Competition and Regulation in the Telecommunications Industry in ...

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Competition and Regulation in TelecommunicationsSouth Africa does not have a cable TV operator, this is not a source of entrynow. It is also unlikely to be the case in the future, as a cable TV companywould only be interested in a small group of high income earners, plus thechoice of technology for pay TV in South Africa is satellite (Multichoice andSentech). The low teledensity in South Africa suggests that the entrant maybe tempted by the number of unserviced areas. However, the reality is thatthey are unserviced because they are the least viable group of potentialsubscribers. Therefore, unless the universal service funding was sufficient tomake these customers profitable, they are unlikely to be served by theentrant. Clearly entry at the residential level is unlikely to be significant unlessthere is significant incentives from the regulator for entry, including puttingrollout conditions in the licence, providing access to universal servicesubsidies, having favourable interconnection agreements and possiblylowering competition in long-distance through a duopoly policy to allow themto cross-subsidise services. Either way, the entrant is unlikely to get asignificant share of the local access market to act as a disciplining effect onthe incumbent. Rate regulation of the incumbent will be the primary tool forensuring the protection of consumers against abuse of dominance.4.3 Long Distance4.3.1 Relevant MarketThe long distance market can be separated into national and internationalnetworks. It is also possible to talk of network providers and service providersin the long-distance market (unlike the local access market). There is littlereason for separating the market in any other way, as most long-distancenetworks are now fibre-optic and so can carry voice, data and broadcastquality. Choice of technology also matters less.4.3.2 Market structureThe network infrastructure for long distance is predominately owned byTelkom, but other network providers exist. In the national long distancemarket, Transtel and Esitel (the telecommunications arms of Transnet andEskom), have considerable long-distance infrastructure that is used for privatepurposes and which Telkom can lease capacity for public purposes. Thisprivate network exists for historical reasons. In the international long-distancemarket, there are a large number of international players that operate fibreoptic and satellite facilities that cover South Africa. They exist because theirinfrastructure is not located on South African soil and so cannot be regulated.Sentech holds capacity in satellite broadcasting services.Despite other infrastructure providers existing, Telkom has exclusive rights tooperate a long-distance network in South Africa. Therefore these companiesare forced to lease to Telkom who then provides the public service. TheTelkom monopoly means that the prices of all other services that use longdistancenetworks (mobile, Internet, VANS) are determined by Telkom. If thismarket structure leads to cost inefficiencies, underinvestment or monopolypricing, then the impact affects the full range of telecommunications products.42
Competition and Regulation in Telecommunications4.3.3 ContestabilityThe primary barrier to entry for network and service provision is of course theregulated monopoly. Again the key question is how will the market change ifentry was liberalised. In answering this question for long-distance, it isimportant to separate the network provision from the service provision, as thebarriers to entry are considerably different. Entry can also be partial orcomplete. Partial may include business or metropolitan areas only, whilecomplete would include a national service.Barriers to entryThe barriers to entry for network providers include:• Sunk costs – the long distance network has fewer sunk costs to a full localaccess network. In addition, long distance is not considered a naturalmonopoly because excess capacity is not a problem. The collecting oflocal traffic and funnelling it down a single long distance network ensureshigher capacity utilisation and scope for more than one network toprofitably exist.The level of sunk costs for long-distance networks can be more easilylowered than in local access. First, there are more established networksdelivering other services making economies of scope possible (includerailway, electricity). Also, satellite is a viable alternative to fixed line givenhigh capacity utilisation rates. Finally, in South Africa there exist privatenetworks with a national long-distance network already installed that hasspare capacity. The incremental cost of providing the service to localaccess subscribers involves providing a point-of-presence (PoP) switchand extending the network to areas that are not covered yet.The sunk costs can be lowered for initial entry if the entrant is able to leasecapacity from the incumbent on entry while they roll out a more completenetwork (those that intend getting a full network). This is the equivalentissue to allow a new mobile network operator to roam on existing networksduring the rollout period.• Customer switching costs – customer switching costs between longdistance networks are focused on the dialling process. If there are morethan one long-distance providers, then it is necessary for the subscriber tomake the choice. Given that the incumbent is going to be the naturaldefault if no specific choice is made (because they own the local accessnetwork), this offers the incumbent a distinct advantage over competingnetworks. The worst possible scenario is if the customer has an incumbentdefault and needs to tap in an access code to use a competing longdistance provider. The longer this code is, the higher are the switchingcosts.The least distortionary means is to have the customer pre-select the longdistanceprovider of choice and then any long-distance call without anaccess code will be routed through their network of choice. If thesubscriber wishes to override their selection, then the access code can beused. However, it is preferable that as short as possible access code isused to limit switching costs.43
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