Trouble on the line - Lower call rates could be short-lived

BY CAMILO THAME Business Co-ordinator

Wednesday, July 11, 2012    

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THE price offensive started by LIME last month may become bogged down tomorrow.

The Supreme Court is to decide whether to disallow the cuts ordered by the regulator to the price that mobile operators charge each other for receiving, or terminating, calls.

Digicel is arguing that the Office of Utilities Regulation (OUR) didn't consult with the industry on the new interim mobile termination rates before it acted last month.

The interim rates were set ahead of the completion of the cost model consultation scheduled for September.

The new wholesale rate (not the final retail price to consumers) of $5 per minute for all calls made to mobile phones will lower the price between the two operators from $9 and will drop international calls from approximately 13.8 US cents ($12.20), if it is implemented next Sunday.

Not wanting to wait, after taking huge financial losses and seeing its market share decline dramatically over the years, LIME slashed rates by as much as two thirds on a bet that an increased subscriber base and higher call times will result in higher revenues in the long run.

LIME Jamaica's managing director, Garry Sinclair, the seventh head of the Jamaican operations since 2003, said that there is no explicit timeline to "win back Jamaica".

"I am no fool," he said. "Shareholders are rational. Obviously we don't have the 10 to 12 years it took to get us in this pickle."

The company took a calculated decision to hug up losses by bringing in its new prices before the expected rate change. Calls made to Digicel are now priced at $6.99 a minute, which is lower than the existing termination rate of $9.

"We projected to take some losses as a commercial decision," Sinclair, told the Jamaica Observer. "We are not hitting anywhere near those kind of losses."

LIME made $5.8 billion in payments to other telecoms companies compared to $20.4 billion in revenue in the year to March 31.

A significant proportion of that cost is related to fixed-line calls originating from LIME and in other cases calls terminating on Flow (which doesn't have mobile phone operations).

But maintaining similar levels of payments to Digicel while taking in much lower revenues could have been a risky proposition, even for the short term.

"What we find is, as we add subscribers to our network, more traffic is happening on our network that would normally have gone to the competitor," said Sinclair. "Because prices are down lower, we are getting a lot more traffic from our competitor."

But the Supreme Court is ruling tomorrow on Digicel's application, filed before the new price plan was launched, for a leave for Judicial review of the OUR's decision.

The high court may also decide to order a stay of the determination, which would mean the rates stay at their current level pending the Judicial Review.

If Digicel gets this, LIME may have to absorb those losses for months more.

"This cost model consultation has been open and transparent and accords with the rules of natural justice," said Richard Fraser, Digicel Jamaica's head of legal and regulatory affairs. "Hence, there is no need for the OUR to impose interim rates when it is already undertaking a process to establish cost-based rates through consultation."

Should the OUR get the nod to implement the rate on Sunday, LIME would have to give up some revenue on international incoming calls.

Fraser estimates that the industry will sacrifice 10 per cent of its annual revenues from foreign carriers under the new rates.

"The revenue risks to each operator, while different on a monetary basis, is however likely to be relatively equal in proportional terms," Fraser said. "Clearly this is significant, especially if the operator — as is the case with LIME — has recurring losses year on year and is in financial free fall."

In dollar terms, Digicel has far more to lose from international calls than LIME, given that the domestic mobile market is valued at US$500 million ($44 billion), and it controls close to 90 per cent of it.

Sinclair's take is that LIME was more than willing to pay that price to get lower termination rates on cross network mobile termination".

Indeed, its plan to double its subscriber base from the existing 310,000 within two years would translate into mobile revenue increasing from the $4.6 billion last financial year to over $9 billion.

But that's if LIME's projection that average revenue per user (ARPU) should level out at US$8 to US$9 a month, or higher by then.

"We expect revenue per users to take an initial dip, because of the transition both new customers coming on to the loser prices plus existing customers moving over to the plan," said Sinclair. "But we expect ARPU to normalise and level out because we expect people to talk for longer than they talk on average now."

A new tax of 40 cents a minute to be implemented on all mobile calls in Jamaica may change the dynamic.

"Intuitively, you would think any tax to curtail on the usage in minutes," said Sinclair. They will be passed on to the consumer, but he is not yet clear how much it will impact call times.

"Prices have come way down compared to where they used to be," he said. "We believe we have compensated for the tax."

Fraser reckons that taxes imposed on other sectors, such as consumer goods, hotels and alcohol, may affect calling patterns.

"It is inevitable that consumers may have less money to spend on services as a consequence," he said. "Time will tell what impact this has on call times."

The LIME managing director does expect that the voice portion of the mobile market, estimated at about 90 per cent, will shrink, leaving space for data to grow in what he expects is a market that has plateaued at US$500 million.

"Investment in 3G was an investment in data adoption mobile, but that is happening slowly," he said. "What you are going to have to do now is accommodate for that shrinkage with increased data revenue and increased data ARPU."

Digicel's recent US$30-million investment in its 4G network is testament to this.

"As technology evolves and customer needs continue to focus on data and smartphone usage, the future growth area in mobile services will be in data usage and mobile broadband," said Fraser.

As the fight continues over lower calling rates, number portability still has a way to go.

"Number portability is a plank in the overall 'win back' strategy," Sinclair said of LIME's push to grab back market share. "The inability to carry your number to another provider is a huge impediment to switching."

Technology Minister Phillip Paulwell has said he is committed to bringing number portability on stream but there is no clear timeline as yet.

"The OUR has acknowledged that the process of number portability will take some time, given the numerous technical issues which need to be formulated and agreed upon by the industry and regulators," said Fraser.

"The fact is that despite the availability of solutions, each operator has different software and billing systems which will be impacted by the process and that significant time and resources will need to be spent in order to ensure proper functionality within the number portability system."

He stressed that Digicel is supportive of number portability "as long as it applies to both fixed and mobile".





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