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Topic this month:

Telco Interconnect

In South Africa there is a move to reduce the interconnect charges between the various operators namely Telkom SA, Vodacom, MTN, Cell C, Neotel and some smaller operators. Interconnect fees refer to the per minute charge that operators charge each other to terminate calls on their own networks that originate from the other operator's network.

Let us consider what that means: A subscriber from MTN for example calls someone who is a subscriber on the Vodacom network. The call originates at the MTN subscriber and is routed to the switching equipment interconnecting the MTN and Vodacom networks. When Vodacom receives this call it then connects the call to its own subscriber on the Vodacom network and the conversation takes place. For this call Vodacom sends a bill to MTN of around R1.25 (currently) per minute. MTN on-charges this to its own Subscriber adding its own fees. The MTN subscriber receives a bill for the call that has to be substantially higher than R1.25 to make the connection viable for MTN.

Above description is an example of an "off-net" call. Of course when the call is "on-net", for example a Vodacom subscriber dialling another Vodacom subscriber, there is no interconnect fee involved.

However in the off-net case there is now a bill for all calls terminated by Vodacom originating on the MTN network, that MTN has to pay. Of course MTN sends Vodacom a similar bill for all calls that originated on the Vodacom network and terminated on the MTN network. Hence there is a monthly net fee that is received by either operator depending who terminated the most calls.

Photo The Tech Herald

It clear to see that if you are similar in size, then the net effect is not large, but if you are a smaller player like Cell C, the bulk of the calls originating on the Cell C network terminates on other networks, so the net payment made by Cell C is much larger to other operators than vice versa. This of course does not put the smaller network at a financial disadvantage per se, as the money is ultimately recovered from the subscriber.

However a smaller player is disadvantaged in the sense that the larger players can offer substantially cheaper "on-net" calls to their subscribers (no interconnect charge involved). As there are many more MTN and Vodacom subscribers the cost of an average basket of calls for subscribers from these larger networks are less than a Cell C subscriber who makes percentage wise more "off-net" calls.

The bottom line is that the subscriber is paying the interconnect fee - and the money ends up in the coffers of the operators. Hence none of the operators are very keen to negotiate with their competitors to reduce these fees. The only solution is to get the regulator involved. This has been called for by many parties in the past decade.

Competitive forces can only come into effect with smaller interconnect charges. To understand why imagine the hypothetical case where the interconnect fee is zero, i.e. the operator has to terminate calls from other operators for free. Suddenly the networks only earn revenue from their own subscribers and must now use price to compete for subscribers as the operator that can maximise call minutes (nr of subscribers times call minutes per subscriber) will be the better off.

It is interesting that only now that Telkom has sold its share in Vodacom that the Government is pushing the interconnect fees to drop. Finally the subscribers will get some relief after sucking the proverbial hind tit for the past ten years, financing the massive over-inflated marketing budgets of these big players.