Continuing on the saga of handset subsidies and cellular tariffs within the South Africa market, the Independent Communications Authority of South Africa (Icasa) held hearings last week regarding a section 27 inquiry into cellular handset subsidies by network operators and service providers.

The inquiry aimed to establish whether cellphone handsets should be subsidized or not, who benefits from the subsidization, and how subsidies affect competition within the local cellular market.

A big concern was that the issuing of free handsets ties consumers into contracts that prevent them from switching networks, even when offered a better or cheaper service by another operator.

The issue of transparency came across strongly in the oral presentations and written submissions, with respondents focusing on the benefit to consumers.

Says Autopage Cellular, CEO, Stephen Blewett: "There should be more transparency given to customers in terms of what they are paying for. They should be given a breakdown of what exactly it is their contract payments are covering."

This comment refers to the fact that consumers, when signing a contract that includes a free or discounted handset, actually pay for the handset over the period of the 24-month contract.

Blewett further says that it should be noted that service providers also subsidize a portion of the handsets on behalf of customers, because network providers" subsidies do not always cover the entire handset cost.

Cell C agrees that transparency is necessary, because it protects consumers and encourages fair competition within the industry. Cell C further believes that there should be a phased approach to the reduction and elimination of handset subsidies, as it will benefit the industry as well as customers. The company proposes transparency as an interim solution, while an intensive market study is done. Handset subsidies should then be reduced or eliminated, based on the findings of the study.

MTN noted that it had already been thinking of phasing out subsidies, but is concerned that the first operator to do so might lose market share, as other parties are not obliged to follow. The company says it supports the elimination of subsidies, through a phased approach, if all parties are obliged to do so.

Autopage Cellular is in favor of Icasa regulating handset subsidization, noting that any regulations should give consumers more choice in selecting a service and network provider. Blewett adds, however: "We are just concerned that completely prohibiting subsidies will drive a technology wedge between the haves and have nots." As handsets are still expensive, many people will not be able to afford them, and the cellular market will diminish instead of grow.

This is a concern expressed by most of the industry players, also taking into account the uptake ratio of newer technologies like 3G - usually more expensive - that become available.

The majority of consumers, according to research company, Ask Africa, are not too happy about having to buy their own handsets. A recent opinion poll of 100 contract customers, carried out by Ask Africa, revealed that customers still want the subsidies, noting that it will be difficult to obtain the latest technologies otherwise.

Andrea Rademeyer, MD of Ask Afrika, says that prohibiting cellular networks and service providers from offering free or discounted handsets on contract is not likely to have the desired effect. "What this will mean is that consumers will have to pay up-front for their handsets in cash. While Icasa has good intentions, and aims to increase competition in the industry, this may not be the right way of going about it," she adds.

Icasa made it clear, however, that this inquiry was called in a bid to help it to understand the situation, and to get clarity on various concerns, and does not mean that handset subsidies will be banned immediately.

"Removing handset subsidies will have to be subject to an extensive investigation, as it could negatively impact on industry profits," says Ask Afrika business analyst, Craig Kolb.

Rademeyer adds: "We believe the voice of the consumer should not be ignored as part of Icasa"s investigation; consultation with the consumer is essential to the credibility of the whole process. After all, increased competition is the ultimate aim, so that consumers benefit in terms of lower costs and increased variety at the end of the day."

MTN proposes that rather than addressing these issues with drastic economic regulatory intervention, such as a straight ban on subsidies, which it believes could have a severe and detrimental impact on universal access, that the industry undertakes to negotiate a suitable code of conduct relating to handset subsidies only. The company believes that this may address Icasa"s concerns.