Econex Presentation 1

8/12/2019 Econex Presentation 1

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Competition issues in vertically integrated

telecommunications markets in SA

30 November 2006

Dr. Nicola Theron

[email protected]
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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3

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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5

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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10

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


Uunet


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


INTERNET SOLUTIONS


Uunet


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

Documents

Econex Presentation 1