Competition and Regulation in the Telecommunications Industry in ...

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