Competition and Regulation in the Telecommunications Industry in ...

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Competition and Regulation in Telecommunications• on a common national pricing system, cellular is more expensive thanfixed line access.• Many customers make use of both suggesting they are not substitutes butcomplements• The two are regulated separately in most countries which suggests thatthey are considered separate marketsAlso, the current level of substitutability may have been enhanced by twotemporary factors:• Excess demand for telephony that existed when cellular operators werelicenced - excess demand raises the effective price of fixed line for thosewithout access (because they incorporate the cost of waiting) making ahigher priced cellular a closer substitute.• Public monopoly – Telkom is less efficient than many international playersin liberalised markets and may also be pursuing monopoly pricing. Thecombination of possible inefficiency and monopoly pricing means thatprices may be inflated making them more substitutable with the moreexpensive mobile technology.It is difficult to determine whether the level of substitutability in South Africa issufficient to have mobile and fixed categorised in the same market. It is alsounclear whether the level of substitutability may actually decrease as soon asmore competition is introduced into fixed line market and saturation of localaccess demand is reached. What is clear is that they are usually regulatedseparately and so considered separate markets. It may therefore be wise toadopt a more cautious narrow market definition for now, separating fixed linelocal access from mobile.However, it is going to be important to review this periodically. In particular,given the more rapid rate of technological change in mobile, specificallyimpacting on costs and bandwidth (UMTS), the market boundaries may wellchange and the two considered sufficiently substitutable.The second case is to see if fixed access should be split further. The divisioninto cable, fixed wireless and PSTN does not seem a suitable division as allare merely alternative means of delivery of what is essentially a fixed localaccess product. Regulatory practice also usually places them in the samemarket, suggesting that this is the case. The one dimension on which todifferentiate may be bandwidth. However, for telephony this is not an issue, itis only an issue for VANS. Further, the PSTN can provide broadband accessat a higher monthly rental fee. The conclusion would therefore suggest thatcable and fixed wireless should be included in the same market and merelyconsidered different technological options but still offering the same service.The provision of local access can be split horizontally into business andresidential customers. The reason for this is the very different usage patternsand the density of demand. These serve to make business customers muchmore profitable, as there are lower installation costs and higher usage ofcapacity.38
Competition and Regulation in Telecommunications4.2.2 Market structureFixed local access is provided exclusively by Telkom. This exclusivity periodis due to end in May 2002, but with the option to extend for an additional yearif Telkom meets a certain proportion of its proposed rollout to under-servicedareas and network performance targets by the end of 2001.4.2.3 ContestabilityThe primary barrier to entry is of course the regulated monopoly. A keyquestion for competition analysis is whether the deregulation of the sectorwould result in entry in South Africa. Entry can be defined as both complete(offering services to the entire market) or partial (servicing only a componentof the market). This requires a focus on the other barriers to entry that exist inthe fixed local access market. The discussion of entry barriers also examineshow specific regulatory decisions may impact on the size of the barrier facedby potential entrants.Entry Barriers• High sunk infrastructure costs – the high level of sunk costs (as discussedin section 1) are why local access is considered to be the only naturalmonopoly component in the telecommunications production chain. Theexcess capacity at the local access level also implies that it is sociallywasteful to duplicate resources, adding to the natural monopoly concerns.The high sunk costs imply low marginal costs, allowing the incumbentspace to pursue a credible predatory pricing strategy to deter entry.These costs can be reduced if the entrant has an existing localtransmission infrastructure that they can ‘piggyback’ on. It is for this reasonthat the majority of entrants at the local level in other countries are cableoperators who have incurred much of the fixed costs of putting in a localloop already. However, there are currently no cable operators in SouthAfrica. Another possibility is the fixed wireless approach where costs aremore closely related to traffic volumes and so less investment is requiredinitially. Finally, the regulator could grant an entrant permission to‘piggyback’ on the incumbent’s infrastructure (poles and ducts).An alternative strategy, and one being mooted by ICASA, is to grant asingle entrant protection from further competition in all sections of themarket (incl. long-distance) – i.e. licence a second national operator (SNO)only. The rationale is to provide the entrant with higher profits toincentivise them to make the sunk investments. The problem with thisstrategy is that it usually favours the incumbent more than the entrant, asthey are the ones with a greater market share over which to makeabnormal profits. Other problems include the lack of incentives for theentrant to serve low-usage customers (resulting in a cherry-pickingstrategy), and a questionable impact on long-term structural change andcompetition. This was the UK experience, with Mercury (the entrant)concentrating on business customers and selected households. In fact,Armstrong et al (1995:241) note of the British duopoly policy, “(t)hedeliberate restrictions on competition contained in the duopoly policy,together with insufficient attention paid to overcoming BTs incumbency39
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