Where to now for the LCR industry?

Ever since the advent of cellular networks in South Africa, entrepreneurs have been using Least Cost Routers [LCR or Premi-Cells] to help businesses save money on cell phone calls originating from their PABX. So where to from here with the advent of change looming on the horizon?

And, in turn, the Industry has over the years flourished because of the “huge” recurring revenue streams that were created. And the foundation on which the industry was built was because of a few simple reasons:

• Firstly cell to cell calls, charged at a per second rate, are far cheaper than a Telkom to cell call, as Telkom charge a per minute rate. So where Telkom charge R1.65 per minute for a GSM terminating call irrespective of whether you talk for one second or one minute, a cell network charges approximately. R 0.02 cents per second, so you only pay for what you use.

• And, secondly, GSM networks are charged an inter-connect fee of 20-25 cents for calls terminating on Telkom’s network – while they charge Telkom R1.25 for calls terminating on the cell phone networks.

The cell phone business is the ultimate recurring revenue stream product and Least Cost Routing of cell phone calls off of a business PABX is no exception to this rule. Companies such as Orion, Storm, Telepassport, Vox, SmartCom, Telemasters [the latest AltX addition], Nashua, Autopage, Vodacom SP, MTN SP and many others have all been using this business opportunity to generate large recurring revenue streams for their shareholders.

Typically, these LCR companies do not want the overhead of large sales teams; so they have traditionally shared this ongoing revenue streams with dealers/resellers of telecoms products who enjoy existing relationships with their customers. It is not uncommon for individuals to have recurring revenue streams of R50 000 to R100 000.00 a month paid to them every month from the vendors in ongoing commissions. Commission can be anthing from 4% to 15% depending on your negotiation skills, the SP whose “minutes” you on-sell and the volumes that you manage to bring to the table.

Historically, the LCR business was quite easy: all you had to do was turn up onsite at business “XYZ”, install the SIM cards and some form of hardware to interface to the PBX and savings began for the customer, while the profits rolled in for the LCR vendor and their dealers.

Along the way the GSM networks got clever and implemented an array of new packages that basically protected their own revenue streams to a degree, by requiring a MTN SIM card for MTN calls and a Vodacom SIM card for Vodacom calls. By introducing these special packages for LCR cellular, the sophistication required to get the right mix of SIM cards connected to the PABX, as well as managing this requirement, overnight upped the ante considerably for LCR company and their dealers.

The fact is that many reputable LCR companies do not have the sophisticated billing analysis tools or operational capacity to deal with these changes, which we see in the reporting we do for our clients on a daily basis.

Some LCR companies do a good job and monitor the way these calls are routed through their PABX systems, but often they get it wrong and fail to find the cheapest routing.

Add to this number portability, where cell phone users can change networks but still keep their same numbers – and all of sudden a call to 082 from a Vodacom SIM means that a company could actually be dialing 083 or 084 and incurring a higher cost than if the call had gone via Telkom.

So, now it’s a whole new ball game and changes are happening that could adversely affect the LCR cellular industry.

These include:

• GSM calls are fast becoming the most popular way to make calls to reach your customers or suppliers quickly and in the most cost effective way. When we started our business we found most companies on a 70% Telkom / 30% GSM call pattern. These days it is not uncommon to find it the other way around, with an 80% GSM/20% Telkom split

• Telkom have already started offering Telkom per second billing packages, limited to a maximum of R 20 000 a month per account number. Telkom has also limited this option to one package per account number in order to protect revenue streams it receives from big corporate customers.

• Now with more PSTN [fixed line] operators coming to market – like Transtel, Eskom and Neotel - Corporate SA will soon have the option of carrier grade voice quality in per second billing at cheaper rates than Telkom’s. An added incentive for customers to switch to these companies is that they offer GSM rates lower than those of Telkom. This results in LCR Cellular becoming redundant at sites that no longer use Telkom as their main stream carrier.

• VANS [value added network service providers] in South Africa will soon be licensed to terminate minutes, meaning they will become virtual “telco’s”. Most have already entered into inter-connect agreements with GSM Networks and are merely waiting for the green light from Icasa.

An added incentive for customers to switch to these companies is that they offer GSM rates lower than those currently offered by both Telkom and LCR vendors.

• Some LCR Cellular companies are already offering 3 year contracts that tie in customers in order to protect revenue streams as they no longer see as so rosy?

Then look at the recent listing of LCR companies on the South African AltX, and one wonders whether the “boys” are cashing in their chips before traditional cellular LCR loses its advantages.

Consider the fact that ICASA is under huge pressure to drop the interconnect rate between networks - including the cost of making calls from Telkom to cell phone networks - and I would say you have some industry players that will have to make major changes or face extinction.

The LCR companies that are morphing into converged voice and data solutions will live to fight another day, but those that rely solely on recurring income from routing calls off PABXs are in trouble unless they change their business models.

So as a business you need to ensure that you are looking very carefully at the manner in which you route your cell phone calls - and ensure that you do not tie yourself into any long-term contracts for the foreseeable future.

Peter Walsh_3rd June 2007 / http://www.dataroom.co.za/