Hasty MTR Cuts Risk Undermining Universal Access Goals

Vodacom stated that mobile termination rate (MTR) cuts imposed by the Independent Communications Authority of South Africa (ICASA) from April 1 2014 will cost its business ZAR1bn (USD94mn) over a year. BMI believes Vodacom and MTN, which is also subject to asymmetric MTRs, will be able to cushion the impact by bolstering mobile data and enterprise services, but warns that rushed implementation of MTRs could set back the government's universal access goals.

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The High Court of South Gauteng ruled the MTR cuts 'unlawful and invalid' at the end of March, but ordered them to go ahead as planned for six months while ICASA forms new regulations. Although the cost of mobile services in South Africa is still high, hasty implementation of regulation to bring this down could lead to unintended consequences. Kenya is a prime example of such a situation, where the rapid decline in MTRs kick started fierce price wars between the four mobile operators, squeezing their profits to the bare minimum. This limited operators' ability to invest in network upgrades and ultimately led to YuMobile's sudden exit from the market in March 2014 and Orange's decision to consider divesting its Kenyan unit (See 'Shutdown Of YuMobile's Network Shakes Up Kenya's Telecoms Market', March 4).

However, BMI does not expect MTR cuts to have such a drastic impact on South Africa's mobile market. The already relatively high penetration of 3G/4G in South Africa will enable operators to continue generating revenue from non-voice services, even as interconnection revenues decline. By comparison, other than Safaricom, whose business was cushioned by the popularity of M-Pesa, Kenya's operators had little in the way of non-voice services to bolster their revenues during the price wars. Furthermore, South Africa has a much more developed economy than Kenya, which has created important revenue diversification opportunities for telecoms operators in the enterprise services sector.

Nevertheless, BMI expects the ZAR1bn Vodacom anticipates losing in revenue between April 2014 and April 2015 to influence its investment strategy throughout the year. Most likely, as has been the case in Tanzania following increased taxes on the telecoms sector, Vodacom and MTN will choose to concentrate capital investments on improving mobile data networks in urban areas and scale back network expansion to underserved rural areas. With low interconnection rates the two operators will have little incentive to extend networks to rural areas, where subscribers are more likely to receive rather than make calls, meaning they generate revenue primarily through mobile termination fees. This will leave smaller operators Cell C and Telkom Mobile or the South African government to fund rural network expansion, likely at a much slower pace.

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Related sectors of this article: Telecoms
Geography: South Africa, Kenya, Tanzania

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