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
Monopolies require price regulation Termination rates at cost of efficient
Provide incentive to invest in new technologies to reduce costs Promote competition and economic efficiency Promote universal service through low retail prices
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
Readers
Newspap er
Advertis ers
Interdependent prices No cost causation Newspapers: lower price per newspaper/higher value niche markets
= more readers = higher advertising revenue per page
MT R
OFF- Net
Fixe d
Up
On- net
Up Up
Less Subscribers
Down
Argument 1 Wholesale Price: contractually fixed Retail Prices: Many prices varying product by product and change frequently
MT R
On-Net Peak On-Net Off Peak On-Net
Off Off Peak
OFF- Net Peak OFF-Net Off Peak OFF-Net
Off Off Peak
Fixed Peak Fixed Off Peak Fixed Off Off
Peak
On-Net SMS OFF-Net SMS
Product 2
Product 1
Introduction of new cheaper products do not lead to MTR increases
Argument 2 Termination rates are mostly symmetrical ... contradicts the two-sided market argument
If asymmetry then smaller operator has higher MTR MTR cannot be increased because
share (newspaper example)
Operator 1
Operat
p=x+a Off-Net Price
Operator 1
Revenue=p* q
MTR x
q=f(p) subject to price elasticity of subscribers of
Quantity of call terminated
Argument 3 Operators can only set their own retail prices but not those of other operators... Cannot control q and p
Operator 2
Fail to predict market outcomes correctly Cannot be empirically observed following termination rate cuts Retail and wholesale prices are not interdependent
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
No of
sequence of market entry lock-ins and club effects business models used by
Mobile penetration rates and mobile retail prices in a country depend on many factors
Cheapest operator
Dominant operator
Most expensive operator
Cheapest Prepaid product in country in US$
Feb 2010
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
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?
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!
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
US cents
2005 2006 2007 2008 2009 2010
Nigeria, South Africa, Botswana
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