Independent Communications Authority

Telephone bills could come down by as much as 30% over the then two years thanks to lower interconnect rates, says Vox Orion MD Jacques du Toit.

The high cost of communication has often been cited as a key inhibitor to business growth and expansion of the economy. Government has repeatedly said communication costs must come down to enable growth, nevertheless so far South Africans have but to see big gains.

According to least-cost routing company Vox Orion, telephone bills will drop by 30% over the straightway two years due to lower interconnect rates as fixed-to-mobile calls become cheaper. “Lower interconnect rates mean everyone is paying less for their phone calls,” says MD Jacques du Toit.

However, it is unlikely all the savings will be passed on to end-users as voice revenue is in accordance with pressure, and operators are anticipated to hold onto as much margin gain as possible, notes analyst Steven Ambrose, MD of WWW Strategy.

Last March, cellphone operators voluntarily cut the peak interconnect rate from R1.25 to 89c per minute. In October, the Independent Communications Authority of SA regulated interconnect rates.

Fixed-line rates will as well drop, and will settle at 12c for peak and off-peak for local calls, during the rate for national calls will settle at 19c in March 2013.

The entire interconnect rate is passed on

Du Toit explains end-users will benefit if the entire interconnect rate is passed on by large and mid-tier operators. He says the total benefit since the initial cut last March will amount to as much as 42% reduction in phone bills.

The fixed-line operator passed on 100% of the March 2010 cut, which resulted in a net interconnect loss of R24 million on fixed-to-mobile calls.

Du Toit says consumers and businesses using a Telkom line will see lower call rates as a result of a portion of the lower interconnect fee being passed on.

Du Toit expects the drop in voice tariffs as a result of lower interconnect fees to have the same effect as the drops in broadband data prices over the past few years. “Everyone is getting much more value for their money now.

The benefits of lower interconnect rates

Ambrose notes that operators can't afford to pass on all the benefits of lower interconnect rates, because voice is a dying business. “The fixed-line business is as well in terminal decline.”

He says lower interconnect rates will trim the cost of making calls from a landline to a cellphone. Nevertheless, he argues the saving won't be as high as 30%, because voice earnings are declining as data starts to take over.

Declining market

“It is unusual that price reductions will be passed on in a declining market.” Ambrose says the only way end-users will see the full benefit is if volumes pick up, which will maintain revenue.

However, says Ambrose, the use of voice, especially fixed-to-mobile calls, is in decline. Real growth will be seen in the use of data and related products just as voice over IP, he adds. “The days of massive price reduction in voice are gone, and they are not coming back.”

The corporate enterprise market will only be offered

Huge Telecoms CEO James Herbst believes aggressive retail price reductions in the corporate enterprise market will only be offered by the fledgling VoIP (Voice over Internet Protocol) operators, and aren't sustainable.

Minnows are operating on a business model that isn't sustainable because it's based on the assumption Telkom will only charge capital costs for its network, and not the cost of running the backbone, says Herbst. “Such business models are not sustainable as there is no such thing as a free lunch.

“Short-term price reductions offered by the VOIP operators will be fleeting and ultimately the costs offered by the incumbents will be the fair market price.” He says, as a result, retail rates for national and local termination will remain stagnant for the straightway two to three years.