MTN SA MD concerned about sudden cuts to interconnect rates

October 14, 2009 • Mobile and Telecoms

MTNKarel_Pienaar.jpgMobile operator MTN SA today told parliament that MTN was willing to reduce interconnect rates but had serious concerns about the potential impact of sudden and substantial cuts on its investment plans, including broadband roll-out, and measures that benefit poorer people and communities.

Karel Pienaar, Managing Director of MTN SA, also told the parliamentary portfolio committee on communication that MTN has invested more on infrastructure in the past three years than its profit in that period.

He said the South African mobile telephone industry was a success story. The industry had delivered a world-class network that had created hundreds of thousands of jobs, promoted social development and boosted the economy.

Interconnect – the rate mobile operators charge each other to receive calls on their networks – had provided the revenue that had enabled mobile operators to meet government’s developmental objectives. This included bringing mobile access to remote rural areas, enabling poor communities and individuals to connect at minimal cost, and providing broadband services that are helping to bridge the digital divide.

Pienaar said that to assume that reduced call tariffs would result from a cut in interconnect rates is not necessarily correct. An international study of more than 24 countries had shown that a 10% cut in interconnect rates was followed by a 10% average rise in retail call rates, he said.

Pienaar explained that interconnect fees and call tariffs were two of MTN’s principal revenue streams, together with Sms and data revenue. If a cut in one source of revenue was followed by a cut in a second revenue stream, there would be a double impact on revenue.

Pienaar said that MTN was willing to reduce interconnect rates, but this had to be done gradually over a period of time to avoid “business model shock”.

“MTN is investing a record R7,5 billion this year in infrastructure expansion, technology and quality improvements and FIFA stadium coverage for the 2010 Soccer World Cup. This huge investment is based on a long-term view of the revenue the investment will produce. If you reduce that revenue through interconnect cuts, and then seek further reductions in other revenue streams such as retail tariffs, our business model will by necessity have to alter.”

Pienaar said claims that South African cellphone call rates are among the highest in the world were factually wrong.

“Mobile tariffs have gone down steadily in real terms over 10 years, a period of high inflation including sharp rises in items such as food and energy. And competitive activity is bringing rates down further, even at current interconnect levels.”

Pienaar took specific issue with figures in a study used by the Department of Communications in its criticism of South African mobile operators. The study had used wrong or outdated information that painted an untrue picture of mobile tariffs, he said. In one case the department had based an international comparison on an old MTN rate that applied to less than 1% of customers and was no longer promoted.

The department had stated that South Africa had some of the highest data prices in the world. In reality, MTN’s data price of 19c a megabyte is among the cheapest in the world, and MTN data prices are 40 times cheaper than Chile, which the department had said was cheaper than South Africa.

Pienaar also disputed claims that prepaid tariffs used by poor people are higher than contract prices, by showing that average prepaid tariffs are cheaper than average contract rates.

“In addition to fair and innovative pricing, enabling calls at extremely low rates, South Africa has one of the lowest costs of mobile ownership in the world. People can get connected and stay connected for very little – 49 cents for a Sim card and one call every 90 days.

“This low cost of ownership, plus the rapid expansion of mobile networks, has given South Africa a mobile penetration rate – the percentage of the population with a mobile connection – of 104%. India, with which we are often compared, has a penetration of only 37%, concentrated in the cities while our networks reach 98% of our people.”

He said mobile take-up in countries like India and the United States had initially been very slow because recipients of calls had to pay for those calls. This is still the case in many countries, but in South Africa – at the moment – incoming calls are free, funded by the interconnect charge.

Rural coverage and affordable access for the poor had been funded by interconnect.

“Interconnect is a driver of South Africa’s world-class mobile coverage and the very high percentage of our population who are connected.”

If prices were too high, as critics claimed, the market would have shrunk. The continuous growth of the mobile industry showed the criticism was wrong.

Pienaar said MTN SA had invested R27 billion in infrastructure development since 1994. Over the past three years alone the company had invested R15 billion in South Africa, more than the total profits of its South African operations.

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