10 December 2012

South Africa: The Great South African Cell Phone Rip-Off

Photo: Daily Nation
Browsing the internet.

opinion

As South Africa enters the festive season, the country is awash with special offers. Yet, beyond the corporate hype that usually accompanies this time of year, many are left with the deep-seated feeling that - in the ordinary course of events - they are being ripped off left, right and centre.

People are becoming angrier and angrier with the cost and quality of many services. From the banks to the bread cartels, from Eskom to the airlines and the pending e-tolling system, indications of excessive profit taking are rife.

But a special place is reserved in many peoples' stores of resentment for the cell phone companies, and justifiably so. An increasing number see beyond the specials that allow you to 'double your summer' or 'do mahala time all the time' and recognise the fact that the basic costs are too high.

South Africans are being forced to spend disproportionate amounts of income on what has quickly become a household necessity. While spending on cell phones accounts for eight per cent of income at a national level, it accounts for 18 percent of income for the poorest.

Out of 47 countries, South Africa has the third highest spend on cell phones as a percentage of Gross Domestic Product. Perversely, the country has a high mobile penetration rate, but one of the lowest mobile usages compared to other peer countries.

Cell phone users are sick and tired of high costs, network disruptions, dropped calls, and inefficient call centres. They are fed up with voice and data bundles expiring when there is no technical need for them to. They are 'gatvol' with the companies boasting that they are rolling out Long Term Evolution or 4G networks, when many mobile Internet users don't receive a proper 3G service, and are forced to rely on the antediluvian Edge technology.

Pricing has become so opaque that it's become practically impossible for the ordinary consumer to decode what the true cost of the service is.

But what has become readily apparent is that the cell phone companies are profiteering at the expense of the poor, and have done so for some time now.

Until recently, Vodacom and MTN derived huge profits from the mobile termination rate (or interconnection rate), which is the rate that one company charges another for terminating a call on their network. This rate is estimate to be between 25c and 40c per minute, yet the costs charged by the cell phone companies have been far higher.

In the initial interconnection agreement between Vodacom and MTN, the interconnection rate was set at 20c. When the third cellular network, Cell C, was introduced in 2001, both cell phone companies, with the consent of the regulator, increased the interconnection rate by 500 percent to R1.23. This move effectively secured Vodacom and MTN's dominance as a duopoly and made it extremely difficult for competitors to grow.

In 2009, in response to a public outcry, the Parliamentary Portfolio Committee and Department of Communications intervened, and made the companies comply with a regulation setting a gradual reduction in the mobile termination rate to 40c to a mobile and 12c to a fixed line by 2013.

The reduction had little effect on retail prices until Cell C and 8ta reduced their prices drastically. However, Vodacom and MTN still have over 80 percent of the market and the largest coverage in the country, which means that they can dictate prices, and they have largely maintained their high prices.

According to these companies, the effective rate of making calls had come down at least 40 percent since the reduction of the interconnection rate. While clearly there have been some price decreases, according to First Avenue Investment Management, Vodacom has proved only slightly more amenable to passing on the interconnection cuts to consumers than MTN and tariffs still remain among the most expensive in the world. Data costs have come down more than voice costs.

But the most perverse indicator of profiteering is the profit margins on sms'. International research has put the cost incurred by cell phone companies to transmit an sms at 2.6c per sms, and industry insiders claim that it is definitely below 5c. Yet the cell phone companies continue to charge as much as 80c per sms, which means up to a 3,000 percent profit on these sms'.

The business press have done the public no favours on the cost to communicate, often lapping up industry spin without proper analysis. After the mobile termination rate reduction, Vodacom and MTN warned that they would suffer massive financial losses, which would probably lead to retrenchments and higher costs for the consumer. But in reality, Vodacom's and to a lesser extent MTN's profits have increased, driven mainly by data costs and increased volumes of users.

The companies have argued that high costs are necessary to pay for the cost of universal coverage of the country. Yet Research ICT Africa has shown that other countries with fewer users have managed to achieve high coverage while drastically reducing their mobile termination rates.

Government policy is to reduce prices through regulated competition, while intervening in the communications space through its own companies when there is market failure. But this approach is flawed. The communications regulator, Icasa, is weak and underfunded. The state owned communications companies have been commercialised to create competitive neutrality with private operators, leading to them being bad at doing business and bad at providing public services.

Regulatory policy has also made competition impossible. Inappropriate asymmetric interconnection rates have enabled MTN and Vodacom to grow at the expense of Telkom, while depriving Cell C and 8ta of a more level playing field.

At times by design, and at times by default, post-apartheid South African society has been structured to maximise profit and minimise resistance. The communications sector is no exception to this general rule.

The most important but least vocal actor in the communications space is the long-suffering cell phone user. Down the years, there has been some impressive consumer activism against profiteering in telecommunications, but this activism is still largely white and male. Campaigners have also argued that the problem will be addressed by full liberalisation, or more strictly regulated liberalisation, where more competition will drive down costs.

There is enormous potential for a much more representative campaign on the right to communicate. But such a campaign will gain real traction only if it moves beyond neoliberal solutions to the problem. The focus should not just be on turning companies into better capitalists and users into better consumers, but changing how goods are produced in society.

Competition will drive down prices only to the extent that it is economic for them to do so. No cell phone company will target users they consider to be uneconomic, which is why competition - unregulated or regulated - cannot be relied on completely to deliver universality of communications, bearing in mind that for universality to be achieved, then services need to be available, accessible and affordable. Arguably, this means removing the profit motive entirely from the core networks and running them as proper public services.

An interesting case in point in this regard is CANTV, the Venezuelan state telecommunications provider, which Hugo Chavez's government renationalised in 2007 after it declared telecommunications a human right.

According to the Transnational Institute, since re-nationalisation the company has expanded its service, and ensured greater community participation in the running of the company through grassroots working groups on telecommunications and workers' co-operatives. Reportedly, CANTV has achieved higher than average levels of teledensity in the region, as well as a 100 per cent mobile penetration.

South Africa is lucky in that it has a rich history of de-commodification struggles in water and electricity to draw on, which can be used to develop demands such as for a free basic service in communications. Drawing on this history, the Right 2 Know Campaign has conceptualised and developed a Right 2 Communicate Campaign, with the costs of communication as a key focus.

If profiteering is to be tackled effectively, then it is important to resist the monetisation of everything. Otherwise there will be nothing left in life that doesn't have a price.

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InFocus

The Great South African Cell Phone Rip-Off?

Browsing the internet.

An increasing number of citizens are reportedly complaining about the basic costs imposed by cell phone companies as being too high. Read more »