Thin margins
On 30 November 2012, Alt-X listed Huge Telecom reported a decline in half-year earnings and profit, citing thin margins at the top-end of the market.
Three weeks later, TeleMasters - another least-cost routing group - reported a large slump in net profit for its financial year and announced a move out of LCR, saying the model no longer made any sense.
Indeed it doesn't. What LCR providers have to cope with is the same thing legacy fixed and mobile networks are saddled with - the high cost of the operators' infrastructure legacy requires them to charge high call rates.
We're now reaching the point where the interconnect rates that the mobile networks are allowed to charge each other is so low relative to their actual cost of carrying calls that little advantage can be had by re-routing a call via the same mobile network on which the call will terminate.
The writing on the wall
By contrast, VoIP carriers' low cost structure (zero-rated on-net calls or call portions) allows them to charge rock-bottom retail prices at a small margin over the prevailing call termination charges imposed by Icasa.
The writing is on the wall: VoIP is the future, and the future gets properly under way on March 1. The mobile and fixed networks, Broadband Infraco and SITA have all invested in network telephony for quite a while now, a resounding endorsement of this fact.
LCR providers could also theoretically turn to VoIP as their primary interconnect route, but for that to be a reasonable prospect their network investments would have had to be quite significant by now. To piggy-back off another provider's network robs the provider of margin and the customer of the price breaks they're entitled to and can get from the right provider.
The interconnect cliff
As things stand, a number of interesting things are happening and could still happen in the market.
Cell C
Cell C has caused consternation with its 99c/minute flat rate - to any network (fixed or mobile), any place (even international), and at any time (peak as well as off-peak).
Let's analyse that in terms of the looming interconnect cliff. 'Anytime' essentially means nothing, as the distinction between peak and off-peak disappears this March. Happy New Year!
'Any network' seems a bold move, but in reality the drop is relatively small. Currently the average mobile retail call rate per minute, after discounts, is about R1.15, so 99c represents a small sacrifice. And all of that will be made up with the expected deluge of Cell C incoming calls.
LCR providers
Huge has opted for the lower end of the market where margins are higher.
TeleMasters will get out of LCR and move customers onto the VoIP network, Digital Direct. The higher capital installation and new resourcing costs will however add time to its recovery journey from the fallout of margin erosion.
LCR players have resisted margin erosion in the past with long-term contracts (as long as two years) that lock customers into rates that are low at the time of signing, but are gradually outperformed by rates from more agile players. To call themselves least-cost providers in the circumstances is a contradiction in terms.
VoIP providers
The agile players in this market are the VoIP providers.
The best among them have the quality assurance and confidence of their innate price advantage to allow month-to-month customer relationships, with automatic price reviews as interconnect rates drop.
Go VoIP!
It's simple, really. The big gorillas are currently playing at 99c/minute, while the leading VoIP players are rocking 75c/minute. Come the first of March, VoIP calls can go down to below 60c.
How much lower than 99c can the legacy networks go? And more to the point, where will you go?
