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Cellular: meet the CPA

Mar 15 2011 10:24 Simon Dingle

Company Data

MTN GROUP LIMITED [JSE:MTN]

Last traded 242.65
Change 2.05
% Change 0.01
Cumulative volume 3877066
Market cap 448.50bn

Last Updated: 31/10/2014 at 04:29. Prices are delayed by 15 minutes. Source: McGregor BFA

VODACOM GROUP LIMITED [JSE:VOD]

Last traded 133.74
Change 1.77
% Change 0.01
Cumulative volume 988484
Market cap 198.00bn

Last Updated: 31/10/2014 at 04:29. Prices are delayed by 15 minutes. Source: McGregor BFA

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EXCEPT, perhaps, for Chinese prisons, South African cellular service contracts may be the most restrictive things in existence. Trying to get out of the two-year contracts that bind local consumers to a particular provider is a difficult and expensive undertaking.

Oh sure, they'll let you cancel - but not before fleecing you for every cent they could've made during the duration of the contract and making you pay off the phone that you got "for free".

Cellular contracts in their current form have been designed to cause snowballing costs for consumers. You will inevitably end up paying more by the time you are halfway through your contract than what you did at the outset, despite "prices coming down" as a marketing ploy. It's been lucrative for contract providers, but the circus is about to leave town.

The new Consumer Protection Act (CPA) comes into play at the end of March, ending years of exploitation by companies in South Africa where retailers regularly refuse to refund consumers for faulty goods and get away with other ridiculous behaviour such as selling expiring gift vouchers - as if the money paid for those vouchers magically evaporated.

With the CPA in place South African consumers will be among the best protected in the world. No more "sure, we'll take back our junk but you have to choose something else in our store to replace it with" - and cellular service providers will have to let you out of your contract within 20 days and with far less in terms of requirements.

As the CPA will be law it overrules any existing contracts, including those you may have signed with Altech Autopage, Nashua Mobile or other service providers, including the direct arms of operators such as Vodacom Group [JSE:VOD] and MTN Group [JSE:MTN].

The new legislation requires that providers cancel contracts within 20 days of "writing or other recorded manner and form" of notice from consumers. They will also no longer be able to force payment for handsets provided, and will instead be required to take back mobile devices where payment is outstanding.

The only grey area that exists is the amount of money service providers will be able to claim as contract settlement. In its current form, draft regulation sets the limit at 10% of outstanding contract fees, but this may change.

The new legislation will raise the churn rate of cellular providers in South Africa and potentially favour smaller operators like Cell C and Telkom's 8ta in the short term. In the longer term, however, it will force better service from all operators and third-party providers.

Consumers will be more likely to switch when they aren't happy with service levels or find a better deal elsewhere. Whereas before outstanding contract fees of R6 000, for example, were a major expense, R600 looks far more reasonable.

Service providers will also have to rethink the provisioning of handsets and modems as they will be loath to deal with an influx of useless, second-hand devices.

Cellular contracts will always tend towards unlimited usage and in developed markets they have already reached that point. In the USA and Europe, cellular contracts rarely provide finite monthly minutes and megabytes any more. Instead, you pay a flat rate for unlimited usage within reason. Metered minutes and bandwidth are reserved for prepaid users.

The CPA is one of the final puzzle pieces that will take South African cellular providers in the same direction, along with reductions in interconnect rates and less inter-network reliance for backhaul.

Unlimited usage and controlled costs for consumers are on the way, whether networks like it or not - and they can't come too soon.

 - Fin24
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