Stork Mobile Termination Rate Debate in Africa Proceedings of the 5 th ACORN-REDECOM Conference, Lima, May 19-20 th , 2011 1 Mobile Termination Rate Debate in Africa Christoph Stork Research ICT Africa [email protected]BIOGRAPHIES Christoph Stork is Senior Researcher at the Research ICT Africa. He has more than 10 years research experience in Africa and has led continent wide household and small business surveys. His research has informed policies, laws and regulations in the ICT field, specifically in Namibia where he has provided technical advice to the Namibian Communications Commission and Namibian Government on ICT policy and regulation, including a ground breaking benchmarking study on interconnection termination rates. ABSTRACT The paper provides empirical evidence for mobile call termination not being one side of a two-sided market and that a waterbed effects does not exists for Calling Party‟s Network Pays (CPNP) markets where mobile termination rates are being reduced towards the cost of an efficient operator. The cases of Namibian, Kenya, South Africa, Nigeria and Botswana are being investigated and the impact of cost based termination rates on subscriber numbers, investment and profits of dominant operators analysed. In Kenya the reduction in mobile termination rates in August 2010 led to an immediate reduction of retail prices, allowing smaller operators to compete with dominant operators. In Namibia, resulting lower retail prices let to an expansion of the market, which in turn led to higher investment and profits for the dominant operator. The paper shows, based on most recent empirical evidence from Africa, that cost-based mobile termination rates increase competition between operators and lead to lower prices, more subscribers and more investment in networks and services. Keywords (Required) Mobile Termination Rates, Waterbed Effect, Two Sided markets, Africa INTRODUCTION Call termination is a monopoly and termination rates should be based on the costs of an efficient operator. There is overwhelming international evidence that cost based termination rates encourage competition and more affordable pricing. In support of high termination rates dominant mobile operators have argued that lowering termination rates will lead to increases in access and usage prices, leading to fewer people being able to afford communication services and resultant lower profits will limit operators‟ capacity to invest. The opposite has evidently been the case. Lowering termination rates toward s the cost of an efficient operator lead to increased competition, lower retail prices and higher mobile subscriber numbers and also the need to invest more to stay competitive. Table 1: Changes in mobile low-usage basket prices compared to changes in MTR (Source: OECD 2007; OECD 2009; ERG 2006; ERG 2010, ITU2010) Mobile Termination rates in Euro cents (ERG/BEREC) OECD Mobile low-usage basket US$ PPP (OECD) Mobile Subscriber in million (ITU) 2006 2010 January Decrease in % 2006 2008 Decrease 2006 2009 Increase Austria 11.21 3.50 69% 193.43 148.26 23% 19.76 24.22 23% Belgium 13.97 8.84 37% 175.51 146.92 16% 9.85 12.42 26% Denmark 11.34 7.37 35% 68.82 50.31 27% 5.83 6.86 18% Finland 7.90 4.90 38% 99.89 60.31 40% 5.67 7.70 36% France 9.80 4.76 51% 239.68 216.49 10% 51.66 57.97 12% Germany 11.39 6.77 41% 123.55 104.55 15% 85.65 105.52 23% Greece 12.48 6.24 50% 302.47 202.46 33% 10.98 13.30 21% Hungary 10.71 5.22 51% 230.48 217.08 6% 9.97 11.79 18% Iceland 12.12 4.45 63% 142.61 117.61 18% 0.30 0.35 17%
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Stork Mobile Termination Rate Debate in Africa
Proceedings of the 5th ACORN-REDECOM Conference, Lima, May 19-20th, 2011 1
Mobile Termination Rate Debate in Africa Christoph Stork
Christoph Stork Mobile Termination Rate Debate in Africa
Proceedings of the 5th ACORN-REDECOM Conference, Lima, May 19-20th, 2011 8
focusing on the retail prices and the financial performance of the dominant operator MTN. The examples show that the
Waterbed effect and the two-sided market argument are not only theoretically not applicable but can also empirically be
rejected for cost based termination rates.
Case of Kenya
The Communications Commission of Kenya (CCK) issued the Interconnection Determination No 1 of 2007 following a
telecommunications network cost study done in 2006 by Analysys UK in accordance with the Communications Act of 1998.
