Telkom CEO Sipho Maseko has severely criticised communications regulator Icasa over proposed new call termination rates, saying they could lead to a jobs bloodbath at the partially state-owned telecommunications operator.

The draft regulations, announced on Thursday morning, appear to ‘target’ Telkom and give a softer ride to the industry’s biggest players, MTN and Vodacom, Maseko said in an interview with TechCentral.

“Icasa’s mandate is to promote competition in this sector … by addressing market failure and thereby reducing the cost to communicate. But their decision does the opposite,” he said.

The sharp reduction in the rates – which operators charge each other to carry calls between their networks – coupled with reduced levels of ‘asymmetry’ favouring smaller market players could force Telkom to cut its workforce by as many as 10 000 people, Maseko said. Telkom currently has an 18 000 strong workforce.

“Telkom has been the aggressive challenger in the market. We have invested in the network, we’ve reduced prices, we’ve offered dramatic improvements in value for money for customers. Telkom is the primary agitator in the market, bringing down the cost to communicate for South Africans. Despite this, the call termination rate decision hits Telkom much harder than the other mobile network operators,” he said.

Under the draft regulations, Icasa has proposed a further ‘glide path’, with the termination rates reduced on mobile and fixed lines to 12c/minute and 8c/minute respectively from October 2018. It wants them cut to 10c and 5c in October 2019 and to 9c and 3c from October 2020.

There will continue to be ‘asymmetry’ in the rates. The asymmetry (or difference in price) for mobile services is proposed to be set at 5c/minute from October 2018 to September 2020 and 4c/minute from October 2020 onward. Asymmetry for fixed services is proposed to be 1c from October 2018 to September 2020 and fall away completely from October 2020.

“Icasa is proposing that fixed termination rates should fall by 70%, with a reduction of 31% in mobile termination rates,” Maseko said. “What is strange is [that] the mobile asymmetry, which supports new entrants, is also being reduced. Icasa’s decision on call termination rates penalises Telkom, rather than the larger mobile operators … This is a missed opportunity to reduce the cost to communicate for the large majority of South African telecommunications users.”

High margins

Maseko said the existing termination regulations haven’t achieved the desired outcome and that, instead of being reduced, asymmetry should be higher. “Despite our aggressive competition, Vodacom and MTN have maintained significant market share. We still see the bigger players with Ebitda margins in excess of 35%,” he said. (Ebitda, or earnings before interest, tax, depreciation and amortisation, is a measure of a company’s operational profitability.)

“We employ about 18 000 people, compared to about 10 000 at MTN and Vodacom combined,” Maseko said. “And yet this decision disproportionately targets the biggest employer in the sector. There’s a lack of feasibility in terms of the proposed fixed termination rate. They (Icasa) require cost reductions … within a three-year timeframe … which are not feasible without significant job losses.”

He said, too, that the Icasa regulations, if implemented, will create “fertile ground for foreign OTT (over-the-top) players” – who make virtually no contribution to GDP, jobs or tax revenue in South Africa – to ‘go after” the local fixed voice market. OTT providers include the likes of Microsoft’s Skype.

“We have about 1 900 exchanges we have to maintain on a national basis. The revenue we generate in the urban areas, including termination revenue, is used to support services in some of the rural areas. This decision undermines our ability to sustain services in the rural areas.”

The draft regulations, he added, “demonstrate a significant disregard by Icasa of the market structure, in the sense that Icasa still thinks there’s a fixed market and a mobile market, when it fact there is one voice market. They have totally ignored the fact that significant market power in voice is held by the large mobile network operators [and not Telkom].”

“Maybe the message we are being given is that we are inefficient. The downside of that is that we employ a lot of people and we may end up with having to lose something in the order of 10 000 people. These are very ominous clouds. In this sort of environment, to lose 10 000 people is not digestible. In a sense … it feels like Telkom is being targeted. We are the ones that have been bringing prices down aggressively in the past two years. Even with asymmetry, we have not seen mass migration of customers from MTN and Vodacom to Telkom, which shows that a 5c or 6c asymmetry is not enough.”

Higher levels of asymmetry allow Telkom to continue to invest in its network, while keeping prices low, he added.

“Why is it that the company that has been the biggest driver of lower costs has to be the one that has to sacrifice the most in terms of call termination rates?”

This article was published with the permission of TechCentral, the original can be viewed here.