click to edit master subtitle style september 2009c4: vodacom company secret presentation to...

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September 2009 C4: Vodacom company secret

Presentation to Portfolio CommitteeMobile termination ratesOctober 2009


• Introduction

22


South Africa has achieved high mobile SIM penetrationHigh mobile SIM penetration has been achieved through high network coverage levels and a low minimum cost of ownership for customers

Source: Bank of America Merrill Lynch Global Wireless Matrix 3Q09 28 September 2009

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High quality networks with extensive coverageThe investment in network infrastructure and state-of-the-art technologies has enabled extensive coverage in South Africa, covers 98% of the South African population

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GSM Coverage

4 September 2009

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2.5

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2004 2005 2006 2007 2008 2009

Lowering the cost of the handsetSouth African operators are responsible for most of the handset sales in South Africa. Handsets are sold with a very small margin, if any, to cover just the cost of distribution

o Vodacom sold 5.5 million handsets in South Africa last year

o Vodacom is currently selling handsets at below $15

o There is limited mark-up on handsets

o Innovative and affordable handset offers enable millions to obtain access to communications

55

Vodacom annual handset salesMillion

Click to edit the outline text format Second Outline

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2004 2005 2006 2007 2008 2009

Subsidising the cost of the SIM cardThe cost of the SIM card is heavily subsidised to ensure costs of gaining access to mobile telephony services are minimised

o South African operators subsidise SIM cards and starter packs, often available at R1 or R2

o Incentives and commissions are offered to the distribution channels supporting an extensive network of independent traders

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Vodacom annual new connectionsMillion

10/16/09

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15.816.5

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2004 2005 2006 2007 2008 2009

Facilitating services for the marginal customers Vodacom has invented unique and revolutionary products for customers who mainly receive calls - allowing customers to remain active and receive calls

Please call me

o Free SMS which customers can send to another customer asking him or her to call them.

Reverse charge

o A customer can reverse charge a call to another customer. The receiving customer opts to accept the call and pay for it.

Call sponsor

o Contract customers can sponsor calls from prepaid customers and this call is billed to the contract customers.

Number of “Please call me” SMSs sent per dayMillion

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Vodacom remains committed to high investmentOperators require an adequate return on capital to ensure continued investment in South Africa’s communication networks

o Radio access network investment− Improving coverage and spectrum efficiencies

o Continued network expansion

− 700 new base stations added in last 12 months

o Self provisioning of transmission accelerates

− Fibre rings

− National long haul fibre project

o Invest in international bandwidth

− Major investor in the West African Cable System (WACS), due to come on stream in 2011

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2005 2006 2007 2008 2009

Capex Cumulative

Capital expenditure and cumulative capital spendR billion


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South Africa needs to invest for broadband growthVodacom is committed to democratising broadband access in South Africa through continued network investment and lowering the cost of ownership of data capable handsets and devices

Vodacom mobile broadband customersYear ended 31 March

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Vodacom packet switched data trafficTerabytes (3G and 2G)


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Vodacom is proactively reducing pricingPrice promotional campaigns have reduced Vodacom’s average effective price per minute by 17% resulting in a substantial growth in traffic, albeit not at the level of the price reductions


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Lowering usage charges on prepaid packagesVodacom has recently introduced new prepaid packages with a 35% reduction on peak calls rates compared to the existing prepaid packages

Vodacom average revenue per minuteR cents

Prepaid tariffs (incl VAT) Per second+

Prepaid tariffs (incl VAT) Per second+


• Mobile termination rates

1212


The South African MTR regime

o In South Africa, customers do not pay for receiving calls because of the MTR regime.

o The costs of terminating the call to the called customer are paid by the calling customer (and reimbursed to the terminating operator by the originating operator).

o MTRs compensate operators for costs incurred in terminating calls received from other networks.

o Without MTRs, customers who make no outbound calls would generate no revenue for operators who serve them.

o MTRs impact the relative incentive to acquire high-usage and low-usage customers.

1313

Calling Party Pays

10/16/09

High

Low

Investment Demand

Encourages duplication of investment - “self-build”

Encourages expansion into new geographical areas

Excess capacity in coverage areas

Reduces investment returns in rural (high cost) areas

Encourages “free riding” – shifting the costs onto others

Poor quality, limited capacity

Favours service provider not infrastructure investment

Increases incentives for operators to acquire additional customers

Particularly increases attractiveness to MNO of low-usage customers.

Higher usage prices

Tilts operator incentives towards high-value customers.

Price competition intense for highest usage customers

Decrease value of low-usage customers and encourages cherry picking

Operators ‘sweating’ assets

1414

How interconnection rates impact the industryCost based MTRs create the optimal balance between demand and investment

MTRs

10/16/09

How interconnection rates impact the industryCost based MTRs create the optimal balance between short and long-term incentives

High

Low

Investment Demand

High

Low

SHORT TERMLow MOUHigh prices High Penetration

LONG TERMLow Congestion and High Call Quality Extensive Network Competition

SHORT TERMHigh MOULow PricesLow Penetration

LONG TERMHigh Congestion and Low Call QualityGrowing Digital Divide

Low

High

Market biases

1515

MTRs


o Higher penetration rates than other countries

o Widespread coverage

o Many low-usage customers enjoy mobile service

o 16% of Vodacom customers make no calls (only receive calls)

o Good quality networks

How the MTR regime has benefited South AfricaChanges to the MTR regime must not jeopardize or erode these benefits

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MTRs have supported low-usage customersThe receipt of mobile termination revenues allows operators to carry the cost of customers with very low usage, providing the total revenue stream and incentive for the operator to keep this customer on the network

Percentage of customers

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Low revenue customers make few calls but receive many more calls


What is the real MTR?A large proportion of the traffic from the lower usage community service and prepaid users is subsidised by MTRs.

@ Rs 0.06

@ Rs 0.77

@ Rs 1.25

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International regulation of MTRsGlobally a glide path has been adopted to minimise disruption

o Termination rates are regulated in most other countries

o The principle that MTRs should be regulated on a cost basis is widely accepted

o Adjustment path needed to minimise transition costs and disruption to investment and business decisions

o 3-4 years at aggressive end of accepted glidepath lengths [USA (FCC) proposing 10 year glidepath; EC implemented 4 year glidepath]Glidepaths in EU

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Austria Bulgaria Czech Republic Denmark Estonia

Finland France Germany Greece Hungary

Ireland Italy Malta Netherlands Norway

Poland Romania Spain Sweden UK

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o Cost based MTR rates because they are efficient for both seller and buyerso MTRs really matter for incentives to serve low usage (and no usage) customers and to

invest in rural areas. o Regulation of rates should be:

– on blended basis to reflect CST subsidy to poorest customers– including a one-off reduction and a glide path to enable smooth adjustment– applied to all parties equally

o Operators commit to work with ICASA to agree on process going forwardo Agree to work with ICASA to develop costing models based on international best

practice to be applied at the end of the glide path period.

2020

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click to edit master subtitle style september 2009c4: vodacom company secret presentation to...

Documents

prepaid customers

sponsorcontract customers

marginal customers vodacom

receiving customer

reverse chargea customer

sim cardthe cost

high network coverage

cost of distribution