The Interconnect Rate and its Importance in South Africa’s Telecommunications Market

Over the past 20 years, making calls in South Africa has changed considerably as we progressed from legacy analogue technology into the digital age using Voice over IP.  At the same time, the regulatory landscape has undergone a number of changes to ensure that legislation keeps up with technology’s pace of change One of the biggest factors for regulating the market and how operators price calls,  has been the evolution of the interconnect rate. 

The interconnect rate or the tariff one operator charges another to terminate a call on its network, affects all parts of the telecoms industry – mobile and fixed-line operators, corporate businesses and the everyday consumer.

The history of the interconnect rate

The history of the interconnect rate has not only shaped the telecoms industry as we know it today but affected the South African economy as a whole. In 2010, the mobile interconnect rate was R1.25 and today it’s sitting at R0.09c

In 2010, the interconnect rate was so inflated, that it was extremely expensive to call any of the mobile networks. Because of this, Least Cost Routing (LCR) existed, which connected business telephones to sim card devices that allowed you to make calls to mobile networks at substantially reduced rates. 

By using LCR, businesses could avoid the interconnect rate and make on-net calls (MTN to MTN or Vodacom to Vodacom).  The result was a vastly cheaper per minute rate. However, as the interconnect rate started to drop, so LCR was no longer needed.  

VoIP soon followed where you could use data links like ADSL, Diginet and later fibre to send calls over direct interconnects. This created a gap in the market for smaller Value Added Network Service Providers to enter the market and provide telecom solutions at far better rates than the larger incumbents.

Through a combination of the reduction in the interconnect rate, a growing variety of VoIP services and better connectivity solutions, VoIP has now become the favoured method of carrying calls across corporate South Africa.

The table below shows how the interconnect rate has changed over the last few years:

How does the interconnect rate impact the telecoms industry in South Africa?

The interconnect rate, which is regulated  by ICASA (Independent Communications Authority of South Africa), has been lowered over the years to:

• Lower telecommunication costs.
• Allow more providers to enter the market and stimulate healthy competition which leads to reduced costs and improved offerings.
• Ensure transparency in providers to help consumers make better choices for their usage.

Impact on the everyday consumer

Despite all this, South African consumers are still charged far too much to make a call. Despite the interconnect rate consistently dropping over many years, these savings have not been passed on to the consumer.   According to the glide path issued by ICASA, the interconnect rate is anticipated to be reduced to 9c in October 2020 and as this downward trend continues, the pressure on mobile networks to reduce call rates needs to be heightened. In addition, the increase in application calling through platforms like WhatsApp, Zoom and Google Hangouts should further entice the networks to cut costs so they can enhance their share of both the data and voice pie 

 As costs start to reduce, the resulting transparency in the market will allow consumers to compare their packages, change service providers and make educated decisions to get the best deal possible.

Impact on corporate businesses

Whilst the benefits of reducing interconnect costs have not found their way to the consumer yet, corporate South Africa has yielded large cost reductions in their telephony spend since the advent of the interconnect rate benefits. As these rates continue to fall, and the popularity of VoIP and cloud telephony solutions continue to rise, the large telco incumbents corporate market share is being challenged even further. With providers competing in price and service delivery, businesses throughout the country have also been able to benefit from cheaper prices and more choice. As a result, the B2B market is highly competitive. However, even though there is now an abundance of choice in the market, many smaller providers still struggle to compete, on price alone as the mature networks have the upper hand due to their scale and time in the market, meaning their prices are often cheaper. Smaller providers have to look at their service levels and operational efficiencies to separate themselves from their competition.

What lies ahead?

It’s obvious that the reduction in the interconnect rate has meant that telecommunication costs have come down, competition has increased and consumers have benefited through better transparency and choice across providers. 

The current landscape shows that prices for both consumers and corporates will continue to drop, the interconnect rate will continue to decrease and mature networks are most likely going to hold onto their market share thanks to their established time in the market.

However, what is not yet clear is whether the consumer will derive the full benefit of the reduction in the future, whether healthy competition will continue to grow, and lastly, whether this changing market will contribute substantially to South Africa’s major need for GDP growth.

Post written by Kyle Woolf
Chief Executive Officer (CEO) – Saicom Voice Services