsible manner, which they had to approve as shareholders and directors. And I make no apology for that.

Now that I do not work for them, I may express my opinion more freely from time to time.

So I am not going to defend what I say today.

Nothing which I have said hurts anyone or any company; it is simply my opinion on various telecommunications matters.

I sincerely doubt that any person who knows me would suggest that I have ever fought against the notion of competition.

On the contrary, my recommendations in 1992 on this issue were to lead to the first competition in South Africa in telecommunications.

And I would therefore be interested if you could quote a single example (which is backed up by the truth) where I have ever fought against competition or slowed the entry of a new competitor down in the South African mobile industry.

I accept responsibility for competing aggressively whenever I could, and I accept responsibility for continuously fighting Telkom’s monopoly.

Vodacom and MTN started providing service in South Africa on the same day. Cell C entered later. Cell C was severely compromised by the continuous delays introduced by the regulator and to some extent by the government of the day.

I might also remind you that, contrary to general practice in the world, Vodacom offered Cell C indefinite national roaming at a price arrived at through competitive bidding from Vodacom and MTN.

All this was recommended by and approved by the regulator. This was a commercial decision and not one born of pity.

But it certainly helped Cell C to start competing on an even footing much earlier than if national roaming were not agreed to. Ask Talaat Lahaam, the original MD of Cell C, if you wish.

Competition in South Africa was fierce from day one.

In 1994 when mobile communication was launched, South Africa had 10% telephone penetration; today it has some 100% penetration.

That was the result of investment, innovation and affordable prices, which have decreased in real terms over the years.

Clearly prices will never be as low as people want them to be, but penetration is a very good yardstick to measure the success of a competitive industry.

Would that you were able to say the same of electricity.

Interconnect has to be the least understood concept in telecommunications.

So let me spend a moment explaining it.

In the world of mobile operators, each charges the other for terminating a call on their network since it costs money to transport the call to its final destination.

This charge is supposed to be based on the cost to carry the call plus a fair profit. When a network starts out, this charge is always much lower than the actual cost.

That’s Economics 101.

As the network grows in terms of customers and revenue, this interconnect tariff approaches the real cost, and as the network grows to saturation this charge usually exceeds the cost by more than a fair profit.

That’s one of the reasons that we have regulators and why each mobile operator has to submit its costs to the regulator.

The regulator then lowers the interconnect tariff to reflect the cost plus a fair profit.

In South Africa this was the case in all respects, except that the regulator, in my view, did not regulate these interconnect tariffs downwards timeously.

In fact, were it not for Patricia de Lille, the regulator may yet have to tackle this fundamental task.

Between 2003 and 2006 regulators around the world started paying close attention to this aspect of regulation.

Even in countries such as Tanzania and Mozambique.

But not South Africa.

One would have expected the smaller operators, like Cell C, to kick up a fuss, but they did not.

Why not?

Because they benefited more from a higher interconnect rate than the bigger mobile operators. Why? Because smaller operators always benefit from being a net receiver of interconnect revenues.

If the smaller ones benefit, then the bigger ones become net payers.

The reasons for this are simple and complex, but they are real.

The correct question to ask is why would the big mobile players in South Africa not be the first to complain and insist on reducing the interconnect tariff. Because, as is the case in most countries, the negative effect of being a “net payer” to other mobile players was offset by the asymmetrical interconnect between Telkom and the mobile players.

So the myth that high interconnect prejudices new mobile players, at least in South Africa, is absolute nonsense.

What Cell C now argues for, is an asymmetrical interconnect. That is, it wants to charge more for terminating a call than anyone else.

In that argument Cell C is fundamentally correct, except that it is about five years too late.

New entrants to the industry are correct to ask for asymmetrical interconnect to get them on their feet, since it means that they can charge a high interconnect and pay a low interconnect.

Incumbents would be derelict in their duty if they did not oppose this.

But such an arrangement must be limited by time.

And the regulator is put in position to deal with this fairly complex issue properly. Our regulator, to date, has not.

