MTN is seeking to hold on to profit at country’s expense

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Dominant incumbents are typically defensive when any attempt is made to curb their otherwise abusive behaviour, but isn’t MTN taking it a bit far?

Not content to make “super-normal profits” (more than normal profits, or the amount of revenue generated after paying costs, by a monopoly) for nearly 15 years, MTN wants to choke the consumer further by refusing to accept regulatory intervention under law, by the Independent Communications Authority of SA (Icasa).

As ResearchICT Africa has repeatedly shown, prices to communicate in South Africa are abnormally high. The prices for communications charged by MTN and Vodacom specifically are excessive when compared with the prices of similar operators elsewhere in Africa.

MTN not only holds more than 35 percent of the entire cellphone market by revenue in South Africa, but holds significant shares in international operations throughout Africa and the Middle East.

Operating under regulatory scrutiny is therefore nothing new for MTN, but it seems that where that regulation is not to MTN’s liking, the company opts for the courts rather than a good hard look at its operating model.

In 2010 when Icasa first intervened in the market in an attempt to introduce real competition and drive prices down, MTN argued that it would have to cut jobs and its business would be prejudiced by the reductions in the rates that operators charge one another to terminate calls. Over the three-year period that those regulations were in place, MTN increased its earnings before interest, tax, depreciation and amortisation (Ebitda) margins year on year until last year, when Ebitda dropped by about 2 percent in the first half of last year.

Instead of examining its own marketing strategy, cutting costs or taking steps to reduce the massive dividend payments it makes to shareholders, MTN went to court.

This despite an admission by its group chief executive last year that it had not paid enough attention to the market.

On February 12, MTN claimed in its papers that Icasa had failed to follow due process in determining termination rates, however it only wants Icasa to stop regulating cellphone termination rates, even though the same process was followed to determine the fixed-line termination rates.

MTN claims asymmetry is not okay for smaller operators and that it is having to “cross-subsidise” Cell C and Telkom Mobile’s businesses with asymmetry and lower termination rates. Without even looking this up in the competition dictionary, it’s easy to see this is only half the story. MTN also leaves out the bit about the asymmetry it, together with Vodacom, has enjoyed for 20 years against Telkom.

Calling asymmetry a “subsidy” suggests that this is some illegitimate theft of private cash, but it’s a regulated sector and one that is potentially subject to pricing regulation – so there will inevitably be limits on businesses in such circumstances.

Icasa can in fact regulate retail rates as well. In any event, MTN would have us believe that cash is being removed from the sector altogether whereas it remains within the sector but just not with MTN.

Asymmetry is proposed by Icasa for a further three years, allowing smaller operators to charge more than they pay large operators to terminate calls.

Asymmetry is a common remedy to make sure that competition is possible – in numerous countries around the world asymmetry is afforded to new entrants, operators with defective or inefficient spectrum, operators which do not have sufficient scale to compete, and for other reasons deemed to be appropriate by the relevant regulator in those markets.

Sufficient scale is generally regarded as 20 percent to 25 percent market share by revenue. Cell C has about 9 percent and Telkom Mobile about 1 percent revenue market share.

So what does MTN really want to achieve here?

Perhaps the following paragraph in MTN’s founding affidavit says it all: “Icasa’s stated objective with the asymmetry is to reduce retail rates. Both Cell C and Telkom have announced they will use the new asymmetry regime to reduce their retail pricing.

“If Cell C and Telkom Mobile were to reduce their retail prices during the period before the review is determined, it would cause a permanent change to the market that would be irreversible even if the review were to succeed. Only the grant of interim relief could prevent this change to the market structure from occurring before the review is determined.”

It is clear that MTN does not want competition or the retail rates to come down. Perhaps MTN should be asking: “What does South Africa need?”

José Dos Santos is the acting chief executive of Cell C.


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