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    Telkom has a point

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    By Duncan McLeod

    Telkom came out guns blazing at Competition Tribunal hearings this week, warning that if it were fined the maximum allowed for alleged anticompetitive behaviour last decade, its business could be put in jeopardy. Does the fixed-line operator have a point or is it all just grandstanding?

    In its closing submission to the tribunal, Telkom doesn’t mince its words. It warns that if the competition authorities impose a large fine on it, it will be “catastrophic” for the company and will “irretrievably jeopardise its viability ”, leading to “disastrous consequences” for the economy and for government, which remains a 40% shareholder.

    Telkom has been accused by the Competition Commission, which believes it has a watertight case, of abusing its monopoly by charging excessive prices, engaging in prohibited price discrimination and withholding services to rival companies. If the tribunal agrees with the commission, it may impose a fine of as much as 10% of Telkom’s 2003 annual revenue, or about R3,5bn.

    The fixed-line operator warns that if the maximum fine were to be imposed — the tribunal hasn’t done so in other cases — then it would plunge the struggling company into the red. It even suggests it could put key services to banks, government departments, the defence force and police service at risk.

    This is melodramatic in the extreme, but Telkom’s argument for mitigation of sentence, if it’s found guilty, is not without merit.

    The alleged anticompetitive abuses date back a decade or more. They happened at a very different time in Telkom’s history, when it was controlled by a voracious foreign management team, led by America’s SBC (now AT&T) and Telekom Malaysia, both of which were hell bent on extracting their pound of flesh from their 30% investment in the operator. They achieved that, but arguably at great cost to the SA economy.

    Telkom argues it was acting within exclusivity rights granted to it by government in return for rolling out infrastructure in underserviced parts of the country. Certainly, Telkom took telephony to rural areas through its DECT wireless network, but people in rural areas either couldn’t afford the services — Telkom hiked local call prices substantially during its five-year state-sanctioned monopoly — or preferred the convenience of mobile telephony, which was booming thanks to the introduction of prepaid services.

    Today, Telkom is a shadow of its former self. In a much more competitive market, its profit margins have come under pressure. It’s not inconceivable that the company will enter a period of protracted financial losses while it restructures to cope in a cut-throat market.

    What needs to be asked is what benefits imposing a large fine now would have on correcting Telkom’s past excesses and on SA’s economy more broadly. The answer is not a lot. Telkom’s ability to impose monopoly rents on customers has largely gone away. Even where it still enjoys a degree of monopoly control, especially in the local loop into homes, it can’t afford to institute big price increases because consumers will switch to mobile options.

    The foreign shareholders that were responsible for pushing the regulatory boundaries of Telkom’s monopoly and for the worst of the company’s excesses have long since sold out. It’s true Telkom was largely responsible for the long delays in the commission’s case reaching the tribunal — it challenged the tribunal’s jurisdiction in the supreme court of appeal (and lost) — but the company has a point when it argues that if penalties are imposed these should be “nominal or symbolic in nature”.

    Telkom’s rivals would no doubt love to see the company forced to cough up billions for its past business practices. But it’s far from clear what such a remedy would achieve.



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