One should also bear in mind that having a high interconnect, as Cell C proposes, whilst its competitors have a low interconnect, can also severely prejudice it insofar as customers on the other networks have to pay more for a call to its network.

This often results in a decrease in market share for the high interconnect network.

I suppose your fundamental question is why did I not explain this to the world long ago.

Well, first of all, it was not relevant long ago.

It became more relevant in the past three to five years when the Telecommunications Act was amended, stripping Telkom of its monopoly.

And finally, the regulator considered the matter each year, and (I presume) in the absence of any objections from anyone (including the public), the regulator maintained the status quo.

Direct your question to your industry experts or the regulator. Why did they not step forward and explain?

Maybe they did not understand. More than a year ago I was running a company.

My comments on interconnect have been as follows:

  • “Interconnect has clearly become too high.”
    All operators have said the same.
  • “Interconnect should be priced-based on cost plus a fair profit.”
    All operators have said the same.
  • “Interconnect should be symmetrical between mobile operators.”
    Vodacom and MTN agree, Cell C disagree.
  • “Only the regulator can and should monitor and rule on interconnect.”
    Every country that I know of does precisely that.
So as I see it, everyone is in violent agreement.

Why anyone should single my own view out is beyond me.

In settling this matter, the first issue is the one of what the interconnect rate should be, and only the regulator can make an objective assessment of that since only he has each operator’s costs.

The second is whether they should be symmetrical or not.

Different people have different views.

Only the regulator can make an objective assessment of that.

Every interconnect rate ever levied in this country had to first be approved by the regulator, and he did so.

No interconnect rate could be unilaterally imposed by any operator. And none ever was.

The regulator
Whilst I have often been critical of the regulator, I have enjoyed a constructive relationship with each of the past five regulators, and we are certainly on good terms.

It is insulting to the regulator to suggest that Vodacom or anyone else could bully him into submission.

In particular, the only issues I personally took him on about (at least that I recall) were the allocation of spectrum, number ranges, and on interconnect.

If there were others, I would be obliged if you could remind me in order that I might give you a reply.

On the issue of spectrum, the first event was in the mid-Nineties when the regulator tried to take away our spectrum with a few days’ notice.

I went to court and the regulator did not oppose.

We kept our spectrum (and MTN kept its).

The regulator also erroneously believed that the 1800 spectrum was better than 900 spectrum (which is patently incorrect); 900 spectrum was allocated to MTN and Vodacom in 1993.

When Cell C was licensed, the regulator wanted to allocate 1800 spectrum to only Cell C and no additional spectrum to either MTN or Vodacom, even though we both needed additional spectrum.

No matter how I tried to explain to the regulator that 900 spectrum was better spectrum, and that Cell C would be better served by being allocated some of our 900 spectrum in order that we might gain 1800 spectrum, the regulator refused. As a consequence Cell C had to build a network with 1800 spectrum and it cost it some.

And we did not receive 1800 spectrum until some years later.

I don’t recall any court case?

The only subsequent spectrum issues that I recall revolved around 3G spectrum and licences. These were amicably resolved over a period of time.

On the issue of number ranges, I spent a lot of time convincing the regulator that we needed number ranges so that we could allocate numbers to future customers.

Although it was a bit of a battle, it was resolved.

And never became an issue again.

I don’t recall any bitterness or court case.

On interconnect I/we asked the regulator to intervene (as I recall) and mediate on the settlement of interconnect rates around about 2000 since the operators and Telkom could not agree between themselves.

He did not, and interconnect remained the same. There was also the issue of interconnect for community telephones, where I/we fought against an increase in these rates and managed to keep them at very low levels.

Once again the regulator had to arbitrate. All these instances are documented and can be verified.

RICA (Regulation of Interception of Communication Act) was an item that I vigorously opposed, but had nothing to do with the Independent Communications Authority of South Africa.

It subsequently became law after I had left and you can see for yourself the resulting devastating consequences without any benefit.

It also had little or nothing to do with competition. If anything, it slowed down competition.

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