SMS Price Cap Piles Pressure On Operators

On January 3 2013, the Nigeria Communications Commission (NCC) set a price cap for Short Message Service (SMS) across all networks. The new price cap of NGN4 (US$0.0252) per SMS applies to all domestic off-net SMSs and will take effect from Fe bruary 5. This move is set to pile more pressure on network operators struggling to strike a balance between the increasing demands on their networks and declining revenue growth.

Aiming For The Lower League
Cross-Network SMS Rates In Selected Countries (US$), December 2012

The SMS price cap is a 60% reduction from the former price cap set at NGN10 per SMS for off-net messages. On-net messages as also expected to drop by at least 20% from the previous cap of NGN5 per SMS. There was no price cap on international SMSs, which are terminated through international carrier service providers in various jurisdictions outside the control of the NCC. This is the latest attempt by the NCC to protect consumers from what it deems undue exploitation by network operators. Other actions taken by the regulator previously include sanctions for poor quality of service (QoS) levels and a ban on mobile promotions and lotteries.

The reasoning behind the regulator's decision appears valid. According to the director of legal and regulatory services at the NCC, Josephine Amuwa, the regulator considers the cost SMSs too high in view of the interconnection rate of NGN1.02 per SMS for off-net messages set in 2009. However, network operators are not convinced by this argument and are proposing a price cap for off-net messages ranging between NGN5-10 per SMS. A comparison of average SMS rates from selected countries across Africa show the current price cap of NGN10 puts Nigeria among the most expensive SMS markets, while the new price, if implemented in its present form, will make Nigeria the second least expensive SMS market, second only to Kenya.

BMI believes the position of the operators is equally valid considering the myriad of operational challenges they face, which could be exacerbated by the new price cap. Network operators have had to invest huge resources in network expansion to cope with strong subscriptions growth and increasing usage in recent years. However, their revenue growth has also come under intense downward pressure during the same period from competitive and regulatory factors, including mobile termination rate cuts. This development, along with high network maintenance and other input costs owing to poor infrastructure, has significantly affected profit margins. We expect the new SMS price cap to worsen this situation via disproportionate increases in SMS usage and revenue.

BMI expects network operators to respond to the increasing regulatory and competitive pressures on revenues from traditional services by expanding their premium services portfolio. Although there are significant subscription growth opportunities in basic voice services (with mobile penetration rate still below 70% as of December 2012), greater emphasis on advanced services provide a surer route to revenue growth and profitability. Nigeria's leading mobile network operators have invested heavily in mobile data networks in the last two years and are expected to continue that trend over the medium term. This should enable them to offset declining revenue growth from traditional services with a wide range of data-centric premium offerings for corporate and personal users.

This article is tagged to:
Sector: Telecommunications
Geography: Nigeria, Ghana, Kenya, Tanzania, Uganda, South Africa, Zimbabwe

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