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Competition issues in vertically integrated
telecommunications markets in SA
30 November 2006
Dr. Nicola Theron
mailto:[email protected]:[email protected] -
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Structure
1. Economics of telecommunications
2. General aspects around market definition
3. Competition issues in the ECA (chapter 10)
4. Problem areas and vertical integration issues
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Economics of telecommunications high initial fixed costs
MTN Net Debt to EBITDA - Total
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
2000 2001 2002 2003 2004 2005
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Telecoms in SA
General characteristics of network marketsrationale forregulation;
Telkomwas a regulatory monopoly;
SA relatively good infrastructurehave not benefited, hightelecoms prices;
Direct (4% of GDP) and indirect effects on economic growth;
Both privatization and competition require regulation;
Government intervention required to ensure optimal resourceallocation;
Essential part of regulatory process during privatizationfair
access to bottleneck network facilities;
ECAsigned 2006;
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Comparative teledensity
Teledensity
10731
129
3576
192 224
29
193261
572
213
364
73
167
37
96
249
325
37
280
381
827
396
0
200
400
600
800
1000
1200
1400
1600
South
Africa
SSA ME & NA Sasia EA & P LA & C Eur & CA LI MI UMI HI World
Countries/Regions/Income-groups
Subscribers
per1000
pe
ople
Mainlines Cellular
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Percentage of population that has access tofixed lines inside dwelling (Source: 2001 Census
(2004))
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Cost of 20 hours internet use ($)Source: World Development Indicators (2005)
0
10
20
30
40
50
60
70
80
90
Algeria
Angola
Argentin
a
Australia
Belgium
Brazil
Canada
Chile
France
India
Israel
Kenya
Namibia
Netherlands
New
Zealand
South
Africa
Spain
USA
LowerMiddle
Income
UpperMiddle
Income
0
20
40
60
80
100
120
140
160
180
20 hours use ($)-2004 % of monthly GNI per capita ($)-2004
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Rank Out of:(num ber of
countr ies
surveyed)
Number oft imes more
expensive
than the
cheapest
pr ice
% greater thanthe average
pr ice
BusinessADSL 1 15 9.3 147.7%
Domestic
leased lines
1 12 14.7 101.5%
International
leased lines
1 11 31.4 398.6%
Retail ADSL 1 15 8.0 139.2%
ISP fees 4 13 5.1 45.3%
SA Foundation study (Genesis 2005)
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Market definition
Distinction between access and retail markets;
Telkom monopoly in a number of access and retail markets;
New entrants and convergence will have an effect but not in
short term;
Incentive for vertical integration; Convergence creates large incentive for mergers (vertical NB);
Some consolidation already in ISP market;
Continuous vertical integration in SA mobile markets;
Telkom expanded its data offerings since 2002Telkom/BCX
an example;
Vertical integration can raise competition problems
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Application market definition
Generally the SSNIP testsubstitution, but also point to point
services (looking at origination and termination points).
Marketing strategies (technology driven markets).
UK (Oftel) and ECmarket definition should not be technology
specific; Market definition will always be case specific;
General guidelines should be developed;
ICN (2006): Overall, defining telecommunications markets is
largely case specific, depending on both the particular facts and
competition concerns at hand; Future convergence can alter market boundaries;
Need for technology neutral legislation.
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ICT Value Chain
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Telecommunications leg of the ICTvalue chain
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Wholesale (access) and Retail(services) markets
Right leg of ICT value chain;
Retail: markets for services or products provided to end users
Wholesale: markets for the inputs which are necessary to
provide services and products to end users;
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Access markets wholesalenarrowband
Wholesale narrowband: PSTN market (Telkom monopoly up to 2006)
Local, national and international calls;
Fax calls;
Dial-up internet calls.
Potential problems:
Call termination at fixed location wholesale market (EC) SNO
pays interconnection fees to majority of fixed line subscribers
Telkom dominant. E.g. if only long-distance telecommunication
SNO a buyer in call origination wholesale market Telkom again
dominant.
Unbundling of local looppolicy directions promised in June 2006?
Mobile-fixed convergence and VoIP may change all this, but not
immediately substitutable.
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Access markets wholesalebroadband
Broadband always on SSNIP testtechnologies
The copper loop
Fibre optic cable
Satellite
Fixed wireless
Mobile wireless
Power lines SAprincipal technology = ADSL. (copper loop converted to high speed line by
installing modems at end-user and at switches (DSLAM) at the operator).
Substitutes :
Fixed wireless (Wi-Fi);
Mobile wireless (3G);
Wireless broadband (SentechMy Wireless).
EC (2003): the only reasonable widespread means of supplying the end usermarketis over the local access network loops of the PSTN which have beenenhanced to provide broadband access services.
