Interconnect hits mobile service providers

By Candice Jones, ITWeb online telecoms editor
Johannesburg, 19 May 2010

The interconnect rate cut already directly impacts margins for service providers.
Planned lower interconnect rates could have devastating consequences for the mobile service providers supplying distribution and airtime for the mobile operators around SA.

Local service providers, such as Nashua Mobile and GloCell, are concerned the revenue crunch put on the likes of MTN, Vodacom and Cell C, will have a bleed effect into the distribution channel, a squeeze that could see several small companies go out of business.

The concern has been sparked by the decrease in mobile termination rates, implemented at the beginning of March. The regulator has now proposed another set of rate cuts that have the operators scrambling to make up revenue losses through serious cost-cutting initiatives.

Both Cell C and Vodacom have indicated they plan to implement these initiatives soon, and Vodacom says it hopes to save in the region of R500 million in the coming financial year.

During Vodacom's financial results presentation earlier this week, the company explained the savings would have to come from areas including distribution, sponsorships and network optimisation.

Mom and pop problems

In an exclusive interview with ITWeb, Nashua Mobile MD Chris Scoble said: “If the mobile operators get squeezed, they squeeze us.”

He says the company is concerned by the decrease in termination rates and the culminating cost-cutting by the operators. “These rates not only affect the mobile operators, they affect many companies. One of our competitors has already retrenched many people,” he explains.

While he is concerned by the troubles that could stem from the rate cuts, he says Nashua Mobile is still in a good position. “A bigger concern will be for the smaller businesses, those with 10 to 20 people. They will most likely be pushed out of the market.”

Scoble says a similar situation happened to South African pharmacies not too long ago, when the regulator in that industry pulled the plug on service charges for prescriptions. “Family-owned pharmacies went out of business, now many of the pharmacies in SA are owned by Clicks,” he adds.

Nashua Mobile, like many of the local operations, believes the market would have sorted itself out and regulatory intervention was unnecessary.

Rural rumbles

Alessandro Mariola, GloCell CEO, says his company is in a similar situation. “The mobile operators are always looking at the margins, and we do substantial work for them.”

However, the impact on GloCell as a business will depend on how the operators react to another cut, he notes. The lower interconnect rate already has a direct influence on the business, because lower call rates means lower margins. “The channel's earnings will be directly affected by the cuts.”

He says the outlying and rural areas of SA will see a heavy hit, and many of the informal players in those areas will be out of business. “The informal players would bring bulk airtime to the outlying settlements at a premium, they will no longer be able to do that,” he notes.

GloCell plays to the lower LSM market and has had some first-hand experience around the success of airtime distribution to the second economy. Mariola says the cellphone registration laws have had a similar effect on the market in those regions, shutting down many of the smaller retail and independent distributors.

“You will see consolidation in the channel now, and the smaller players will definitely fall away,” he adds.

GloCell says it is looking at bringing technology into the rural areas to help mitigate the loss that much of the population in those areas can expect. “We want to see if we can turn a cellphone into a business for those people,” he explains.

Long-term contract

Local airtime distributor Blue Label says it is not particularly concerned by the expected cost crunch, since it has signed several long-term contracts with operators for distribution.

The company's media and investor relations manager, Michael Campbell, says the current climate can be expected in a maturing mobile market that SA is now facing. “It is healthy to see the pressure on the market,” he explains.

For Blue Label, the cost-cutting initiatives will provide a little more clarity and less complexity in the market. “It will take out the smaller players in the chain, which will also take out many of the inefficiencies,” explains Campbell.

Vodacom tried to reassure the service providers when it presented its results to investors on Friday, saying it will work with the channel to find efficiencies.

However, all the providers are preparing for a possible price squeeze in the near future.

Altech Autopage Cellular was not available for comment at the time of publication.