Let's not build another monopoly - TechCentral

Let’s not build another monopoly

There is a prevailing view in government — or certainly in the department of telecommunications & postal services — that infrastructure competition in providing broadband is bad.

Nothing could be further from the truth.

At a meeting on Friday with industry players, telecoms minister Siyabonga Cwele said that government’s national integrated ICT policy white paper — which sets out proposed policy for the ICT sector for the next decade — states clearly that competition is good, but that it must be based on services.

The idea is that infrastructure competition is a waste of money, that duplication of networks makes no sense. In fact, rivalry between infrastructure providers is crucial to ensuring South Africa doesn’t become an also-ran in ICT. It is the building of a single wholesale network to the exclusion of all other models — as proposed in the white paper — that’s the terrible idea, the one that is very likely to cost us dearly as a nation.

Without proper interrogation, the idea of a single national network might appear to make some sort of sense. After all, South Africa is not a rich country: can it afford to duplicate networks? It’s more sensible, advocates of a single network model will argue, for operators to pool their investments, reducing their costs in the process and passing on those benefits to end users. Nice in theory.

But there are a myriad problems with creating a single national network, or Woan (wholesale open-access network) as government calls it.

Firstly, and most obviously, the state, in effect, wants to create a new infrastructure monopoly. Has it not learnt its lesson from the 1990s, when Telkom — granted a legislated monopoly — rode roughshod over both competitors and consumers?

Ah, but government will argue, the Woan is different. It’s open access, meaning (in theory) that anyone can use it, and, anyway, the real need is for competition at the services level rather than at the infrastructure layer.

But what if the Woan — which, in terms of the proposed policy, will get access to all future “high-demand” spectrum assignments — chooses a technology that fails to take off in the rest of the world (remember WiMax, Dr Cwele?). If there are multiple infrastructure providers, other network operators might choose to invest in different technologies. There are then alternatives. The Woan’s failure to invest in the right technology might doom it, but at least it won’t take the whole country down with it.

And then there’s the fact that monopolies — no matter how well-intentioned they might be — are inefficient. Even with multiple shareholders, what incentive will the Woan have to provide access at the lowest cost? Competition keeps prices in check, not regulators. If government expects to keep the Woan’s prices down through regulation, then it should ask the industry how successful Icasa and its predecessor Satra were at keeping Telkom’s prices in check between 1995 and 2005.

I’m not saying that there should be a complete duplication of infrastructure in all cases. It makes no sense, for example, for 10 companies to dig up the same suburb to provide fibre to the home. And having every operator building fibre between Johannesburg and Cape Town is equally nonsensical. But it should be up to the market to decide where duplication makes sense and where it doesn’t. When money is involved, operators will tend to eschew duplication of basic infrastructure like fibre sleeves and phone towers. This is especially true in an environment where margins are under pressure.

A key principle behind the white paper and the proposed Woan is that smaller industry players will be able to invest in infrastructure. This is where the concept makes some sense, provided it’s not done to the exclusion of alternative network infrastructure.

Government, through Icasa, could reserve a chunk of spectrum (by no means all of it) for a multi-shareholder consortium made up of smaller industry players interested in participating (government should not be one of the shareholders).

Such a network could provide the price competition that government is seeking, without damaging the sector through the creation of a new infrastructure monopoly.

Vodacom, MTN, Telkom, Cell C and other interested network operators should still be able to get access to exclusive-use spectrum, but a (reasonable) portion of sub-900MHz (digital dividend) spectrum, and perhaps some spectrum at 2,6GHz (for use in denser urban areas), could be set aside for smaller players outside an expensive spectrum auction process.

Beyond that regulatory “favour”, however, investors in the new network should compete with the big boys on the network’s merits. Too much regulation distorts markets and leads to unintended outcomes. The market, for the most part, should be left to sort itself out.

At the same time, to expand coverage in rural areas, a spectrum auction for the big players should require them to reach certain rural roll-out targets (defined by Icasa and based on a proper study) before they’re allowed to use the newly allocated spectrum in the cities. Germany did this to great effect; there’s no reason to believe it won’t work here.

For the sake of the industry and consumers — and the broader economy — let’s not experiment with an all-or-nothing model that hasn’t been tested successfully anywhere else in the world (oft-quoted examples Mexico and Rwanda have not had demonstrable successes with similar approaches). Monopolies — including the open-access wholesale kind — should be rejected because, in the long term, they will do much more harm than good.

  • Duncan McLeod is editor of TechCentral. Find him on Twitter

12 Comments

  1. Nice balanced article, surprisingly no comments yet. I also cannot see much future in Gov running a WOAN.
    Rather leave it to the private sector, even when it means some duplication. At least we will have more competition.
    We just need a very strong and independent ICASA and competition authorities to oversee and referee it all.

  2. If we had government departments that could deliver, there might be limited merit to the argument. As it stands with the current incumbents, it’s a recipe for disaster.

