McLeod is wrong about Telkom

Telkom would like to take up the offer to publish a reply to TechCentral editor Duncan McLeod’s column of 16 August on the company’s opposition to the MTN and Vodacom duopoly in South Africa.

We believe that McLeod has overlooked key aspects of Telkom’s argument for a fair playing field in the telecommunications sector and a pro-consumer approach to regulation and oversight.

At the same time, we respect his commitment to a healthy and functional marketplace, as evidenced by his joining the Capitalist Party of South Africa (the “Purple Cow”), which flopped in the last national election. Better luck next time!

For the record, we share his views on free and fair markets. However, we wish to raise some points in this regard.

Distinguish between the old and new Telkom

Telkom is a vastly different business to the one it was in 1994 when it was a state-owned enterprise and the only telecommunications operator in town. Today Telkom is highly diversified, profitable, competitive, efficient and – if we say so ourselves – well led. Capitalists should be cheering!

McLeod’s column suggests that because Telkom was once the monopoly — prior to democracy — that somehow regulation of our business should be based on retribution, not fair market practice. So-called “light-touch” regulation has entrenched the duopoly, rather than allowing new entrants a fair chance.

Consider that mobile services were launched in 1994, granting MTN and Vodacom a head-start. Yet, despite the regulator allowing entry by other operators, their dominance has persisted. Together, MTN and Vodacom account for about 75% of subscribers – and an even larger slice of revenue. Vodacom’s share has hovered around 42% for the past 10 years, whereas MTN, the largest African mobile network’s share, has decreased, but not significantly. The number of subscribers attributable to MTN is substantially higher than Telkom’s (the third largest mobile operator).

No country for new entrants

Vodacom and MTN were able to benefit from regulatory support during the early years, but this support has not been forthcoming to later entrants.

All the while, the termination-rate regime continues to favour the two largest operators, who continue to benefit from higher mobile termination rates compared to fixed termination rates. This despite their size and the fact that Telkom’s termination rate out-payments subsidised their entry and continue to benefit these giants. We gave them a helping hand up, so to speak.

On the mobile broadband front, there has been little regulatory support for newer entrants, like Telkom, to compete on equivalent terms. This is despite Telkom’s attempts to disrupt the market with lower prices and better value propositions. Rather, through a lack of regulatory intervention, the duopoly structure has persisted, with Vodacom and MTN continuing to dominate the mobile-services market. Cell C has yet to turn a profit after 20 years in the market, posting an improved loss this year of R5-billion. Capitalists should be weeping!

Remember the data services market inquiry?

Data costs remain high in comparison to many other, less-developed markets in Africa.

Vodacom and MTN have been able to ignore Telkom’s aggressive mobile data prices for years. This took place for so long that the Competition Commission eventually forced them to reduce retail prices through settlement agreements following its data services market inquiry.

It pointed out that “the fact that the challenger networks hold a much higher share of actual data traffic relative to their share of data revenue indicates that revenue per gigabyte for the dominant two networks is considerably higher than that of the challenger networks”. This is despite the economies of scale and regulatory interventions that advantaged Vodacom and MTN. If that doesn’t define “duopoly”, we don’t know what does.

The inquiry revealed that the prices and margins of Vodacom and MTN in South Africa were higher than in other countries in which they operate – a clear indication of market failure.

Evidence of domination

Both the Competition Commission and Icasa found, in their inquiries, that Vodacom and MTN are dominant across the supply chain. Their dominance is even more entrenched by the spectrum-sharing deals that they have entered into with Cell C, Liquid Intelligent Technologies and Rain. Cell C is wholly reliant on MTN and Vodacom to provide mobile services, and Liquid and Rain are disincentivised from competing aggressively in the mobile market due to the lucrative deals they have struck to provide capacity to either Vodacom or MTN, or both. This has limited their ability to compete independently – leaving Telkom as the only entity in the position to be able to challenge the “cosy” market structure head-on.

Not all spectrum frequency is equal

The point is often made that Telkom has the largest spectrum allocation in the market. That is true. However, not all spectrum frequencies are as efficient for mobile purposes. Having a greater share of inferior spectrum is not an advantage.

The problem is then compounded by communications regulator Icasa wanting Telkom to bid on the sub-1GHz spectrum currently being utilised by and SABC for their broadcasts. It effectively amounts to buying something you cannot use – at least not for a very long time.

Pushing the boundaries of regulation is a slippery slope

The regulator also needs to consider that Vodacom and MTN have circumvented the ban on spectrum trading through their deals with Rain, Liquid and Cell C. They have thus effectively gained access to significant amounts of spectrum without having to face the necessary regulatory scrutiny. Without any analysis of the impact of these deals on competition and regulatory intervention, the market will continue to be dominated by Vodacom and MTN, which have a history of charging above competitive mobile prices.

McLeod suggests that Telkom should by now have “pressed the legal and regulatory envelope” in a similar manner to MTN and Vodacom. It is a sad day for the market when “pressing the envelope” is required to remain competitive. Capitalists should be concerned.

Pro-competitive spectrum licensing would be the first step in the right direction, but Icasa must not stop there. It needs to level the playing field across the board by addressing the market failures in the wholesale markets that it has itself identified in its mobile broadband services inquiry. It can only do this by introducing appropriate and effective regulation.

  • Liza Zouabi is executive for competition regulation and group pricing at Telkom

Now read: Telkom is wrong – there is no market failure in mobile

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