Service Providers Interconnect Costs

Ever wondered how much Vodacom and MTN makes through their interconnect fees?

The high interconnect rates in South Africa continue to make headlines, something which recently prompted ICASA to call a meeting with the major telecoms operators in the country to discuss the issue.

The meeting resulted in an agreement that the interconnect negotiations between the operators will be concluded by the end of December 2009, with ICASA proposing an implementation date of potential new interconnect rates by 01 February 2010.

The main complaint from both consumers and certain telecoms players is the R 1.25 per minute in peak times charged by the cellular operators. According to ECN Telecoms CEO John Holdsworth high interconnection charges prevent new operators from entering the telecommunications market and discourage consumers from switching to new operators.

“Mobile interconnection charges cost more than 5 times that of fixed-line interconnection fees (calls to landlines). The current mobile termination rates cost consumers up to 80% of the price per minute from a landline to a cell phone,” said Holdsworth. “These high interconnect charges create an artificial price floor that keeps call rates high, because charging less than the interconnect fee is not feasible. ”

Research ICT Africa Director Alison Gillwald suggested an interconnect rate of R 0.25 instead of the current peak-time cellular interconnect rate of R 1.25 per minute. Gillwald added that R0.25 per minute can be seen as a conservative figure which leaves a fair margin for profit for operators.

With Vodacom and MTN involved in the interconnect negotiations such a drastic interconnect rate cut as suggested by Gillwald is however unlikely. The two dominant mobile operators are raking in billions each year through interconnect charges, and lower rates may significantly influence their revenue and profits.

What Vodacom and MTN earn through interconnect

For the financial year ending 31 March 2009 Vodacom generated R 8 632 000 000 through interconnection in South Africa, up from R 7 945 000 000 a year ago. This is the company´s second largest revenue stream after ´airtime and access´, and is far higher than the R 5 973 000 000 generated through data services (SMS, MMS & broadband) or the R 5 190 000 000 from equipment sales.

MTN generated R 6 951 000 000 in interconnect revenue for the financial year which ended December 2008, up from R 6 346 000 000 for the previous twelve months. As is the case with Vodacom it is also the second largest revenue generator for the MTN behind airtime and subscription revenue.

MTN´s interconnect revenue is in fact more than its data and SMS revenue (R 3 596 000 000) and cellular telephone and accessories sales (R 3 122 000 000) put together.

Impact of lower interconnect fees

It is not difficult to understand why Vodacom and MTN are hesitant to reduce their interconnect rates. The impact of lower interconnect fees is well illustrated by the recent Barnard Jacobs Mellet Securities downgrade of Vodacom after it was announced that ICASA has set a firm date for lower interconnect rates.

According to the brokerage the lower interconnect rates can significantly influence Vodacom´s profits, and they subsequently dropped its target share price from R84 to R60. It also reduced MTN´s share price target from R124 to R120. The MTN Group´s diverse international portfolio means that it is less reliant on local revenue and the impact of lower interconnect rates in SA will therefore influence them less than Vodacom.