Competition and Regulation in the Telecommunications Industry in ...

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Competition and Regulation in Telecommunications• Interconnection pricing – a long distance call must originate and terminatein a local access network. As such, the cost of interconnection will impacton the overall cost of the long-distance call. Unless the incumbent isvertically separated (as with AT&T), there is a danger that the incumbentcan set interconnection rates at higher levels for competing long-distancenetworks and so raise the costs of their rivals. As discussed in the localaccess section, there are also dangers of delaying interconnectionagreements to raise rivals costs. The other danger with interconnection isthat the incumbent offers a lower quality of connection to competing longdistanceproviders, making their service less attractive to subscribers.• Facilities leasing – as with interconnection pricing, the price at whichfacilities are leased will influence the price of rival’s costs. If the entrantneeds to lease facilities as a short-term measure, then the price of leasingwill be an important influence on average costs. It is clearly in the interestof the incumbent to overprice these services. The preferable arrangementis for the leasing price to at least reflect long run costs of providing thefacilities. However, it is also feasible that the incumbent price below cost inoff-peak periods to get rid of excess capacity.For long-distance service providers the barriers to entry are substantially less.Service providers lease network capacity from network providers and thenresell it to subscribers on a per minute basis. The infrastructure they require isa billing system and a switch connection to the long distance provider’s pointof-presence(they are routed through the local access network like all others).However, service provider’s face the same customer switching costs ascompeting network providers. In liberated markets the pre-select option israrely made available to service providers because of the highly contestablenature and proliferation of suppliers. Service providers also face the problemof interconnection pricing and facilities leasing. The facilities leasing is more ofa problem for service providers than network providers because they lease allfacilities and not just where they have not rolled out.Likelihood of entryEntry into long distance network and service provision is highly likely in SouthAfrica if the market were liberalised. On the network side, Transtel and Esitelalready have networks in place, and international network providers alreadyexist but cannot sell directly to the subscriber. Given the growth in data traffic,there is considerable scope for other entrants into the market. Opening resaleand network competition at the same time makes it highly likely that initialcompetitors will lease facilities while they establish their own networks. Thiswill accelerate the process of competition. Competition in service provision iseven more likely given the low costs of entry. However, the regulatorydecisions around facilities leasing, customer switching and interconnectioncosts will have a considerable impact on the entry of firms and the coverageof their networks.44
Competition and Regulation in Telecommunications4.4 Mobile4.4.1 Relevant MarketThe discussion of the relevant market in fixed local access determined thatmobile access was not a substitute for fixed local access, though it may beconsidered as such in the near future. Also on the horizon are the so-called3 rd generation cellular services (UMTS). These can be separated from thecurrent 2 nd generation GSM networks in that they have broadband capacityand so are able to provide a range of product options that the GSM networkscannot. Although these can be seen as two distinct markets, there areeconomies of scope in their production. Finally, network provision can beseparated from service provision.4.4.2 Market structureThere are currently two network providers, MTN and Vodacom, with a thirdnetwork licence currently being issued to Cell C (pending litigation). Themajority shareholder in MTN is M-Cell and in Vodacom is Vodafone andTelkom (50%). The large shareholding of Telkom is potentially a cause forconcern, especially as mobile is increasingly becoming a substitute for fixedlocal access. This shareholding gives Telkom the chance to act strategicallyto influence the degree of substitutability and transfer price betweencompetitive and uncompetitive markets. The market shares have stabilised ataround 61% for Vodacom and 39% for MTN (Telkom 2001). Given that themarket has grown at almost 50% per annum, the primary concern of bothnetwork providers is signing up subscribers, and not competing on price towin subscribers away from the other network. Recent estimates are that if CellC entered the industry at this point, they would only secure a 10% share ofthe market by 2003 (Business Report 19 February 2001). TheTelecommunications Act requires the regulator to examine whether a fourthlicence is desirable or not.The network operators do not deal directly with the public but wholesaleairtime to appointed service providers who in turn retail network access to thepublic or corporations using their own tariff structures. The service providerscurrently appointed to each network are:• MTN network – Autopage Cellular, M-Tel, Nashua, Nedtel, PlesseyCellular, Radiospoor Cellular, Sebcom, Supercall, Transtel and TTC.• Vodacom network – Afritel, Autopage Cellular, Cellphones Direct, GSMCellular, Nashua, Nedtel, Plessey Cellular, Radiospoor Cellular, Supercall,Teljoy and Vodac4.4.3 ContestabilityThe primary barrier to entry for network provision is regulation – the need for alicence (currently restricted to three). In service provision there is lessregulatory intervention but service providers need to be approved by thenetwork providers for reasons of protecting their reputation and customerservice levels.45
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