interconnection public seminar final

Interconnection RateBenchmarking

Namibia

Dr. Christoph Stork

Tuesday 28 July 2009

Namibia’s Success Story:9 months from dispute to resolution

October 2008: Minister of ICTs Joel Kaapanda hosts a workshop to address an interconnection workshop between telco operators. Operators agree to conduct a benchmarking study

January 2009: NCC commissioned Research ICT Africa to conduct a benchmarking study

June 2009: NCC prescribes new termination rate ceiling of N$ 0.60 with glide path to N$0.30 by January 2011


Table of Contents

Interconnection background

Situation in Namibia

Benchmarking termination rates & trends

Benchmarking cost of termination

Namibian benchmark model

Conclusion


Termination rates

What operators charge each other for terminating a call for the other network

Example: A Vodacom customer calling a CellC customer

Vodacom collects the revenue from its customerCellC has a cost, the cost of terminating the call on its networkVodacom pays CellC a termination charge to compensate for that cost


Why Regulate Interconnection?Each operator holds a monopoly for termination on its network

Incumbent may seek to limit competition and preserve its market power:

Refusing to interconnectHigh prices that make it difficult for new entrant to compete“Sabotage” by providing a lower quality interconnection service

Regulatory intervention can lead to a more efficient outcome

ITU: Interconnection = single most important problem in the development of competitive telecom sectors


International trends and best practice

International best practice: Termination rate = cost of termination of efficient operator:

Promote economic efficiencyProvide incentives to invest in new technologies to reduce costs and expand service offeringsPromote competition Promote universal service (through low retail prices)

NGN / IP based voice traffic will become insignificant...new pricing principles RPNP... SKA


Interconnection Price - Too LowBelow cost recovery of terminating network

Often sited: Incumbent operators may not invest in the network or maintain its quality. However...

Operators build their networks to make money off their subscribersTermination revenue makes up around 10% of total revenueReceiving party benefits from the call too, therefore the terminating network provides a service for own subscribers

However, SKA can lead to undesirable arbitrage in CPNP


High Interconnection PricesCustomers pay more than they need to

Incumbent can prevent new entrants from gaining market share

New entrants need to compete with their off-net rates against incumbent’s on-net pricesHigh termination rates can prevent them from doing that

Incumbents high off-net price makes it expensive to be called for switchers

Causing traffic imbalanceNet termination payment outflow of new entrant


CellOne

MTC

Switch

Benefit of size:Customer Switching has Initially mostly on-net calls ie MTC to MTC callsAfter switching mostly off-net call eg CellOne to MTC


Approaches

Industry Consensus

Regulatory InterventionCost based

Benchmarking

SKA or Bill and Keep

Retail minus pricing


Situation in Namibia


The best outcome for Namibia

Fair competition among telecommunication operators

Lower consumer pricesBetter servicesMaximum job creationHighest income for government through company tax and individual income taxReasonable returns for shareholders / Investors


Competition has been good for Namibia and MTC, it needs to be fair to new investors as well!

!"#$%!!

!&%'$%!!

!#()$*!!

!%+$+!!

!&*%$+!!

!#*($%!!

!%($'!!

!&&($+!!

!&%($+!!

,-.!/012! 314567!/012! 859:!/012!

;:1<=10>!3?;!@1=>17A12!#++B!

;:1<=10>!3?;!CD>-A12!#++%!

;:1<=10>!3?;!E1D17A12!#++"!

MTC 2005 2008

subscribers

net profit after tax

Staff

400,000 1 million

293million

358million

302 (2006)

364

OECD Price basket


Legal Requirement for Termination Rates

MTC’s and CellOne’s LicencesNew ICT policiesNew telecommunications Bill (passed by parliament in July 2009) all require that termination rates are:

Cost basedTransparentSufficiently unbundleddoes not pay for network components or facilities that it does not require for the service


CellOne and SWITCH cannot compete with their off-net rates with MTC’s on-net prices

!"##$%&'()'

*$+,-.$'

!"##$%&'()''

/.$$0"1''

!"##$%&'

2))'*$+,-.$''

!"##$%&'

2))'3%45$''

!"##$%&'

6()'

3%7+$5$.''

