1. 11
PRESENTED BY: Greg Hatfield & Siyabonga Madyibi
DATE: 12 October 2009
Interconnect pricing

2. Internet Solutions Overview Market & Process Review 22
Agenda
Agenda
Internet Solutions Overview
Market & Process Review
Suggested MTR reduction
Rationale
Price structure
Ideal Impact on Retail Pricing
Plausible Industry scenario
Questions & Discussion

3. Internet solutions company overview33
Internet solutions company overview
Founded 1993
ISP Converged Communications Services Provider
Pioneers of South African technology solutions
Fibre optic links (1994)
Mobile Connectivity
Switched VPN (1997)
Applications Hosting (2003)
MPLS VPN, VRAS, ASP / SaaS (1999)
Wireless Hotspots (2005)
VoIP (2005)
Built SA’s largest online community
6,500 corporate (>15,000 offices)
30,000 SME’s
100,000 non-business users

4. 44
IS footprint

5. 55
Overview of mtr process
IS applauds the Portfolio Committee on its intervention
Culminations of long, tortuous road started before ECA promulgation
Competition is key to industry effectiveness
Interconnect rates are key to competition
Incumbents have no incentive to facilitate competiion
Incumbents possess all the negotiating strength
Direct negotiations fail

6. 66
Market overview
MNO’s dominate with > 40m users
Interconnection terms set independent of competition
Interconnect rates increased by 500%
New entrants impotent to force MTR downwards
ICASA recognise this abusive position
Pro-competition regulatory framework being pursued

7. Key competitor in Fixed-to-mobile market LCR still prevalent 77
Is’ voice business
Launched Feb 2005
VoIP based
Reach
Over 2,200 company branches use IS VoIP
Over 320 companies use IS VoIP
Carried approximately 450m minutes last year
Key competitor in Fixed-to-mobile market
LCR still prevalent
Channel model for consumers and SME’s

8. 15% p/a reduction R0.27 over 5 years88
Recommended MTR changes
R0.60 immediately
15% p/a reduction R0.27 over 5 years

9. 99 Rationale Corporate 500 Retail Price R 730 Excl VAT R 640
In bundle minutes
500
Cost per Minute (Excl)
R 1.28
SP Discount (up to)
28%
Discount per minute
R 0.36
Net Cost Per Minute
R 0.92
Connection Incentive Bonus per SIM
R 3,500
Monthly over 24 months
R 146
Effective CIB Subsidy per minute
R 0.29
Net Revenue per Minute
R 0.63

10. 10101010 qualifications Many variables Different package pricing
Subscribes not using all their “free” minutes
Subscribers using more than their “free” minutes
SP’s not reaching the full 28% discount
20% error rate: Net Retail Revenue = R0.75
EBIT margin = 30%
“Accounting cost” per minute <= R0.44
ICASA research produced similar value
MTR of R0.60 – R0.80 is not a material change
IT’S AFFORDABLE!

11.
industry Structure
Current
Wholesale - R1.25
Net Retail - R0.63
Required
Wholesale - R0.27
Retail - R0.63
Benefits
Challenger operators can compete
Fixed to mobile market moves to interconnect
Spectrum availability increases by 20%
- User experience
- 3G performance
- Mobile TV

12.
Retail price changes
The MNO’s need to remain financially viable
Certain retail prices must provide that viability
‘Tolerable’ offerings
Contract packages - Lower rates per minute
Currently contribute the bulk of MNO profits
15% market penetration
‘Intolerable’ offerings
Prepaid services - Higher rates per minute
Lower profit contribution
85% market penetration – poor majority

13.
Plausible industry scenario
Required Changes
MTR drops to R0.60 immediately
Prepaid retail pricing drops significantly
Contract retail pricing remains unchanged
MNO Impact
Interconnect and prepaid revenue declines
Contract revenue maintains economic viability
End User Cost Reduction
Poor majority (prepaid)
Fixed-to-mobile market (R8b) for businesses

14.
conclusion
The interests of all major stakeholders can be met, particularly the majority of South African citizens, by this plausible industry outcome
IS urges all appropriately mandated organisations to construct this outcome urgently