Cellphone wars to cause collateral damage

MTN and Icasa's court case contesting new reduced interconnect call rates is a high-stakes game that is going to leave no one in the cellphone sector untouched, experts have warned.

"This is the first time that MTN and Vodacom have been staring down the barrel of a gun," said analyst Nadim Mohamed. "The Independent Communications Authority of South Africa [Icasa] is obviously serious about these changes and, as far as I can remember, this is the first time a case this big against a regulator has made it to court in South Africa. Normally it’s resolved internally within Icasa."

Steven Ambrose, the chief executive of consultancy Strategy Worx, agreed, saying it marks a new "chapter" in the relationship between the networks and the regulator, and indirectly with the government, where previously issues were resolved through consultation.

The bonus is that the consumer is likely to benefit from a decreasing interconnect rate – the rate one network pays another to connect a call – with one analyst saying it will probably result in a "price war". "There have already been new deals offered by cellphone companies, with Vodacom in particular targeting new deals to try to get ahead of the curve," said the analyst.

Ambrose said the cheaper prices will take a while to filter through to the consumer, however.

Signal deterioration
A point was made that less profit for the players may result in a deterioration in service and signal if infrastructure cannot be maintained.

MTN has said in court papers that it expects to lose R1-billion a year in revenue, excluding the money it would receive from the other three operators. Vodacom has also objected to the decision.

Icasa agreed to postpone the implementation of the new mobile termination or interconnect rate to May, after MTN, in the Johannesburg high court, challenged the new regulations that would see MTN and Vodacom paying 20c to connect calls, with smaller players Cell C and Telkom charged 44c.

The case is now said to be scheduled for the end of March, but this could not be confirmed at the time of going to press. Thirty other respondents, which have been linked to the case merely as interested parties, including Vodacom, have been asked to submit affidavits.

The irony is that before 1998 the call rate was about 20c. Soon after Jay Naidoo, then communications minister, announced that new player Cell C would be entering the market the interconnect rate moved to R1.23 between 1998 and 2001, making South Africa’s rate the most expensive in Africa. Cell C’s recent advertisement challenging MTN clients to move to a company that was not fighting to keep its clients paying higher connection rates is more than likely a strategic move by Cell C acting chief executive José dos Santos.

Pencil sharp deals
Ambrose said: "MTN have been the worst affected recently by the migration of customers [as prepaid figures show], and have lost customers to Cell C. The flip side is that they [MTN] will have to sharpen their pencils and offer real value to customers going forward."

MTN has accused Icasa of not following proper procedure and warned that the consequences will be "disastrous" for the company.

A successful application by MTN to halt the implementation of the new rates could have repercussions for Cell C. A senior staff member said it could mean the loss of some investors that may not want to wait a year or two while the case goes to court.

The investors of MTN and Vodacom might have to pay smaller dividends and make some cuts, but are unlikely to be seriously affected.

Mohamed said: "Our research shows that the top two companies tend to hold their position and are not seriously affected. I think their future is going to be in data." He said people tend to hold on to the shares of companies that in this case still bring in 90% of the sector’s revenue.

Of course, taking on Icasa before being allocated increased spectrum for its Long Term Evolution network, or 4G wireless broadband technology, may not have been a strategically sound decision for MTN, one analyst said.

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