Satellite broadband expensiveseparate market for the moment.
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The Internet Access value chain
THE INTERNET
1st tier participant
INTERNET SOLUTIONS
1st tier participant
Uunet
1st tier participant
TELKOM
Customer 2nd tier participant Customer 2nd tier participant Customer 2nd tier participant
Customer 3rd tier particpant Customer 3rd tier participant Customer 3rd tier participant
THE INTERNET
1st tier participant
INTERNET SOLUTIONS
1st tier participant
Uunet
1st tier participant
TELKOM
Customer 2nd tier participant Customer 2nd tier participant Customer 2nd tier participant
Customer 3rd tier particpant Customer 3rd tier participant Customer 3rd tier participant
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ADSL example
First tier access providersbroadband capacity to service providers;
Second tierbroadband access and VANS.
Wholesale national broadband;
Wholesale international broadbandSAT-3/WASC/SAFE submarine cable
Telkom monopoly on landing capacity;
Operated by a club consortium Telkom the largest. Oftel: separate markets on different international routes for submarine cables;
Future: independent access networks with local scope (Transtel and Escom);
May remove need for access to local loop;
ADSLICASA (2005)40 ADSL complaints;
Retail narrowband data market(dial-up via PSTN)not a substitute ;
Dial-up and ADSLseparate markets;
Fixed wireless? (Wireless Business SolutionsiBurst & Sentech);
Mobile wireless (3G)Vodacom 90% of market;
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Telephone
CopperCable
(1-5km)
Telkom Exchange
ComputerDSL
Modem
DSLAM
ATM
ESR
ADSL USER
ISP
ISP
MAIL SERVICE
INTERNETBANKING
VOICENETWORK
M
ADSL access costs
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Retail markets broadband data (Numberof broadband customers in 2005 (excluding
3G)
Supplier Customers
Telkom ADSL > 67000
Sentech MyWireless > 4000
WBS iBurst > 2500
Small Wireless ISPs < 2000
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Mobile telecommunications valuechain
Operators
(Vodacom, MTN, Cell C)
Service Providers
(operator-owned)
Vodacom, MTN & Cell C SP
USERS
Service Providers
(independent)
Autopage Cellular & Nashua
USERS
Operators
(Vodacom, MTN, Cell C)
Service Providers
(operator-owned)
Vodacom, MTN & Cell C SP
USERS
Service Providers
(independent)
Autopage Cellular & Nashua
USERS
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Mobile is a separate market
Mobile and fixed line services are fundamentally different.
Mobile phones have the distinct functional advantage of
portability;
Prices for mobile telephony services are significantly higher than
fixed line services; and
Competition authorities in both the US and EU have ruled that
mobile and fixed line telephony services constitute two distinct
markets.
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Mobile market shares (subscribers)
MTN
35%
Vodacom
55%
Cell C
10%
MTN Vodacom Cell C
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Retail mobile service providers (Pre-paid/ post paid: 83/17 (MTN))
Market shares for mobile contract subscribers
VSP
35.31%
Smartcom
2.24%
MTN SP
25.01%
I-Talk
2.47%
Cell-C
8.24%
Autopage Cellular
13.53%
Nashua Mobile
11.18%
Orion
0.35%Other
1.66%
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Vertical concerns
Much consolidation in downstream mobile service provision market;
2 independentsAutopage and Nashua;
Vodacom owns VSP (Teljoy, GSM Direct, Tiscali and Smartcom)
Vodacom/Tiscali merger (2005): Concerns were notified to the Commission to
the effect that Vodacom was entrenching its market power in the contract
subscriber market by buying out all service providers. The concern was raised
that this would increase its vertical links in the supply chain and allow it to
eliminate all discounts currently given, thereby increasing Vodacom's margins in
a saturated market and entrench their market power to set high prices on a take
it or leave it basis.
MTN has 41% stake in iTalk and owns MTNSP;
Pre-paid marketfierce competition;
MTN has 60% of MTNNS;
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ECA Competition Matters (Chapter10)
Important ECONOMIC concepts:
substantially prevent or lessen competition;
undue discrimination;
regulations defining the relevant markets and market segments;
licensees having significant market power;
define and identify the retail or wholesale markets or market segments; consider the non-transitory (structural, legal, or regulatory) entry barriers;
relative market shares in relevant markets;
Section (6)(b)(ii) similar to Competition Act (12)(A).
discriminationaccess, provisioning of services, interconnection and
facilities leasing;
transparency in relation to access, interconnection and facilities leasing;
separation for accounting purposes;
matters relating to the recovery of costs and costs orientation.
