JORGE MENDES: The imperative for asymmetrical call termination rates

Call termination rates — the costs charged for the routing of phone calls from one network to another — have been one of the focal points for regulatory oversight in the SA telecommunications industry, and demonstrate how regulatory interventions can shape the competitive landscape of the market

With the early years of the industry characterised by a duopoly of major operators, the high termination rates in the 1990s were seen as a barrier to entry for new operators, and criticism prevailed for keeping call costs high for consumers who had limited to no choice in services and products.

In response, the Independent Communications Authority of SA (ICASA) began to take a more active role in the regulation of termination rates, by introducing a glide path for the reduction of mobile termination rates (MTRs) and fixed termination rates (FTRs). The intent was to gradually lower these charges over several years. 

ICASA’s objectives were to ensure that MTRs reflected more closely the actual costs that operators incurred for terminating calls, remove excessive profits from termination charges, support more robust competition and be most cost efficient for consumers.

As part of the wider framework and regulatory mandate to increase market access and affordability, MTRs have been continually adjusted down over the years.

As a smaller operator, Cell C has been one of the notable later entrants who took on the role of providing lower prices and more choice, and championed the cause of broadening access to telephony services with innovative bundled offers and packages. 

A vibrant and competitive telecommunications sector is good for the citizens of SA, and the entrance of Cell C has benefited consumers who now have choice, which delivers value. 

This is testament to ICASA’s critical role in ensuring a fair and competitive market that benefits consumers, in shaping industry landscapes, balancing the interests of operators and meeting the needs of consumers.

In a rapidly evolving telecommunications landscape, the importance of fair and pro-competitive regulation cannot be overstated. ICASA plays a crucial role in shaping the future of the industry, balancing the interests of operators and consumers alike.

However, ICASA's recently published draft amendments to the Call Termination Regulations of 2014 — including proposals to reduce wholesale voice call termination rates substantially and to curb excessive rates for terminating calls coming into SA from foreign countries — have sparked debate within the industry, with stakeholders voicing concerns about the potential effect on competition and consumer welfare.

At the heart of this debate lies the issue of asymmetry in termination rates — a principle that Cell C believes is essential for maintaining a level playing field and ensuring a vibrant, competitive market.

Advocating for call termination rates and a three-year glide path 

Telecommunications serve as the backbone of SA's digital economy, facilitating social inclusion, economic development and competitiveness. However, the sector's potential is fully harnessed only when a fair, competitive marketplace exists — one where policies like asymmetrical call termination rates ensure smaller players can compete with established giants.

ICASA’s proposed regulatory changes, while well-intentioned in lowering costs for consumers, inadvertently threaten to worsen market inequalities. The current policy framework allowing for asymmetry in call termination rates is a crucial lever to ensure smaller operators can sustain their operations amid the dominance of larger players. 

Cell C is opposed to the proposed amendments, with its stance rooted in the strong belief that removing or aggressively adjusting this asymmetry, as contemplated in the draft amendments, risks entrenching the duopoly further, threatening the sustainability of smaller players, eroding consumer choice and stifling innovation across the board.

Consumer choice and affordability

Maintaining asymmetry in call termination rates is essential for lowering costs and improving offerings for consumers. By allowing more providers to enter the market, transparency and affordability can be enhanced, ensuring consumers have access to a wider range of choices for their connectivity needs.

Slashing interconnect fees without maintaining asymmetry will reduce choice for consumers and inhibit the lowering of costs.

Effect on smaller operators and fostering healthy competition

SA needs a telecommunications industry characterised by robust competition, transparency and consumer choice. The proposed reduction in interconnect fees, particularly the removal of asymmetry, raises concerns about market dynamics and consumer welfare. Cell C emphasises the importance of maintaining pro-competitive regulations to ensure a level playing field and drive innovation for the benefit of consumers.

As a smaller player in the telecommunications sector, Cell C understands the challenges faced by operators of all sizes. The proposed removal of asymmetry threatens to further consolidate the power of dominant players, stifling innovation and limiting choice for consumers. It is imperative that ICASA carefully considers the implications of its regulatory decisions, considering the diverse needs of all stakeholders.

The proposed changes disproportionately benefit dominant players like MTN and Vodacom, posing a significant threat to smaller operators like Cell C. The removal of asymmetry would lead to revenue erosion for smaller players without directly benefiting consumers. This move undermines the regulator's mandate to promote fair competition and jeopardises the sustainability of smaller operators, risking diversity and innovation in the industry.

Technical concerns with ICASA's model

This policy stance is predicated on comprehensive cost modelling and ICASA’s own findings, highlighting the current lack of competition in the voice call market.

Cell C has identified significant shortcomings in ICASA's bottom-up cost model for mobile networks. The model fails to adequately capture the intricacies of pure long-run incremental costs (LRIC) and lacks reliability in calculating appropriate termination pricing. Moreover, the model demonstrates a high degree of cost asymmetry between small-scale and large-scale operators, further justifying the need for asymmetrical pricing.

This highlights the need for a more robust and reliable approach to pricing. Without accurate cost modelling, regulatory decisions risk being based on incomplete or inaccurate information, potentially harming both operators and consumers.

Through continued market analysis, rates should reflect the competitive dynamics and cost structures of smaller operators, as evidenced by rigorous cost modelling, with regular review and effect assessment, adjusting the glide path as necessary to avoid unintended consequences. 

As SA stands on the cusp of profound digital transformation, ensuring a vibrant, competitive telecommunications sector is imperative. The continuation of asymmetrical call termination rates, via a carefully calibrated glide path, represents a balanced, evidence-based approach to regulation — one that safeguards consumer interests, promotes healthy competition and underpins the broader economic and social goals of the nation.

In light of that, Cell C calls upon ICASA to work together with industry stakeholders, and reconsider its approach to call termination regulations and maintain asymmetry on a glide path for the next three years. This will safeguard the interests of smaller operators, promote fair competition, and uphold consumer choice and affordability.

A phased adjustment period would allow smaller operators to adapt financially and strategically. 

By maintaining asymmetry on a glide path, SA can ensure a telecommunications industry that serves the needs of all stakeholders, fostering innovation, diversity and economic growth; an industry that remains dynamic, competitive and responsive to the needs of all its citizens, advancing the country's digital agenda for all.

This article was sponsored by Cell C.