CompCom takes a machete to South Africa's telecoms industry - TechCentral

CompCom takes a machete to South Africa’s telecoms industry

The Competition Commission’s threat to prosecute MTN and Vodacom if they don’t immediately reduce data prices, coupled with its demand that all operators offer free daily data to South Africans, has been welcomed in many quarters.

This is wrongheaded, but predictable. The commission’s final report on the data services market in South Africa is, frankly, an embarrassment. It amounts to regulatory overreach and dangerous populism that could threaten billions of rand in planned investments in the coming years. It should be condemned in the strongest possible terms.

In essence, the commission is taking a regulatory big stick (no, make that a machete) to the industry to try to remedy problems that exist in large part because of telecommunications policy (read: government) and regulatory failure over the past 25 years. It’s attacking the wrong target.

Bizarrely, a full 48 hours after the commission announced the summary findings and recommendations, the final report still isn’t available on its website – unacceptable given the vast destruction in shareholder wealth it’s unleashed in that time. MTN said on Wednesday it has not had sight of the document, so presumably the other operators are also still in the dark.

Based on the summary document, the commission has done decent background work in trying to understand the industry and identifying problems that are impeding competition in the sector. That’s good; it’s its job. The problem lies in the radical and populist interventions it’s proposing.

It found that data prices in South Africa are “expensive”, especially relative to other African markets, and in the case of Vodacom said these are “excessive”. Much higher charges per megabyte for small data bundles relative to larger ones unfairly punish the poor, who can’t afford big bundles, it said – a fair point. And price-based competition is inadequate, with smaller players Cell C and Telkom “unable to constrain the two first movers” (Vodacom and MTN).

Interventions

To recap in brief, key interventions the commission has tabled include:

  • Vodacom and MTN must independently reach agreement with the commission on substantial and immediate reductions on tariff levels, especially prepaid monthly bundles, within two months of the release of the report, or face prosecution. “The preliminary evidence suggests that there is scope for price reductions in the region of 30% to 50%.”
  • Vodacom and MTN must reduce the headline prices of all sub-500MB 30-day prepaid data bundles to (warning: mouthful ahead) “reflect the same cost per megabyte as the 500MB 30-day bundle, or cost-based differences where such cost differences have been quantified, as well as the cessation of partitioning strategies that contribute to anti-poor pricing and/or inferior service outcomes”. It’s not entirely clear what that means, but it may imply that the per-megabyte cost of prepaid bundles must be the same as contract/post-paid options. We won’t know for sure until the final report is published.
  • Vodacom and MTN must cease partitioning and price discrimination strategies that may facilitate greater exploitation of market power and anti-poor pricing.
  • All mobile operators must reach agreement with the commission within three months to offer all prepaid subscribers a lifeline package of daily free data to ensure all citizens have data access on a continual basis, regardless of income levels. The amount of free data must still be determined but must be “sufficient to ensure each citizen’s participation in the online economy and society”. It will be adjusted upward annually.
  • All mobile operators must comply with an industry-wide approach to zero-rating access to content from “public-benefit organisations and educational institutions”.
  • Legislative changes must be made to facilitate “cost-based access” to operator’s networks.

There are other interventions, especially in the wholesale market, but for the sake of brevity, I haven’t included them here. I do recommend reading the full summary findings here (PDF).

The biggest problem here is the way the commission intends intervening directly in the business models and retail pricing of the operators. If Vodacom and MTN don’t immediately cut their prices, they will face the full wrath of the law, the commission has warned. Where else do authorities try to set retail prices in sectors not controlled by monopolies? Venezuela comes to mind. Zimbabwe has tried it, too. Are we really that stupid that we think it will work here? It won’t.

The author, Duncan McLeod, argues that the Competition Commission has grossly overreached and risks damaging the telecommunications sector

And free data for all South Africans? What a marvellous idea! That will help grow the economy! In fact, imagine the impact on GDP if every small business owner got a free tank of diesel each month from Engen or Shell or BP. And why stop there? Food prices are high for the poor, so why not force McDonald’s or Steers to give everyone a free hamburger every so often? You see where this is going?

Socialists love free stuff. It’s why it’s often joked that the only problem they have is they soon run out of other people’s money. There’s no difference when it comes to Internet access. Yes, having data is important to participate in the modern economy. But so is having access to transport. Why not force minibus taxi owners to give free rides to commuters? You get the picture. It’s not how the world works, even if politicians like minister Ebrahim Patel, whose portfolio includes the Competition Commission, think it is.

The longer-term threat here is that MTN and Vodacom – and other operators – go on an investment strike in protest at the commission’s plans. Alone, these two companies invest in the region of R20-billion/year in infrastructure. They spend far more in this country than they do in the other markets across the continent in which they operate, including Nigeria, which has a much bigger population.

Both operators are watching the liberalisation of Ethiopia’s economy with keen interest and are keen to secure lucrative licences to operate there. It would be so sad if they decided, as a result of the commission’s interference in their businesses, that it’s better to redirect a big portion of their spending to other markets where they’re treated less shabbily.

It’s instructive – but not surprising – that the commission’s summary report fails to point a finger at government and regulatory failure in South Africa’s telecoms sector, which allowed Vodacom and MTN to become as dominant as they are in the first place. I hope more than passing reference is made to this in the full report, but I’m not holding my breath.

Failures

These failures include not liberalising the market quickly enough, protecting Telkom from competition, failing to allocate spectrum, not allowing the free trade in spectrum, bungling the digital migration project (and doing so in the most spectacular way possible), allowing call interconnection fees to stay far too high for far too long (preventing Cell C from emerging as a strong competitor) and not crafting policies and regulations to help the industry reduce costs. The list is long.

Instead of a socialist-style incursion into what is largely a successful sector (despite the myriad, mostly government-created problems it faces), the Competition Commission should withdraw this report and go back to the drawing board. It won’t, of course, which means years of legal battles, industry paralysis and, yes, even investment strikes lie ahead.  — (c) 2019 NewsCentral Media

  • Duncan McLeod is editor of TechCentral

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