Tuesday, 24 March 2015

Consumer Organisation Analyses Reasons For MultiChoice Price Hike

Simon Ngona
There has been a pouring of complaints from consumers in retaliation to the looming subscription fees for Multi-Choice DSTV services effective this April. The increase has been received with mixed feelings with most consumers feeling that this is not the right timing for it.
We have observed that DSTV consumers on social media channels such as Facebook and Twitter have started online campaigns to boycott paying for their April DSTV subscriptions.

As Consumer Unity and Trust Society (CUTS) International Lusaka, we have made an effort to try and understand the justification behind this increase so as to fulfil our watchdog duties. This process involved having a bilateral meeting with Management and other stakeholders – including individual consumers.

This array of engagement enabled us to collate and aggregate different concerns against the justifications presented by Multi-choice to arrive at conclusions below. It must be mention from the onset that Multi-choice, despite the Zambian government owning 49% shares, is a private entity – and therefore the company has every right to adjust its prices accordingly.  We are convinced that price adjustments could be timely, but the margin of adjustments is too steep and would affect consumer negatively. The pending price adjustments are tied to two things. Firstly, the normal annual price adjustments and secondly, underperforming economy.  These two factors are collectively addressed in the subsequent points.

1.    General Macro-economic performance
Prudent macroeconomic management is the panacea to private sector and economic growth. Medium-term prospects for Zambia’s growth remain good but are subject to evenly balanced risks emanating from global uncertainties and macroeconomic management at national level. Among the external risks are fast-declining copper prices. The economy can absorb moderate declines in copper prices, but steeper declines will hurt the country and the performance of the exchange rate further. We agree with Multi-choice and other private sector players that, if home grown solutions are not sought to eschew the external economic risks, the domestic economy will be affected gravely. Secondly, Zambia’s economy has seen far too many unexpected policy changes in recent years. Persistent and even escalating perceptions of an uncertain policy environment could weaken investment, thereby reducing GDP growth. Further, the risks of fiscal slips could undermine macroeconomic stability and undo some of the country’s recent hard-earned gains.  Government hostility measures are required to police this situation as it is suffocating private sector progression (including Pay TV) and ultimately consumers.

Among the arguments Multi-choice has given on the pending hike is the increasing cost of production in Zambia as a result of exchange rate volatility and inflation.

2.      Inflation:
High inflation is cited as one of the factors affecting the cost of production for Multi-choice.  We need to make mentioned that it does not necessarily mean that all commodities or services should have their prices increasing when inflation is on a rise. In actual fact some can even be dropping. 

Current Central Statistical Office (CSO) inflation figures show that February inflation dropped to 7.4 % from 7.7 % in January 2015. This downward surge should be considered in Multi-choice’s subsequent decision. We are, however, in agreement with Multi-choice that using the January and February figures might not be prudent as sustainability is not guaranteed.

The other issue that require further clarification from Multi-choice was how inflation was affecting the company – in specific terms. In our meeting, we didn’t explore this due to time limitation. Disaggregating the Consumer Price Index (CPI) and pointing out the commodities or services under the CPI which were affecting the operations of the company would assist rest this issue. A snap shot of the major drivers in the drop in inflation from 7.7% to 7.4% include alcoholic beverages, tobacco and housing. Generally, these are the products that have been driving inflation over the last months. From these products, its only housing, that has a relationship with Pay TV Pricing. We might have an asymmetric view from Multi-choice and the company would assist us by explaining the inflation argument further. 

In the same vain, it might be important for Multi-choice to consider looking at the net equalisation and trade off effects arising from fuel reduction on its operational costs.   

3.    Exchange rate volatility;
This was eruditely explained and it come to light that transactions associated with this industry involve huge costs - both in content procurement, rights and transmission holding.  Billions of dollars are spent annually meet consumer satisfaction. With this justification made and upon reflection, there remain some concerns which might still require clarity. Firstly, production/Programming of DSTV content that is consumed in Zambia is transmitted from South Africa. This entails that production is done in South Africa and all production related costs are subjected to the South African exchange rate regime. It is clear that South Africa is a low cost-producer of DSTV content hence the variance in prices. The signal that is transmitted to Zambia could be the only major service that could be subjected to the Zambia exchange rate system. The impact might be minimal compared to other players that produce the content in Zambia.    

4.      Dollar vs. Kwacha Pricing Methodology: It is comforting to learn from Multi-choice that the company has stopped using the dollar ratio to come up with a kwacha price list. But what is worrying is that dollar-kwacha performance still informs much of the company’s decisions on pricing. Nonetheless, this paradigm shift in the pricing methodology will require probing. Our initial assessment presents serious concerns which reveal that, despite Multi-choice, freezing the subscription fee in kwacha, the company was still gaining from an inflated exchange rate figure.

