Competition and Regulation in the Telecommunications Industry in ...

Competition and Regulation in TelecommunicationsClearly this approach has a stifling effect on competition – that is why theincumbent, main contender and revenue-maximising government support theapproach, and the rest of the industry does not. The approach has some meritif it is able to permanently alter the market structure of local access in theshort exclusivity period allowing the regulator to ‘exit’ control of incumbentpricing in the medium term. Evidence from other countries suggests that thisis unlikely to be the case. The UK pursued this model and after a seven yearduopoly period the incumbent still had 97% of the residential local accessmarket, 87% of the business local access market and 76% of the Internetmarket. Clearly this policy had no significant long-run impact on the marketstructure and no reduction in regulatory activity and hence regulatory cost.The approach may also has merit if it is able to significantly raise access totelephony by residents of underserviced areas (social goal). This is also aquestionable assumption. The primary tool for universal service will be thenon-distortionary USF, which raises money from a tax on alltelecommunications operators. The duopoly approach is an attempt tosupplement this with internal cross-subsidy – an inefficient alternative that willhave business local access and long-distance supporting residential access.Raising the penetration of telephony is probably better served through raisingthe USF tax rather than distorting competition, especially if the adjustment hasto come eventually.Open Competition ApproachEvidence from most countries suggests that in the residential local accessmarket there is a considerable natural monopoly element resulting in theincumbent remaining highly dominant even with completely open entry. Ifduopoly is not going to succeed in changing this either, then tight regulation oflocal access will remain a part of regulatory life for the foreseeable futureregardless of entry strategy. If this is the case, it seems that one should reapthe gains from competition in other parts of the telecommunications marketnow rather than later, while supporting some long-term market structurechange in local access.This approach would open up the market for long-distance network and resaleto make this a competitive component. This is a potentially competitive marketand so is likely to see entry. It also offers significant gains for business andthe Internet, both of which make considerable use of the long-distancenetwork. In this way the policy supports the intermediate role of the sector ingrowing business in South Africa.In the local access market there are two possible approaches. One approachwould be to open entry completely. In this scenario, entry is likely to occur inthe business component, linking businesses to the long-distance networks (asin the USA). If the incumbent is cross-subsidising residential then the amountof bypass will be greater. To ensure that the incumbent is not overly exposedto bypass, the universal service approach should be entirely through the USFand not built into contracts. Entry could also be encouraged into residentiallocal access through bidding for USF funds to install local loops inunderserviced areas (a successful USA approach).54