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Main issues
Access to an essential facility (network) and interconnection
issues;
Collusive behaviour;
Barriers to entry and vertical integration;
General exclusionary acts and exclusive dealing;
Foreclosure/ margin squeeze and raising rivals costs (RRC);
Excessive pricing (national and international bandwidth and the
cost of submarine bandwidth);
Predatory pricing/ cross subsidisation and discriminatory pricing;
Inferior technical access;
Tying and bundling;
Refusal to supply/ grant interconnection (access to the peering
link);
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Application SA markets
Telkomde facto monopoly in PSTNother services (mobile and VoIP) maybecome substitutable from a demand perspective;
Any vertical integration into downstream marketsmust be examined;
Wholesale broadband marketdominant technology ADSLTelkom dominantas they own the local access network; (local loop that has been enhanced)
Future substitutes: Wi-Fi and 3G;
Telkoms VANS licence and ADSL offering already numerous complaints
about wholesale access pricing; Future playersEscom and Transtel;
Retail narrowband marketTelkom 2nd position (after MWeb), this market notproblematic;
Retail broadbandADSL and Wireless possible substitutesTelkom dominant;
3G might change this;
Narrow ADSL retail marketTelkom 37% (Mweb 32%, IS 8%);
Fixed wireless retailSentech 67%, iBurst 33%; 3GVodacom 90%;
Telkom and SNO also 3G licences;
Vodacom dominant in mobile voice and broadband (3G);
Vodacom and MTNjoint dominance?
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Vertical concerns Foreclosure andmargin squeeze
Vertical integrationexclusion and leveraging by a monopolist; Telkom- must grow market share of downstream service provision markets;
Foreclosure/ margin squeeze/ raising rivals costs:
i) raising rivals costs by means of either input or customer foreclosure,
ii) ability to promote co-ordinated conduct between competitors, and
iii) ability of a vertically integrated firm to evade price regulation.
Foreclosure especially a problem in network markets;
Margin squeezereduce margin between wholesale and retail pricesmakeentry difficult or encourage exit;
Raising wholesale prices, lowering retail prices, or both;
Vodacom/ Teljoy merger: elimination of strategic outlets could raise rivalscost considerably and inhibit entry into the market;
Margin squeeze tests; Must calculate true access price;
Hungary, Italy, Japan and Turkeyrecent cases where dominanttelecommunications engaged in anticompetitive margin squeeze
Deutsche Telecom was fined 12.6 million euro.
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Other vertical concerns
Exclusive dealingcommon in ICT
E.g. French Carribeanforeclosure of distribution network via exclusivitycontracts with independent retailers by dominant mobile operator;
2ndoperator could not use local maintenance company and had to send phonesto France for repairs;
Exclusivity clauses removed as an interim measure;
Cell C (Vodacom/GSM/Teljoy): The purchase of Service providers to facilitate verticalintegration does not concern our client as much as the practice of limiting the number ofdistribution outlets through exclusivity agreements, either directly or through service
providers or either of the operators. Both Vodacom and MTN appear to be engaging inthese practices, which we believe are anti competitive, and warrant the attention of the
Competition Commission.
Tying/ bundlinge.g. Microsoft in browser market;
SAVA complaintbundling was not referred by CC; SA Mobilee.g. exclusive service providers must obtain handsets from network
operator, cannot source independently;
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Essential facility
Network and essential facility;
Refusal to supply(exclusionary acts)
France Telecom refused a new competitor access to wholesale broadband
internet market
20 million euro finewas doubled by court of appeal;
Excessive pricinginterconnection pricing NB issue; Predatory pricingselling below marginal or average variable costs;
Parallels between predatory pricing/ cross-subsidisation and margin squeeze;
Wanadooa French ISP marketed ADSL services a prices below average cost
(1999-2002). Sustained losses, but market share rose from 46% to 72% Jan
2001-Sept 2002.
Fine of 10.35million euros. Discriminatory pricingeconomic theory predicts outcome may be
ambiguousSAVA complaint.
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Solutions
Access pricingdynamic field in Competition Economics
LRIC
Vertical separationweak and strong forms;
Weakaccounting, functional and corporate separation;
Strongownership separation; assets separated and put under control of
independent entity; club approach; Vertical separationreduce economies of scope, increase transaction costs,
loss of innovation.
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Convergence and the challenge forfixed line operators
Realisation that focus must be on combining telecoms and IT; ECAregulates this process;
Telkom positionSNO and convergence;
Deregulation experiencefixed voice revenues decline ito margin and
proportion of revenues;
Telkom has PSTN and VANS licence;
The provision of IT services combined with connectivity services is emerging as
way fixed telecoms operators can move up the value chain;
Telkom (2005) managing 11961 data sites (55% increase from 2003)
Efficiency gains;
Lower costs;
Technological developments and deregulationconvergenceopportunities formergers increase.
Possible anti-competitive acts.
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Telkom revenue growth and datacontribution