9 August 2002

Top Story

The grey market is where Africa’s comparatively recent regulatory regime meets the realities of the market and new technologies. There is a grey market in every African country and it will grow larger unless the regulators get to grips with why it occurs. It makes the international accounting rate system largely meaningless. Some grey market services operate in the margins of legality, whilst others are currently illegal. The smarter incumbent telcos are beginning to understand how to fight back but the regulators seem largely clueless. Tim Parsonson of Storm describes how the grey market operates in South Africa and how companies and consumers are finding a better deal.


The monopoly revenue streams of the incumbent telcos are locked in competition with grey market services. This should come as no surprise as new entrants always target the most profitable sectors. The new services can be found both on the incoming and outgoing calls:


- Outbound international voice minutes use "call-back" and pc/internet telephony.


- Inbound international voice minutes use what is known as "leaky PABX" (ISPs, local hotels and call centres, VSAT) and refile.


The problem is rife. On outbound international in South Africa, Storm estimates that 25-30% of corporate voice traffic is carried over callback or IP. And on inbound international traffice a well-informed insider from an African state telco told us:"A year ago, 9 out of 10 calls made by budget prepaid calling card from the UK and USA into the country, came over illegal routes". So an average telco carrying 100 million international minutes per month in and out of the country is losing 25% of the traffic in and out, and retaining only 25% of the revenue on the lost traffic. Therefore on these "guesstimates", it could be losing between US$10-30 million a year.


Worse still for the incumbent telcos, this traffic loss also occurs at the domestic level. Paradoxically, the shortest distance between two points is often the most expensive. To overcome this costly paradox, there are several forms of least cost routing already available in South Africa: these can be offered nationally, internationally and over cell phones. Least cost routing is enabled by technology (PABXs, switches) and deregulation (particularly interconnection).


International call-back is as its name implies a way of connecting the caller by calling them back from a cheaper calling regime like the UK. Against state telco charges, you can save between 20-50% on call charges. Is it legal? I understand that there has been a recent court case in Zambia in which it was declared legal. With fax, Storm can install a unit that allows you to send out a fax as data over IP connections, giving 20-70% savings. Legal? Certainly. On cellular, we can take advantage of connecting cellular to cellular (again with a unit) that offers savings of 20-30%. Legal? Yes. So if we look at a Least Cost Routing case study we can show the impact on the typical monthly bill of a corporate customer in South Africa:

table tel issue 122 - 1

Unfortunately current regulation prevents us offering cheaper calling. The unit Storm puts in costs only R5,000 so the customer easily recoups this in the first month. But this is not just possible in South Africa. Storm is already reselling its services through rebranded resellers in other African markets.


So how are the incumbent telcos reacting to this lost revenue? Well they can spend more on lawyers but that only tends to make the lawyers richer. They can invest heavily in "anti-call back" equipment and try DTMF/DDI blocking. They can send staff overseas to buy cheap phone cards and track where the calls come from. What’s the result? Well as with the lawyers, it means that more money is spent without radically increasing their revenue. The grey operators move services and re-appear faster than the telcos can track them. Furthermore there are now new DDIs for call back, offering new triggering methods.


If you cannot beat the grey market operators through recourse to lawyers or by trying to cut off their services what do you do? Well you try and beat them in the market. Telkom SA’s retail prices have fallen as follows for the following desinations (cents/minute):

table issue 122 - 2

And if you can’t beat them by lowering your rates, then you join them by buying the same technology that the grey market service operators use. The following incumbent telcos are already doing so: South Africa, Morocco, Zimbabwe, Nigeria, Ghana, Cote D’Ivoire, Senegal, Namibia and Egypt. And many others are actively looking at it.


If Storm has an inbound partnership with the incumbent telco it offers the following advantages:


- it can re-capture a portion of the illegally operated "leaky PABX traffic with targeted pricing and offering quality/compression.


- The independent operator makes the investment in the equipment.


- Lower cost outbound termination of international minutes through competitive new operators, outside of bilateral settlement agreements.


- You have the means to create flexible new services.


For more details about Storm:


This article is based on a presentation given at ACT 2002.