The determination prescribed a glide path to bring down the termination rates towards the cost of an efficient operator with
the final reduction in March 2009. Cost of termination is traffic and technology sensitive and falls with increasing volume
and new technologies. A second cost study was subsequently commissioned by CCK in 2010 and conducted by Analysys UK
in the first half of 2010. This second cost study and sector wide consultations led to Interconnection Determination No 2 of
2010. This determination addressed several issues that hampered fair competition in the sector including off-net to on-net
price ratios, cross network money transfers and number portability.
Figure 5: Kenya’s Termination rate reductions in US cents based on average FX for 2010 (Source CKK 2007 and CCK 2010)
Despite four players in the mobile market competition has not been sufficiently fair and provided an advantage to Safricom.
The cost study conducted by Analysys UK revealed “...instances of market failures where the on-net to off-net price spread is
perpetuating a “club effect” which arises when consumers tend to have a preference for a network with a large pool of
subscribers in order to benefit from the possibility to call and be called at a lesser calling rate by the largest possible number
of subscribers.”(CCK, 2010)
Figure 6: Monthly cost of OECD Low User bundle in US$ (2006 Definition).
This determination No 2 of 2010 is ground breaking in several ways. Kenya is the first country to apply the EU
recommendations of 2009 by enforcing cost based termination rate caps based on pure LRIC. Kenya has thus the lowest
mobile termination rates in Africa of 2.21 Ksh (2.7 US cents). The CCK announced that it will monitor market developments
in SMS termination, broadband interconnection, money transfer interconnection and infrastructure sharing and that it will
Stork Mobile Termination Rate Debate in Africa
Proceedings of the 5th ACORN-REDECOM Conference, Lima, May 19-20th, 2011 9
intervene if commercial negotiations will not lead to competitive outcomes. This creates regulatory transparency and
certainty, two very desirable regulatory attributes.
Table 4: Safaricom’s key performance indicators for financial years ending in March (Source: Safaricom annual reports)
2007 2008 2009 2010
Revenue billion KES 47.45 61.37 70.48 83.96
Subscribers in million 6.10 10.23 13.36 15.79
EBITDA Margin 51.7% 45.9% 39.6% 43.6%
After-tax profit in billion KES 12 13.85 10.54 15.15
Dividend paid in billion KES 3 2 4 8
The impact on retail prices has been dramatic. Airtel. Orange and Yu immediately cut their prices after the announcement of
the new termination rates. Airtel‟s cheapest product for the low OECD usage basket fell by more than 80% between January
2011 to January 2011. Safaricom hesitated to reduce prices initially but had to give in to competitive pressure towards the
end of 2010 and cut its prices by 68%. The consequence of lower prices have been an expansion of the market with a
subscriber base growth of 9.5% in the quarter July-September 2010. (CCK 2011).2
Kenya provides a good example how cost based termination rates increase competition in the industry and bring down the
prices. Often falling equipment prices, increasing traffic volumes are being cited as masking waterbed effects. In the Kenyan
case the reaction to the termination rate reduction has been immediate leaving no doubt about the causal relationship.
Case of Namibia
Market entry to Namibia‟s telecommunication sector is restricted. Companies offering voice services are required to have a
licence to operate. The induced market structure, monopoly for fixed-line and oligopoly for mobile requires that the market is
regulated to safeguard fair competition among the few existing operators and to protect consumer interest. The Namibian
Communications Commission (NCC) undertook three major interventions in the mobile market since 2006:
Liberalisation by awarding a second mobile licence in 2006.
Resolving a termination rate dispute between operators by enforcing licence conditions of MTC and Leo with regard to
cost based termination rates in July 2009. The cost of an efficient operator was established through benchmarking.
Resolving a dispute regarding high off-net and mobile to fixed-line calling tariffs in March 2011 by enforcing a price cap
on off-net and fixed-line call prices to the level of on-net prices.
The dispute resolutions of the NCC involved intense consultations with all parties involved, hearings and consultative
workshops. Decisions and supporting studies have been made public in the spirit of fair and transparent regulation.
Telecom Namibia and Leo had been net termination rate payers to MTC and the result of the termination rate reduction
meant a relieve for both operators. During the termination rate debate in 2009 MTC argued that its EBITDA (earning before
interest, tax, depreciation and amortisation) margin would drop to 36.8% if termination rates were reduced to the cost of an
efficient operator. MTC also argued that it would have to reduce investments, increase retail prices and pay less in dividends
and taxes to government (Government of Namibia has a 66% share in MTC).