!"##$%&'

())''

!"##$%&'

2)))'

8+"#$$.''

8."9$,,+"#:;' <:#="'>$.'

1+#-&$'

/-,+"#'(?' /-,+"#'@?' <:#="'A:B'

:#0'C+=7&'

<:#="'>$.'

,$%"#0'

<:#="'D$5$#'

&"'<E$;5$'

F#GC$&'8$:H' F#GC$&'FI'8$:H' F#GC$&'FI'FI'8$:H' J<K'


MTC Connect 50 LeisureMTC Connect 50 FreedomMTC Connect 100 Leisure

MTC Connect 100 ActiveMTC Connect 250 Achiever

MTC Connect 500MTC Connect 1000 Pioneer

MTC ProfessionalMTC Tango per minute

MTC Fusion 59MTC Fusion 39

MTC Tango Day and Night MTC Tango per second

MTC Tango Seven to Twelve 397%571%

397%397%397%

532%310%

259%284%

310%310%

365%365%365%

Peak Fixed Retail Price as multiple of FTR

MTC’s fixed retail rates are causing traffic imbalance and net termination payment outflow for Telecom Namibia...starving the fixed line network


Termination revenue as share of total revenue

6%

9.8%

11.2%

MTC CellOne Telecom Namibia


Interconnection net payments in N$ million (Source: Telecom Namibia and CellOne)


Traffic imbalance (minutes)


Fixed-Mobile ConvergenceMTC’s Home Phone: cheaper prices for On-Net calls compared to a mobile subscriber but mobile retail rates when calledDifferences between mobile and fixed termination rates favour mobile operators in offering converged services, using mobile termination rates to subsidise the on-net retail ratesConverged termination rates stimulate converged solutions and prevent bias towards mobile operators (Tanzania and Uganda)


Playing field is not levelTermination rates are neither cost based, nor transparent nor sufficiently unbundledMTC has on-net rates that are below MTR: it makes it impossible for CellOne or Switch to compete on priceHigh Off-net and fixed-line retail rates deter MTC’s customer to call CellOne, Switch or Fixed, causing traffic imbalances and interconnection payment out flows from CellOne and Telecom NamibiaLacking number portabilityHigh Once-Off fee for CellOne N$65.3 million


Namibia needed to be pragmatic about interconnection regulation

The direct regulatory costs of a detailed forward-looking cost regime is significant:

Operators may hire engineers, economists and lawyers to put forward their views Regulator must have enough resources to assess competing claims about costThere may be costly dispute resolution processes Accounting separation may needed to be pre-scribed which is time consuming and expensive

No guarantee that detailed cost estimation approaches will be accurate

NCC has only 7 staff members and part-time commissioners


Benchmarking termination rates & trends


EU Recommendation 7 May 2009

Objectives of regulation:Technological neutrality

Preventing distortions and promoting competition

Deliver maximum benefit for consumers (choice, price and quality of service)

Termination rates should be brought down to the cost of an efficient operator - Cost Model:

Bottom-up LRIC, only taking into account cost that are caused by the provision of wholesale call termination (the increment)

