We all hate the fact that cellular phone calls are so expensive, but have you ever given any serious thought as to why? We have some of the most expensive call costs in the world mostly due to high interconnect rates. The interconnect rate is what telecommunication companies charge each other when a call from an external network is terminated on their own network.

mtn-logo-smallIn the early 1990s, before Cell C entered the market, Vodacom and MTN had an interconnect rate of around 20c per minute. This was judged to be fair, and was based on a cellular market a lot smaller than the one we have now. Yet when Cell C entered the market, the peak interconnect rate was raised to R1.25 a minute. That’s an increase of over 500%. Why would the interconnect rate need to be increased? With growing economies of scale, it really should not have.

The answer is simple. A high interconnect rate severely disadvantages smaller players in the market.  When you are a smaller player, the majority of calls placed will be off-net calls and with a high interconnect rate, there is very little in the way of wiggle room with regards to prices; dropping the call rates below the interconnect rate just isn’t feasible. Dropping on-net rates will have a negligible effect on attracting clients, as a small user base does not make cheap on-net rates attractive.

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. He said this was a conservative figure which leaves a fair margin for profit.

vodacom_logoVodacom generated R8.63 billion  through interconnection in South Africa for the financial year ending 31 March 2009, up from R7.94 billion a year ago.  This is the company’s second largest revenue stream after “airtime and access”, and is far higher than the R5.97 billion generated through data services, or the R 5.19 billion from equipment sales. For the financial year which ended December 2008, MTN generated R6.95 billion in interconnect revenue, up from R6.34 billion for the previous twelve months.  Similarly to Vodacom, it is also the second largest revenue generator for MTN, after airtime and subscription revenue. MTN’s interconnect revenue is more than its data and SMS revenue (R3.59 billion) and cellular telephone and accessories sales (R3.12 billion) added together.*

ICASA and the Parliamentary Portfolio Committee on Communications have been making a lot of noise lately regarding the interconnect rate. Whether anything actually gets done is another matter, as ICASA is generally seen as a toothless regulator. One also has to question why the government is now so interested in dropping the interconnect rate after government’s cash cow, Telkom, no longer has shares in its cash cow – Vodacom.

The next few months in the telecommunications industry will definitely be interesting to watch.

*Interconnection figures via MyBroadband

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 which he said was a conservative figure which leaves a fair margin for profit.

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