Termination Rate Debate in Africa Dr. Christoph Stork Termination - PowerPoint PPT Presentation

Termination Rate Debate in Africa Dr. Christoph Stork

Termination = Monopoly Monopolies require price regulation Termination rates at cost of efficient operator Provide incentive to invest in new technologies to reduce costs Promote competition and economic efficiency Promote universal service through low retail prices

Dominant operators will argue that if MTRs are lowered Retail prices will increase There will be less subscribers Operators will invest less However, the opposite is the case - Increased competition leads to: lower retail prices more subscribers and operators have to invest more to stay competitive

Waterbed Effects

Two sided market Interdependent prices No cost causation Newspapers: lower price per newspaper/higher value niche markets = more readers = higher advertising revenue per page Newspap Advertis Readers ers er

Two-sided market would predict On- Up net Less Down MT OFF- Subscribers Net Up R Fixe d Up

Argument 1 Wholesale Price: contractually fixed Retail Prices: Many prices varying product by product and change frequently Product 1 MT On-Net On-Net R Off Off Peak Peak On-Net Fixed Off OFF- Off Peak Peak Net Peak OFF-Net Off OFF-Net Introduction of Peak SMS Fixed new cheaper Peak Fixed Off Off products do not Peak On-Net Product SMS lead to MTR OFF-Net 2 Off Off increases Peak

Argument 2 Termination rates are mostly symmetrical ... contradicts the two-sided market argument If asymmetry then Operator smaller operator has higher MTR 1 MTR cannot be increased because of higher market share (newspaper Operat or 2 example)

Argument 3 Operators can only set their own retail prices but not those of other operators... Cannot control q and p Operator Operator 1 MTR x 2 Revenue=p* q q=f(p) subject to price elasticity of subscribers of p=x+a operator 2 Off-Net Quantity of call Price terminated

Two-sided market & Waterbed Effect Fail to predict market outcomes correctly Cannot be empirically observed following termination rate cuts Retail and wholesale prices are not interdependent

OECD countries (TMG2010)

OECD countries (TMG2010)

Pro Waterbed Effects Waterbed effect is masked by other developments such as increased competition and decreasing unit costs Questionable evidence from panel data studies: 1) Constructing data sets with enough data points is impossible 2) Omitted variables may render models invalid 3) Retail prices used for modelling only prices of dominant operators

Mobile penetration rates and mobile retail prices in a country depend on many factors No of operators business models sequence of used by market entry operators lock-ins and club effects

Cheapest Prepaid product in country in US$ Feb 2010 Cheapest operator Dominant operator Most expensive operator

Alternative 1: Panel data model based on operators not countries Incorporate all operators of a country Increase the data available by a factor of 3 or 4 allows to include significant explanatory variables such as market share and year of market entry The waterbed effect is a hypothesis about the pricing strategies of operators and as such need to be tested at the operator level

Alternative 2: Case Studies A less econometrically sophisticated but more plausible: Did Vodafone UK increase its retail prices after any MTR reduction in the UK? And how did the smaller operators or the net-interconnect-payers react?

Case Study Kenya

MTR US cents

Retail Prices

Safaricom ’ s key performance indicators for financial years ending in March 2007 2008 2009 2010

Termination rate reduction in Kenya 9.5% more subscribers in last quarter or 2010 quarter Retail prices dropped by 60% Opposite effect to the waterbed effect!

Case Study Namibia

In 2009 MTC stated that if termination rates are reduced to cost it ’ s: EBITDA margin would drop to 36.8% Would invest less and not be able to fund WACS Pay less dividends to Government

Termination Rates US cents

Retail Prices of MTC in US$ for OECD (2006) baskets

MTC key performance indicators 2005 2006 2007 2008 2009 2010

Case Study MTN Nigeria, South Africa, Botswana

High User OECD usage baskets in US$

Conclusion No Waterbed Effect in Namibia, Kenya, Botswana, South Africa or Nigeria Two-sided market argument can clearly be rejected Retail prices decrease after termination rate cuts Operators pursue different pricing strategies Cost based termination rates lead to more competition: more subscribers more traffic more investment bigger pie of revenues to share among operators