Mobile and fixed core network based on NGN

Mobile access network based on a combination of 2G and 3G

Asymmetric termination rate for max 4 years: if incremental unit costs higher


Termination Rates April 2009 MTR N$India

CyprusAustria

SwedenFinlandKenya

TanzaniaBotswanaSlovenia

FranceUganda

UKNamibia

South Africa PeakSouth Africa Off peak 0.75

1.251.06

0.930.86

0.830.77

0.710.630.62

0.590.550.54

0.240.04


Termination Rate Trends in Euro cents

!"!#

$"%# $"&#

''"!#

&"%#

%"$#

!"'#

(#

$"'#$"(# $"%#

%")#

!#

)"(#

*"+#*"$!#

("&#

$"$#

,"*#

!"$*#

)"&#)"*#

("*# ("+#

,"+#

)")#

+#

)"*#*#

!#

+#

-./012# 345657# 897:;76# <12=09;# 80;7>5# ?@# A769;#

!,,(# !,,$# !,,%# !,,&# !,',# !,''#


0

0.05

0.1

0.15

0.2

0 125 250 375 500

Mob

ile T

erm

inat

ion

Rate

s

Population density 2006


Benchmarking Cost of Termination


Market Share 17%17% 25%25% 31%31% 44%44%

Coverage 96%96% 96%96% 96%96% 96%96%

WACC 11.68%11.68% 11.68%11.68% 11.68%11.68% 11.68%11.68%

A$ Cents

N$ A$ Cents

N$ A$ Cents

N$ A$ Cents

N$

Voice On-Net 13.4 0.93 10.7 0.74 9.6 0.66 8.9 0.62

Voice Termination 7.3 0.51 5.9 0.41 5.3 0.37 5 0.35

Voice Origination 6.4 0.44 5.2 0.36 4.6 0.32 4.2 0.29

Termination share of on-net

54.48%54.48% 55.14%55.14% 55.21%55.21% 56.18%56.18%

WIK 2007 study for Australia:TSLRIC


Sweden Sweden 2008-09 2009-10 2010-11 2011-12 2012-13

Based on costs of highest operator

SEK 0.358 0.275 0.227 0.201 0.183Based on costs of highest operator

N$ 0.449 0.345 0.285 0.252 0.230

Based on costs of lowest operator

SEK 0.213 0.204 0.175 0.144 0.125Based on costs of lowest operator

N$ 0.267 0.256 0.219 0.181 0.157

Analysys 2007 study for PTS in Sweden based on LRIC


Austria Austria 2005 2006 2007 2008 2009

Operator 1 Euro Cents 6.67 5.69 4.40 3.40 3.08Operator 1

N$ 0.80 0.69 0.53 0.41 0.37


N$ 1.55 0.77 0.78 0.41 0.33


N$ 1.55 1.23 0.49 0.29 0.23


N$ 1.94 1.50 1.00 0.55 0.33

Operator 5 Euro Cents 11.64 8.41 8.74Operator 5

N$ 1.40 1.01 1.05


TanzaniaTanzania 01-Jan-08

01-Jan-09

01-Jan-10

01-Jan-11

01-Jan-12

LRIC+ equi -proportionate

Mark-Up (EPMU)

Real 2007 US cents

7.15 6.88 6.63 6.51 6.39LRIC+ equi -proportionate

Mark-Up (EPMU) Nominal US

cents7.30 7.18 7.08 7.12 7.16

LRIC+ equi -proportionate

Mark-Up (EPMU)

N$ 0.60 0.59 0.58 0.58 0.59

Glide Path for MTR &FTR & international

incoming

Nominal US cents

7.83 7.65 7.49 7.32 7.16Glide Path for MTR &FTR & international

incoming N$ 0.64 0.63 0.61 0.60 0.59


Mobile termination costs Namibia (N$/ZAR): MTC being the most efficient operator

Current MTR

MTC total expenditure per minute

MTC opex per minute

MTC direct cost and depreciation per minute

MTC direct cost per minute

MTC 50% of dircet cost and depriciation per minute 0.24

0.34

0.48

0.97

1.02

1.06


Mobile termination cost per minute in N$

Tanzania LRIC + mark up

Australian Efficient Operator (44% market share)

Swedish Efficient Operator

French Efficient Operator (upper level)

MTC’s estimated cost of termination

Austrian Efficient Operator

Telecom Namibia’s estimated cost of termination

French Efficient Operator (lower level) 0.12

0.14

0.23

0.24

0.24

0.26

0.35

0.59


Namibian Benchmark Model


Termination Rates should be

Based on cost of an efficient operatorTechnologically and service neutralFacilitate emergence of IP-based NGNsShould be implemented in terms of the current licence condition and acts


Benchmarking Models

The proposed termination glide path = ceilings: Operators would be free to negotiate for lower rates:

