The Interconnect Rate and its Importance in South Africa’s Telecommunications Market

For the last 20 years, making calls in South Africa has changed quite considerably. One of the biggest contributing factors to this change is the evolution of the interconnect rate. The interconnect rate, the tariff one operator charges another to terminate a call on its network, affect all parts of the telecoms industry. This includes mobile and fixed line operators, right through to corporate businesses and the every-day consumer.

The history of the interconnect rate

The history of the interconnect rate has shaped the telecoms industry as we know it today. Since 2010 until now, we’ve seen huge developments to the interconnect rate that have in turn affected the South African economy as a whole. In 2010, the mobile interconnect rate was R1.25, today it’s R0.16.

The table below provides some context as to how the fixed and mobile rates lie in South Africa today:

Start Date End Date Mobile Fixed Regulated Fixed Assymetry
Regulated Assymetry Local National Local National
01-Oct-15 30-Sep-16 0.16 0.24 0.11 0.12 0.15 0.16

In 2010, the interconnect rate was so high, that it was very expensive to call a number on a different mobile network. Because of this, Least Cost Routing (LCR) existed, which connected your business telephone to a sim card device allowing you to make calls to mobiles at reduced rates. By using LCR, businesses could avoid the interconnect rate. However, as the interconnect rate started to drop so LCR was no longer needed.  VoIP soon followed where you could use data links like ADSL, Diginet and later fibre to send calls over direct interconnects. This created a gap in the market for smaller Value Added Network Service Providers to enter the market and provide telecom solutions at reduced rates.

Through a combination of the reduction in the interconnect rate, a huge variety of VoIP services and better connectivity solutions, VoIP has now become the favoured method of carrying calls across corporate South Africa.

The table below shows how the interconnect rate has changed over the last few years:

Start Date End Date Mobile Fixed Regulated Fixed Assymetry
Regulated Assymetry Local National Local National
01-Mar-13 28-Feb-12 0.40 0.44 0.19 0.12 0.13 0.21
01-Mar-14 30-Sep-14 0.20 0.44 0.12 0.16 0.13 0.21
01-Oct-14 30-Sep-15 0.20 0.31 0.12 0.15 0.18 0.21
01-Oct-15 30-Sep-16 0.16 0.24 0.11 0.12 0.15 0.16
01-Oct-16 0.13 0.19 0.10 0.10 0.12 0.12

How does the interconnect rate impact the telecoms industry in South Africa?

The interconnect rate is monitored by ICASA, the regulator for the South African communications, broadcasting and postal services ,and it is through their instruction that the rate is dropped. Some of the reasons why they’ve chosen to lower the rate over the years are to:

  • Lower telecommunication costs.
  • Allow more providers to enter the market and stimulate healthy competition which will lead to reduced costs and improved offerings.
  • Ensure transparency in providers to help consumers make better choices for their usage.

As the graphs show below, the reduction in rates over the last 5 years has led to a healthy increase in competition within the telecommunications industry. Cell C’s market share has grown, and it’s given new entrants the opportunity to compete in the same market space. Above all, it’s meant consumers are paying less, they have more choice and there are more providers to choose from.

Network 2011 2012 2013 2014 2015
Vodacom 50.00% 46.60% 43.00% 39.30% 38.40%
MTN 33.60% 37.30% 36.80% 35.10% 33.20%
Cell C 13.20% 14.30% 17.20% 22.70% 25.10%
Telkom Mobile 1.80% 1.75% 2.30% 2.30% 2.60%
Other 1.40% 0.05% 0.70% 0.60% 0.70%

Impact on the everyday consumer

Despite all this, South African consumers are still charged too much for their calls. Even though the interconnect rate has been dropping, these savings have not been completely passed onto the consumer.  However as per the glide path issued by ICASA, the interconnect rate will reduce to 10c during 2016 and when this happens, consumers should see a further drop in call rates. This transparency will allow consumers to compare their charges, change service providers and make educated decisions to get the best deal possible. For consumers, it’s about value for money and good service.

Impact on corporate businesses

The benefits experienced by consumers are passed through into corporate business too – and this is also shown in the fixed line space. Through the continuous drop in the interconnect rate, as well as the popularity of VoIP solutions, Telkom’s and Neotel’s corporate market share continues to be challenged. With providers competing in price and service delivery, businesses throughout the country have also been able to benefit from cheaper prices and more choice. As a result, the B2B market is highly competitive. However, even though there is now  an abundance of choice in the market, many smaller providers still struggle to compete,on price alone as the mature networks have the upper hand due to their scale and time in market, meaning their prices are often cheaper. Smaller providers have to look at their service levels and operational efficiencies to separate themselves form their competition.

What lies ahead?

It’s obvious that the reduction in the interconnect rate has meant that telecommunication costs have come down, competition has increased and consumers have benefited through better transparency and choice across providers. The current landscape shows that prices for both consumer and corporates will continue to drop, the interconnect rate will continue to decrease and mature networks are most likely going to hold onto their market share thanks to their established time in market.

However, it’s not yet clear whether the consumer will get the full benefit of the reduction in the future, whether healthy competition will continue to grow, and lastly, whether this changing market will increase the growth of economy in South Africa as a whole. This will remain to be seen.

Post written by Kyle Woolf
Chief Executive Officer (CEO) – Saicom Voice Services