Back-Breaking Interconnect Fees Hamper Consumer Cost Savings, says ISPA

2 July 2009

A substantial portion of what the consumer pays for any voice telephone call, including VoIP (Voice over IP) calls, is the interconnect charge which each network operator levies against the sending network for enabling the call.

These crippling costs, set when the cellular networks first began rolling out across the country, are now inhibiting the growth of new services that could reduce the costs of telecoms to the benefit of businesses and consumers.

The mobile operators charge a fixed peak tariff of R1.25 per minute (excluding VAT) to the network provider of the caller to connect the call with a subscriber on their own mobile network. The charge applies whether the call is initiated from another mobile network operator, fixed-line services such as Telkom, or IP-based VoIP services from one of South Africa’s Internet Service Providers.

This fee is largely responsible for the artificially high costs of making a call to any cellular network. Incoming calls to Telkom’s network, for instance, are charged at under 30 cents per minute, a figure much more in-line with the cost-to-revenue ratios of building and maintaining the supporting network.

The premium that the cellular networks claim on interconnect tariffs was based on the high costs of rolling-out GSM-based network infrastructure from scratch when the cellular market kicked off in the country. It is also based on the costs operators would need to charge to achieve a profit on a pessimistically projected local mobile-user ceiling in the region of 500,000 users.

However, in reality, the actual infrastructure costs of building a GSM network lies at the comparatively reasonable level of US$300 per user, while fixed-line infrastructure carries a much steeper price point for the operator of US$1000 per user to establish and maintain. Meanwhile, growth has continued well beyond that initially-projected market, with about 30-million active mobile users in the country.

How, then, can the astronomical interconnect fees still be applicable, beyond the sheer profiteering of the MNOs? These outdated interconnect fees are dampening the potentially explosive growth of new VoIP circuits being rolled out by ISPA members.

VoIP users have to pay the exorbitant minimum fee to connect to a cellular user in the same city, making the customer’s communications costs a sum of broadband connectivity costs plus these inescapable interconnect tariffs, plus the small margins which the VoIP operators are able to squeeze out.

Ideally, the industry needs the regulator to take a tough stand on this barrier to entry. For inspiration, ICASA could look to an instruction OFCOM delivered to UK mobile operators at the turn of the 21st century demanding that they reduce interconnect fees by 75% as quickly as possible.

There was a lot of initial resistance to this decree by mobile operators, but in due course, they realised they were still allowed to charge a rate which would ensure their profitability and sustainability while opening up new opportunities and services for consumers and service providers, and growing the market to the benefit of all players.

With broadband penetration expected to grow rapidly in SA over the next year as the increased competition drives down costs, there is an excellent opportunity for service providers to deliver cost-effective VoIP services to consumers and businesses.

Unless action is taken about mobile interconnect tariffs <,> local consumers will not be able to enjoy the full savings potential. Only by negotiating these costs down to a more reasonable level can the industry move forward with rolling out universally-appealing IP-based value-oriented communications solutions.