After engaging with Multi-choice, we were furnished with the figures that were being charged for the premium bouquet dating as far as April 2012. For purposes of this discussion, we will look at the premium bouquet and zero in on the period starting July 2014 to date. The table and graph below summarises our findings

July 2014 was the period when the Statutory Instrument (SI) 33 was affected. The SI prohibits the quoting, paying, demanding or receiving foreign currency as legal tender for goods, services or any other domestic transactions. By this development, Multi-choice, including other private sector players, were coerced to start charging in kwacha. In arriving at the July 2014 compulsory kwacha figure from the USD currency which was being used, Multi-choice converted the June 2014 average subscription fee which was USD 82. According to the pricing statistics received from Multi-choice,   USD 82 subscription fee amounted to ZMW 521.   This entails that Multi-choice was using ZMK 6.35 per dollar exchange rate. According to Stanbic Bank, the July exchange rate was ZMW 6.15.  

This therefore entails that the USD82, which was converted so us to have the present fixed kwacha rate, should have translated to ZMW 503.48. In short consumers should have been paying ZMW 503.48 and not ZMW 521 for the premiums package. Using this exchange rate, ZMW 521 converted to USD 84.71 and not the USD 82. This entails that, beyond the monthly profits which were made per subscription, a 3.3% extra was charged. In kwacha term, an extra ZMW 17.52 was being charged. There could have been a justification for this but we are not privy to that. And please note, we have used Stanbic Bank rates and have not used any other rates from other Banks and this analysis is purely in relation to the exchange rate system of Stanbic Bank.

By end of August, an extra ZMW 33.92 was charged due to the higher exchange rate that was used when converting to kwacha in July. According to Stanbic Bank, the Kwacha had gained in value and it was trading at ZMW 5.94 per dollar.   Since Multi-choice had frozen it subscription fee (ZMW 521) using ZMK 6.35 per dollar exchange rate and not ZMW 5.94 as reported by Stanbic Bank, there were gains the company recorded.  Converting ZMW 521 given by Multi-choice at 5.94 per dollar, this translated to USD 87.71 per subscription.  This also entails a further 6.96 percent extra was charged from the initial indicated $82 despite the monthly kwacha subscription fee being constant.  

In the third month, ZMK 11.74 extra per subscription was paid by consumers due to high exchange rate used. Stanbic Bank statistics show that the kwacha depreciated resulting in the K521 converting to USD83.89. In October, ZMW 6.03 November, ZMW 3.53 extra was being charged.  The final quarter showed a downward trend in the Kwacha.  However, severe as it was, Multi-choice was still earning ZMW 2.72 more in December. 
We can therefore conclude that in 2014, Multi-choice gained substantively due to the higher exchange rate used when transforming the pricing structure from dollar to kwacha. In aggregated terms, using Stanbic Bank rates, about ZMW 75.46 extra was charged for one subscriber between July and December. Assuming that there are a thousand subscribers in the Zambian market for the premium bouquet and they all constantly bought the premium package, this would amount to ZMW 75, 460. 
The exchange rate affected Multi-choice in January-onwards as the kwacha underperformed below the ZMW 6.35 exchange rate used by Multi-choice. This has however been only for two and half months and the gains acquired between July and December can be used to cushion the negative effects.
5.      Territorial Spread: we are informed that there are three categories of Multi Choice Services in Africa namely South Africa, Nigeria and the Rest of Africa. Zambia falls on the latter (the Rest of Africa). The content (films etc) bought by the South African Unit of Multi-choicethrough specific demands ensuing from consuming countries under the Rest of Africa ambit, is consumed by all these countries under this category. The ethical argument in this narrative is that Multi-choice accrues benefits from its territorial spread as content purchased (as a result of demand from one specific country) is also consumed by other countries in this category. In short, other consumers could be paying for a specific content enjoyed by one particular country and this brings positive spin-off in the income generation process of the company.

   We are cautious that addressing some of these questions would require divulging confidential information and it will not be in the best interest of Multi-choice to share such information. We are, therefore, hoping that points raised above are substantive enough for Multi-choice to reconsider and adjust downwards the pending hike. Multi-choice enjoys a good level of market dominance and therefore, any action has potential to coerce other industry players to follow suite.

Issued by:

Simon Ngona
Center Coordinator
Consumer Unity and Trust Society (CUTS) International
Lusaka, Zambia

17th March, 2015


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