The Kenyan mobile market has been in the throes of an acute price war over the past month, following Bharti/Zain Kenya’s move to slash its prepaid rates by half, to KES 3 (US$0.035). Rivals Essar and Orange followed through with cuts of their own, with market leader Safaricom responding with an elaborate model offering deep discounts based on the value of the recharge. All these moves have combined to give Kenya arguably the lowest mobile rates in the African continent. Over the past three years, airtime prices have declined by more than 80%.

The catalyst of the latest cuts was regulatory body CCK’s decision to cut mobile termination rates further, to around $0.02. The CCK will continue to cut MTRs annually, with a long term target of KES0.99 ($0.01) by 2013, the lowest in Africa.

The CCK’s cuts, combined with increased competition and the emergence of Zain from its long slumber, will offer the stiffest challenge to Safaricom’s market’s dominance. This will be good for consumers, not so much for margins. Impact on revenue growth will be negative, and all operators will have to move quickly to broadband to make up for the voce shortfall. This may be a harbinger of what will happen elsewhere, though that is unlikely. No other regulator has cut MTRs this quickly, and this deeply.

Over the past three months, an open conflict has opposed Senegalese fixed carrier Sonatel to international wholesale carrier Global Voice Group (GVG). The GVG-Sonatel dispute follows similar (if not as contentious) disputes in Ghana (where Vodafone loudly protested) and Cote-d’Ivoire.

In Senegal, GVG signed a deal to managed inbound international calls into Senegal. The government subsequently raised Senegal’s termination rate to EUR 0.215 per minute, from EUR 0.14 per minute, and effective tax of EUR 7 cents per minute. Under the terms of the deal, GVG receives 49% of the “tax” on incoming calls, with the government retaining 51%. The company has signed similar deals in Ghana (where termination rates rose from $0.12 to $0.19), Congo-Brazzaville and a handful of other African markets.

The impact of GVG is not inconsequential. In Senegal, local operators terminate about 100m minutes in international calls each month; the GVG tax would generate about $10m a month, around half of which would go to GVG. By our estimates, GVG generates around $7-$10m a month combined, in Congo, Togo and Guinea-Conakry. In Ghana, GVG would stand to make another $4-$5m a month.

The GVG approach is fairly cunning. The company deals directly with African governments, who are starved for cash, and can use their power to impose new rules. It rarely intervenes directly, only providing monitoring equipment and training. There is increasing resistance. Besides Sonatel and Vodafone Ghana, other operators are becoming increasingly vocal. In Cote-d’Ivoire, the government has backtracked on its initial decision to allow GVG. The regional ECOWAS organization has formally protested and requested an exemption for regional traffic. Some foreign operators are already applying reciprocity. Senegal may ultimately backtrack, but the lure of fresh revenue remains too strong for many governments to resist.

 In an aggressive step, the South African parliament’s Portfolio Committee on Communications has announced its intention to push for a major cut in South African mobile termination rates. South African mobile networks currently pay each other ZAR1.25 ($0.17) per peak time minute for terminating calls on their networks. The Committee has indicated that it would like telcos to reduce this rate to ZAR 0.60 by November this year, and by a further ZAR0.15 annually over the next three years. [Click title to read full analysis]

 The net impact of a sharp MTR cut on operators will be materially negative in our view; from a consumer and regulatory standpoint, however, this move may be too little too late.

 - South African MTRs are among the highest in Africa. They are at the same level as rates in such markets as Gabon and Congo-Brazzaville (hardly examples of progressive economies) and 2x-3x higher than at least a dozen other African markets. Regulators in other countries have been more aggressive in cutting MTRs; to say that South African MTRs are due for a downward correction is a hard form of euphemism.

- From a regulatory standpoint, and welcome though this measure would be, there are reasons to be skeptical of its medium term impact on headline retail prices. For one, South Africa is a mature market, with mobile penetration rates around 110%. Competition has settled into a comfortable triopoly, while most other African markets now have four to six operators. The optimal time to make this move would have been prior to the licensing of a third operator in 2001. South Africa’s high prices are the direct result of its policy approximations over the past 15 years, which have created a Gordian knot that will not be easily undone.

- MTRs are merely the tip of the iceberg underneath South Africa’s mobile cost structure. Peak time on-net prepaid rates are 70% higher than the African median. The differential between peak on-net and off-net airtime prices is less than 20%; in other words, on-net calls (which do not include any form of termination fee) are nearly as high as off-net calls. A cut in termination fees would not in itself impact on-net calls, which account for more than half of all voice traffic for the main operators.

- There are other issues; according to the AfricaNext Research report The Future of African Mobile Profitability, South Africa’s network costs are high, at about $4,500-$5,000 per site per month, higher than at least a third of African markets, though increased self-provisioning should start alleviating the burden of this item. Average per employee costs are 2x-3x higher than in most other African markets.

- Strategically, we expect MTR cuts to impact the South African market in a number of ways:

      -Push operators to offer better on-net deals, so as to increase the amount of traffic they control

      -Increase the differentials in prices between on-net and off-net calls

      -Increase overall average usage

 Slashing termination rates may not make much of a difference on a stand-alone basis, but should provide enough of a threat that operators will move to cut on net calls without additional regulatory prodding; moderate on-net price cuts would provide some arguments against deep MTR cuts, with increased usage making up for the decline in revenue.

 -We expect the overall impact of an MTR cut to be a net positive for mobile operator Cell C and fixed operator Telkom, both net interconnect payers. For MTN and Vodacom, the proposed interconnect cut would have a material impact if implemented within the next three to six months. Net interconnect margins typically account for 15%-20% of EBITDA; a 50% cut in termination rates, for example, would slash 3-4 percentage points in EBITDA margin, assuming no change in prices and traffic patterns. As a result, the optimal approach for the operators would be three-pronged:

(1) slow the process somewhat until alternative sources of revenue and cost-savings processes make MTR cuts inconsequential

(2) move in front of the public relations issue, ideally by slashing on-net prices before MTRs are cut

(3) accelerate network self-provisioning.