Model 1: Immediate drop to N$0.30Model 2: Symmetric glide path to N$0.30 starting 1 July 2006Model 3: Symmetric glide path to N$0.30 starting 1 July 2009Model 4: Asymmetric glide path to N$0.30 starting 1 July 2009


CellOne Telecom Namibia MTC

Model 1: Immediate N$0.30

Model 2: Symmetric glide path to N$0.30 that started 1 July 2006Model 3: Symmetric glide path to N$0.30 starting 1 July 2009

Model 4: Asymmetric glide path to N$0.30 starting 1 July 2009

MTC model: reduction to N$0.60 until 2011

2nd choice: if accompanied by other

regulatory interventions

2nd choice: Removing distortionary factors immediatelybut request higher transit charge for outgoing international calls

No comment

2nd choice: if accompanied by other

regulatory interventions

1st choice: Compensates for market distortions of past

years

No comment

Rejected: sees no reason to wait to remove market

distorting factors

Rejected: only gradually removes market distortions and

disadvantage TN and consumers unjustifiably for two years longer

No comment

1st choice: because of current traffic

imbalance

Rejected: only gradually removes market distortions and

disadvantage TN and consumers unjustifiably for two years longer

No comment

Rejected: same as for Model 3

Rejected: same as for Model 3 Otherwise: Drop in EBITDA margin to 37% because

of having to compete on a

level playing field


After several consultations with all operators: Industry consensus

Immediate drop of termination rates to N$0.60 to catch up with the region and international developments

Glide path to the estimated cost of an efficient operator + 25% mark-up, ie NS0.30

Immediate fixed-mobile convergence of termination rates

It gives time to MTC and CellOne to conduct LRIC studies and contest the results


Compromise ModelCurrent 1 July 2009 1 January

20101 July 2010 1 January

2011MTR 1.06 0.60 0.50 0.40 0.30

FTR 0.63 0.60 0.50 0.40 0.30

Originating internationally, terminating locally via Telecom Namibia

0.59 0.60 0.50 0.40 0.30

Originating in Namibia and terminating internationally

Government Gazette

0.60 + international

settlement rate


settlement rate


settlement rate


settlement rate


Net termination payment flow in N$ million for 2008 assuming unchanged retail prices and traffic for N$0.6 and N$0.3

Current TR TR N$0.60 TR N$0.30

23.2346.46

91.5

-22.25-44.5

-88.9

-0.98-1.97-2.6

CellOne Telecom Namibia MTC


MTC EBITDA Margins

MTC current

MTC direct impact of MTR N$0.60

MTC direct impact of MTR N$0.30

Vodacom South Africa

MTN South & East Africa

Orange UK

Orange Spain 15.1%

20.3%

34.4%

34.6%

47.4%

48.1%

49.9%


CellOne and SWITCH off-net rates compared to MTC’s on-net rates at MTR N$0.60, assuming cost saving is passed on

!"#$%!! !"#$%!! !"#$%!!

!"#&%!! !"#&%!!

!"#"%!!

!"#%%!!

!"#&$!!

!&#$%!!

!"#'%!! !"#'%!! !"#'%!! !"#'%!!

!%#'$!! !%#'$!! !%#'$!!

!%#($!! !%#($!!!%#)*!!

!%#)+!!

!%#('!!

!"#"'!!

!%#($!! !%#($!! !%#($!!!%#)*!! !%#)*!!

!%#),!!!%#$'!!

!%#(&!!

!%#*)!!!"#%%!! !"#%%!! !"#%%!! !"#%%!!

-.//012!$%!

3045670!

-.//012!$%!!

87009.:!!

-.//012!"%%!

3045670!!

-.//012!"%%!

;1<=0!!

-.//012!&$%!

;1>40=07!!

-.//012!$%%!! -.//012!

"%%%!?4./007!!

?7.@0554./AB! CA/D.!E07!

:4/620!

8654./!$*! 8654./!+*! CA/D.!FAG!

A/9!H4D>2!

CA/D.!I0=0/!