The termination rates have since dropped to 4.1 US cents (N$0.3) from 14.4 US cents (N$1.06) while MTC‟s EB DTA
margin rose from 50.9% in 2008 to 53.8% in 2009 and 55.8% in 2010. MTC paid record dividends in both 2009 and 2010,
increased its investment and increased its subscriber base in light of falling retail prices.
2 The impact of the price cuts on Safaricom’s profitability cannot yet be evaluated. The latest annual report available for Safaricom is for the financial year ending in March 2010.
Christoph Stork Mobile Termination Rate Debate in Africa
Proceedings of the 5th ACORN-REDECOM Conference, Lima, May 19-20th, 2011 10
Figure 7: Termination rate reduction towards cost of efficient operator in US cents (Source NCC 2009)
MTC‟s subscriber numbers increased further to 1.5 million subscribers while Leo also managed to attract new customers,
indicating that the lower prices led to an expansion of the market.
Dividend paid in million US$ 14.99 10.90 33.38 30.11 50.41 52.26
Dividend payment as share of after tax profit 37.6% 23.7% 72.1% 62.0% 95.5% 96.6%
Tax payments in million US$ 19.96 23.35 24.11 24.62 27.10 25.5
Prices of MTC have not increased as predicted by two-sided market and waterbed-effect models but instead decreased or
remained the same. Figure 8 shows the cost of OECD usage bundles for the cheapest postpaid or prepaid product of MTC.
The prices for Tango Prepaid per second prices were slashed by more than half in December 2009, and a new, substantially
cheaper postpaid product was introduced in early 2010, effectively reducing MTC prices again. Prices of the incumbent
mobile operator MTC are below 25% of what they used to be in 2005 in real terms.
Figure 8: MTC cheapest product (prepaid and post paid for OECD usage baskets (2006 definition) in US$ (Average FX 2010)
All of the NCC‟s interventions have been win-win interventions. The second mobile licence brought competition to
Namibia‟s mobile telecommunication sector and with it lower prices, better services, more jobs and more investment.
Resolving the termination rate dispute removed an obstacle to fair competition and lead to further declining prices and
increased investments. t allowed Leo and Telecom Namibia to compete with MTC‟s on-net prices and removed the implicit
subsidy to MTC linked to above cost termination rates. The fairer competition and the subsequent lower prices lead to an
expansion of the market and and resulted in record earnings for MTC. Enforcing a price cap that prevents operators to
discriminate in their retail prices against other networks removed another obstacle to fair competition. The new retail prices
Stork Mobile Termination Rate Debate in Africa
Proceedings of the 5th ACORN-REDECOM Conference, Lima, May 19-20th, 2011 11
approved by the NCC show that consumers benefited immediately. The revenue impact for MTC will be small if any since
most of its traffic is on-net (97%) and the price cap will increase cross network traffic and lead to a further market expansion.
MTN Nigeria, South Africa & Mascom South Africa, Botswana and Nigeria have seen recent termination rate cuts that lend themselves to investigate retail prices
changes, subscriber numbers and performance of mobile operators as a consequence of the regulatory interventions. This
section analysis specifically dominant operators in there three markets since dominant operators are usually the operators that
object to cost based termination rates. MTN was selected for this analysis which holds dominant positions in all three
countries.3
The Nigerian Communications Commission issued a mobile termination determination in December 2009 (NCC 2009b).
prescribing converged termination rated for fixed and mobile networks (like in Namibia) and allowing for asymmetric
mobile termination rates for new entrants until December 2012.
The Botswana Telecommunications regulatory Authority issued a termination rate directive on the 8 February 2011 (BTA
2011), reducing mobile termination rates to 4.3 US cents by 2014.
The Independent Communications Authority of South Africa (ICASA 2010) issued a mobile call termination regulation 29
October 2010, reducing termination rates to 5 US cents by Match 2013.
Table 6: Mobile termination rates Determination of December 2010 (NCC 2009b)
31/12/2009 31/12/2010 31/12/2011 31/12/2012
Naira US
Cents*
Naira US
Cents*
Naira US
Cents*
Naira US
Cents*
Mobile (voice) termination rates- New entrants 10.12 6.6 9.48 6.2 8.84 5.8 8.20 5.4