Competition and Regulation in the Telecommunications Industry in ...

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Competition and Regulation in TelecommunicationsAgain the key question is how will the market change if entry was liberalised.In answering this question for mobile, it is important to separate the networkprovision from the service provision, as the barriers to entry are considerablydifferent.Barriers to entryIn the network component the barriers to entry include:• Sunk costs – if the network provider is required to roll out a completenationwide network (as is the case in South Africa), then the sunk costswill clearly be high. However, with mobile, as opposed to fixed line, thelevel of infrastructure required depends on the level of traffic (see section1). The result is that there is a lower investment required to launch aservice, but which can rise in proportion to the growth in subscribers. Thismakes entry easier and more likely that the industry can support morethan one or two network providers. A further means of easing the entry ofa new network is to allow the use of infrastructure from competing networkproviders until a full network is up and running. The reduction in time toenlist subscribers means that the entrant can start generating a return ontheir investment sooner, thereby lowering costs of establishment.• Interconnection pricing – as with any network, a mobile network needs toconnect to all other networks in order to provide their subscribers with thechance to call anyone else. The key interconnection prices are fixed localaccess, other mobile networks and long-distance. There are similarconcerns about overpricing of interconnection, especially when there is adominant player in the mobile networks or a player that isvertically/horizontally integrated into other markets (long-distance or localaccess). The dominant player concerns were discussed in detail underlocal access. Problems are non-standard pricing, delaying interconnection,or overpricing interconnection. For the vertically integrated/horizontallyintegrated firm there are opportunities to engage in transfer pricing fromthe competitive segment to the uncompetitive segment. If there is a localaccess monopoly with a mobile network, it may be in their interests toraise local access interconnection prices for all mobile networks (includingtheir own). There is no fear of retaliation in the local access market wherethere is no competition, and overpricing enables them to extract rents fromother mobile providers and also affect the overall substitutability of mobilewith fixed line.• Facilities leasing – similar concerns to interconnection arise on facilitiesleasing. The difference is merely the nature of the contract, but theproblems of strategic pricing of facilities remains the same.• Customer switching – customer switching costs include the usual numberswitching issues, but also would include the use of long-term contracts bythe current service providers (linked to specific network providers). Longtermcontracts are part of the product range offered by service providers(including pay-as-you-go) and serve the customer by providing a chanceto ‘hire’ a phone as part of the contract – thereby saving them from thepurchase price. However, the length of contracts would need to be46
Competition and Regulation in Telecommunicationsexamined more closely to see whether they constitute significant barriersor not.The entry of service providers is far easier. The sunk costs include a retailnetwork and customer billing system. However, they also need to beapproved by the network providers so some quality assurance is required.This is justifiable on business grounds. Only if the network provider hasvested interests in another service provider, is there a potential cause forconcern around discriminatory behaviour to favour their service provider.Likelihood of entryThe lower initial sunk costs involved in mobile network establishment meansthat the market is able to sustain far more network operators. The existence ofscale economies does mean that a limited number of competitors will exist,especially if they are limited to provide a national service. The level ofcompetition is likely to be fiercer in mobile networks because there was noinitial monopoly.4.5 Value-added Network Services (VANS)4.5.1 Relevant marketsThe VANS sector can be separated from basic voice. The sector comprises ofa number of potential horizontal markets that will receive greater clarity inspecific complaints and investigation. The market can be split roughly intopublic data services (Internet provision) and private data services. Each ofthese may be further sub-divided. For instance, it may be possible to subdivideInternet based on access mode. Currently, Internet content andservices delivered to mobile phones differ from that delivered to PCs on fixedlines. The key difference is the smaller screen and no broadband, and so theservices are more limited. Although 3G cellular will bring broadband, it will stillretain the small screen and so this market division may persist. It may also bepossible to separate fixed line access into dial-up and leased line access.Vertical divisions could include the separation of customer management fromnetwork management (core backbone). However, in relation to generaltelecommunications regulation, the markets can be considered as one.4.5.2 Market structurePublic data networks (Internet)Internet access includes both leased line and dial-up access. South Africaranks 25th in the world in terms of number of Internet sites. There are anestimated 2.5 million Internet users in South Africa (media africa.com 2000).Telkom provides the physical infrastructure backbone for Internet as theyhave a monopoly over this component. The leased networks are thenmanaged by various companies including The Internet solution, Pipex InternetAfrica, Sprint SA, SAIX, OpenNet, and UUNet. Of these, SAIX (Telkomowned)offers a full infrastructure for Internet service providers (ISPs),allowing even small niche players to establish and run an ISP withoutinvesting in actual points-of-presence (PoPs) to connect to the local switch.47
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