2.!CJ0B=0!

?0AK! LM!?0AK! LM!LM!?0AK! NCO! -0BBL/0!LMP/02!! IJ421>!LMP/02!!


CellOne and SWITCH off-net rates compared to MTC’s on-net rates at MTR N$0.30, assuming cost saving is passed on

!"#$%!! !"#$%!! !"#$%!!

!"#&%!! !"#&%!!

!"#"%!!

!"#%%!!

!"#&$!!

!&#$%!!

!"#'%!! !"#'%!! !"#'%!! !"#'%!!

!%#'$!! !%#'$!! !%#'$!!

!%#($!! !%#($!!!%#)*!!

!%#)+!!

!%#('!!

!"#"'!!

!%#($!! !%#($!! !%#($!!!%#)*!! !%#)*!!

!%#),!!!%#$'!!

!%#(&!!

!%#*)!!!"#%%!! !"#%%!! !"#%%!! !"#%%!!

-.//012!$%!

3045670!

-.//012!$%!!

87009.:!!

-.//012!"%%!

3045670!!

-.//012!"%%!

;1<=0!!

-.//012!&$%!

;1>40=07!!

-.//012!$%%!! -.//012!

"%%%!?4./007!!

?7.@0554./AB! CA/D.!E07!

:4/620!

8654./!$*! 8654./!+*! CA/D.!FAG!

A/9!H4D>2!

CA/D.!I0=0/!

2.!CJ0B=0!

?0AK! LM!?0AK! LM!LM!?0AK! NCO! -0BBL/0!LMP/02!! IJ421>!LMP/02!!


Cellone and Switch: Minimum requirement= Set off-net price at 2*MTR until it is on par with on-net prices

CellOne: reduce call rates to fixed lines to 2*FTR until it is on par with on-net prices

MTC has a complex pricing structure. Minimum requirement= Fixed or Off-net calls should be On-net rate + MTR/FTR

Recommendations for operators


Likely ConsequencesFairer competition will lead to lower prices and better services for consumers

The market will expand and Namibia will have more subscribers

Namibians will be able to communicate more

Investment in the sector will increase

The sector will employ more people and contribute more to Namibia’s economic growth

MTC’s EBITDA margin will only be slightly affected despite lower market share due to increase in mobile users and mobile usage


Conclusion 1Regulators across Europe and Africa agree: Termination rates should be based cost of an efficient operatorThis prepares the markets for a smooth transition to IP based Next Generation NetworksSymmetry between mobile and fixed termination rates supports fixed-mobile convergence and removes distortions that would advantage mobile operatorsAsymmetric termination rates are unsuitable to facilitate market entry - more effective tools exist that do not lead to economic distortions and enshrined traffic imbalances


Conclusion 2The compromise model removes several market distorting factors

The glide path will bring termination rates down to the cost of an efficient operator

Converged termination rates set the scene for fixed-mobile convergence

Continuous monitoring of the sector by regulator is required

Other regulatory measures may be required to level the playing field further


Conclusion 3

Implementing cost based termination rates (LRIC eg) is a challenge for many developing countries requiring adequate legal powers and institutional capacity

Benchmarking provides a fast feasible solution if cost data and support is available from other jurisdiction

Something regional regulatory bodies should look into


How was this possible in 9 months?

Visionary Minister for ICTs, Joel Kaapanda

Dedicated NCC commissioners

Co-operation from African and EU regulators:Botswana Telecommunications AuthorityCommunications Commission of Kenya Instituto Nacional das Comunicações de MoçambiqueTanzanian Communications Regulatory AuthorityUganda Communications CommissionRundfunk & Telekom Regulierungs GMBH (Austria)Swedish Post and Telecom Agency, PTS


http://www.incm.gov.mz/

http://www.incm.gov.mz/

Thank You!Report can be downloaded from:

http://www.ncc.org.naPublications tab


http://www.ncc.org.na/page.php?pn=publication




interconnection public seminar final

Technology

net rates

termination rates

efcient operator

net calls

glide path

gc

terminating network

termination