SA's phone rates - cartel hell?

To the average South African, the cellphone industry looks like a maelstrom of competition and innovation. After decades of having the post office run our telephone network, this is perhaps not surprising. Many are however aware that we are paying very high rates for cellphone calls and believe that these rates need stricter regulation. This posting argues that we might actually need less regulation, or regulation of a different nature. First, how do we tell that we are being overcharged for calls? By looking at what we are being offered cheaply or for free. Who pays for those R2,00 SIM cards in the shop and the shiny phones that are "free" on a contract? You and I do, through the excessive call charges we pay. How many SIM cards and cellphones can you use? Not many. How many minutes could you use? Lots. That is why the networks like the SIM cards and cellphones to be free/cheap.

In SA (and many other countries) the main revenue lies in the so-called interconnect charges that providers pay each other. So, if I call an MTN nunber from my Vodacom phone then Vodacom will pay a per-minute charge to MTN. If somebody calls me from MTN, then Vodacom receives the per-minute fee from MTN. Note that Vodacom actually really makes money if somebody calls me and that would explain a bit about those almost-free SIM cards. How much are these interconnect rates? The Mail&Guardian reports them to currently be R1,25 per minute - as opposed to about R0,20 in India, a country which started GSM mobile telephony considerably later than SA. Incidentally, when cellphones were introduced to SA in 1993, the interconnect rates were just R0,20 per minute. Can anyone point to another mature technology which has actually seen costs rise?

If there is competition, does it matter if high call rates subsidise phones and SIM cards? If there were competition, not really - of course. However, the interconnect charge is filed with ICASA (the telecoms regulator in SA) by the networks and this becomes, in effect, a state-controlled price. The barrier to entry in the industry is infinite since the government is not licensing new providers. One is inevitably reminded of Adam Smith in The Wealth of Nations (1776):

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

Many countries (including SA) contrive to regulate mobile interconnection charges based on cost. A comprehensive report by Genesis Analytics for the SA Foundation has concluded that the mobile interconnect charge was substantially higher than cost in SA. Regulation of fees based on average cost to companies of providing a service is however something that should outrage the public. Can the baker sell his week-old loaf of bread at the price it cost him to produce? Can we guarantee to the poorest peasant that her efforts will not be wasted and that she will be able to recoup her cost from the sales of her produce? Of course not. Why do we then accord these luxuries to giant companies with plush office parks and sponsored sports teams?

As this blog entry is being written, further cartel-forming is afoot in SA. The interconnect rates (also called termination rates) are being set for fixed-line providers, among them SA's Neotel - the first official competitor to the much-unloved monopoly Telkom. These charges are going to be very important for the development of competition in the SA market. It is very difficult to see how anyone could justify interconnect rates higher than about R0,09 per minute - the price for which it is possible to call the US using a VOIP operator from SA - but prepare to be surprised...

Having discarded further price regulation as a remedy, I propose some lateral thinking about the SA market. In the USA - which uses a system where a mobile phone user basically pays for both incoming and outgoing calls - the average cellphone use among African-Americans (the demographic group with the highest usage) was already well over 1000 (sic) minutes per month, costing them on average under R500, in 2005. This so-called Receiving Party Pays (RPP) system in use in the US has many advantages over the Calling Party Pays (CPP) system used in SA and most countries in Europa and in Africa. For a start, the purchaser of the service (a mobile phone plus connection) pays all of the cost related to running his or her wireless connection and is therefore more directly aware of the cost thereof. It also encourages competition between mobile and fixed-line operators as consumers receive ordinary geographically-based telephone numbers that are indistinguishable to the caller (and hence the RPP system) from normal fixed-line numbers. It is true that a CPP system encourages penetration, at least initially, and that many poor people might be averse to an RPP system on the basis of cost. There is no reason, however, why an RPP system could not be introduced in SA - in parallel to the current system. This could take the form of paying a fixed monthly rate for a number (say on the Pretoria dialling code 012) and to receive calls, for which callers would pay the normal fixed-line rate. Note that one version of this system is already in operation - in the guise of the Telkom home telephone service. There is however no reason to restrict this service to one kind of technology and if one wanted to provide such a service on a wireless basis (as Neotel will probably do), or using VOIP - why not?

The SA Competitions Commission should probably study the Carterfone case of 1968 in which the US Federal Communications Commission opened the connection of any device to the telephone network that did no harm to the infrastructure. Without the Carterfone decisions we might have waited many years longer for the introduction of the fax or the telephone answering machine. I am, incidentally, writing this entry from Perth where I am visiting the Communication Economics & Electronic Research Centre (CEEM) at Curtin University. I am using a Vodafone prepaid SIM card plus one recharge which cost under R240 in total and for this I got 10 minutes of international calls and about 150 minutes of calls within Australia. It seems pretty inexpensive by South African standards.

The Swiss company Cablecom has just announced free calls to all fixed-line phones in Switzerland for consumers subscribing to their telephone service at around R120 per month. My immediate recommendation to Neotel (or perhaps, CellC) is to shake up the SA retail market by offering free on-network calls between their own subscribers in the evenings or, at least, at night and on weekends. Like Skype.