  3. I agree with everything that Duncan is proposing. If rural connectivity is required, tax incentives or licence discounts are the way to do that, not inefficient monopolies.

  4. There are a few problems that need to be addressed:

    – Saying infrastructure competition is good is not entirely valid. There are many examples, such as water, where infrastructure competition is pointless as the cost of the resource in question is so low that private sector competition would actually make it more expensive. We are fast going this way with data. If I were the telcos, I’d start spinning off my infrastructure with the goal of selling it to the public sector in about fifteen to twenty years, then get a nice service contract to keep running it. Mobile network infrastructure will eventually become a loss maker, just as major infrastructure such as water, electricity and public transport have become (or always were). Higher levels of regulation of critical data infrastructure, as we already see in the Cybercrimes bill, will also make it harder to gain profit from those assets.

    – Infrastructure competition is not working in South Africa. If anything, the networks use it as a reason to keep costs high. Even the landing of new sea cables did not drive down costs, even though they could. The players involved effectively did not pass on the savings. It wasn’t until a combination of regulations (MTR) and maverick companies (such as Afrihost) that the market was forced to lower costs. Even then, most players sat on the sidelines,hoping the mavericks would fail and the status quo returns (it took a while before Mweb responded to Afrihost’s lower data prices by offering uncapped services). MTN and Vodacom are really just waiting for Cell C to disappear, then they will be back to their own habits again. They’ve not even really left those old habits behind.

    – This conversation shouldn’t be about infrastructure. It should be about the limited nature of spectrum and the risks of subdividing that spectrum diluting its effectiveness. In such a view, a pure free-market argument isn’t good enough, just as free market ideas shouldn’t be left to run uncontested around water, electricity and other scarce yet vital resources.

    – The need for service-based competition is very important for South Africa’s future as a global economy, but not something the larger networks subscribe to. Telkom, Vodacom and MTN have been anything but pioneers of service-based offerings, even though they are by far the best prepared to offer those. All their service-based offers have been reactionary and some have even fought against services or tried to have tariffs enforced on them. At best they started bolstering their offerings with acquisitions, which pretty much admits they never developed real capacity internally for service-based offerings. When they did do their own thing, it flopped (which is probably why Vodacom partnered with Showmax than develop its own VOD service). These are the same companies who gain the most from infrastructure competition. We cannot pretend the two are not related. Infrastructure competition suits the business models of the large companies, who in turn have been using their clout to make it harder for smaller players. I’d support the whitepaper if only because it will break that particular strangehold on the market.

    The mistake here is to assume we even have infrastructure competition at the top levels of SA’s telecommunications. The column argues that monopolies are inefficient. Well, we are already in a monopoly situation. We never really left it since 1994. It’s all good and well shooting down the whitepaper, but I don’t hear suggestions of how we can fix the market.

    We keep putting this through a prism of the Government’s behaviour. Since when did we stop criticizing the networks, which have been doing even more damage?

  5. Like the ‘competition’ we currently see in the mobile arena? How’s your data prices? Mine are still pretty steep.

    Agreed on ICASA. But a strong ICASA won’t miraculously solve this problems. We are dealing with a very powerful and entrenched culture. Also, a ‘strong’ ICASA would have to require purging the former network employees at the regulator and former ICASA employees at the networks.

  6. Have we forgotten load-shedding already?

    All Networks (despite redundancy etc) experience outages from time to time.
    Are we ready for a mass network failure that affects the entire Nation?

    The operators wouldn’t care because everybody is affected and not a single operator would lift a finger to fix this.

    Differentiation in terms of Network Uptime, Drop Call Rates, Speeds etc is what differentiates networks and gives us choice.

    Networks that are better run with better management and motivated staff give better service to their customers and deserve to charge a premium for their product.

  7. How much are you paying for Electricity?

    What about ADSL?

    Don’t assure that because the Govt controls something it will become cheaper…. the opposite is often true.

  8. So agree Duncan. Reading another article in today’s TechCentral that the ‘late-comers’ CellC are ‘north of R20bn in debt makes me wonder how much MTN and Vodacom have invested. Government’s well-intentioned meddling would, in my opinion, be a damper on private enterprise’s appetite for massive investment to continue the growth.

  9. I fully agree with the Duncan, let’s not build a (WOAN) monopoly, but equally important, let us undo the oligopolies. The South African economy is notoriously rife with oligopolistic arrangements. If it’s not in bread, and cement industries, it’s in the construction industry or among the Rating Agencies and, recently, the Banks (the list goes on). The Competition Commissions, here and abroad, are snowed under. Oligopolies retain market control through barriers to entry, exclusive resource ownership, patents and copyrights as well as high start-up cost. This is what the ICT White Paper seeks to disrupt.

  10. techcentralzanew on

    Yes, yes and yes!! 🙂

    Build the Woan (it might change the market for the better), but don’t throw the baby out with the bath water… 🙂

    Duncan