Vodacom May Curb Investment After South Africa Rate Cuts

South Africa’s two largest wireless operators may curb investment and cut staff numbers if they can’t reach a compromise on lower mobile termination rates with the country’s regulator.

“There’s a very real chance that if the fees go through the way they are at the moment, we’ll have to take a significant knife to costs,” MTN Group Ltd.’s South Africa Chief Executive Officer Zunaid Bulbulia said in an interview. “We would have to take costs out of the business, right across the board. So staffing, commissions we pay, handset subsidies.”

The amount mobile-phone companies pay each other to end calls on another network will halve to 20 cents ($0.02) as of March 2014, the Independent Communications Authority of South Africa said in an Oct. 4 statement. The draft proposals include changes to so-called asymmetry, which helps smaller competitors by charging them less to use the larger networks of Vodacom Group Ltd. and nearest competitor MTN.

“There’ll be less revenue for us to reinvest into the business, as we’re subsidizing our rivals,” Vodacom Chief Executive Officer Shameel Joosub said in an interview late yesterday. The company will seek to review its business model by looking at marketing, staff and real-estate costs, he said.

The wireless operators will respond to the South African regulator and are seeking to negotiate the depth of the fee cuts, MTN’s Bulbulia and Vodacom’s Joosub said. They plan to suggest the rates are reduced more gradually, so the Johannesburg-based companies can adjust their business models.

‘Less revenue’

MTN expects the proposals to cost its business more than 1 billion rand ($100 million), while Joosub declined to quantify the effect.

Vodacom shares gained as much as 2.2 percent after Joosub’s comments, the most in two weeks, and traded 0.4 percent higher at 113.80 rand at the market close in Johannesburg. The stock fell 8.4 percent in the two sessions after the lower rates were announced. MTN advanced 1.3 percent to 191 rand.

“The recommendations are still at the consultative stage,” Paseka Maleka, a spokesman for the regulator ICASA, said by phone today. “We are still waiting for comments from all stakeholders.”

“Worrying Sign”

Vodacom and MTN’s threat to slow investment comes less than a week after Bayerische Motoren Werke AG, the world’s largest maker of luxury vehicles, said it would stop expansion in South Africa after labor strikes forced its plant to shut down for three weeks in August and September. BMW’s plans are a “worrying sign,” Finance Minister Pravin Gordhan said on Oct. 7, while the German carmaker’s move was condemned by the National Union of Metalworkers of South Africa.

ICASA’s proposed asymmetry measures are “ludicrous,” Joosub told the mybroadband.co.za technology conference in Johannesburg today. “Big players are subsidizing smaller players.”

While mobile-phone call prices should fall and lower termination rates are a way of achieving that, the proposals by the regulator go too far, he said. “We’re hoping to find a more amicable solution that helps everyone.”

Vodacom is the biggest operator in South Africa with about 47 percent of the market, according to a report by Deloitte Digital published in February. It said last month it’s in exclusive talks to buy Internet provider Neotel, a unit of Tata Communications Ltd., to increase its number of business customers. MTN has a 37 percent market share, according to the same Deloitte report.

Cell C

Cell C, a closely-held company that is South Africa’s third-biggest mobile-phone operator, said today it had complained to the Competition Commission about anti-competitive behavior by Vodacom and MTN with regards to their networks. Cell C has a 14 percent market share, according to the Deloitte report, and is targeting 25 percent, Chief Executive Officer Alan Knott-Craig said in a presentation at the conference.

MTN denied any wrongdoing. “We see this as another desperate attempt to cry for further subsidies for a failing business,” the company said in e-mailed statement.

Vodacom said in a statement it was “standard practice worldwide for companies to offer their customers lower priced calls when those calls are to other people on the same network.”

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