Competition and Regulation in the Telecommunications Industry in ...

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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
Competition and Regulation in TelecommunicationsThe alternative is to maintain a cross-subsidy approach and allow entry intothe business local access on condition of certain residential obligations. Thisappears less attractive as it requires considerable regulatory oversight and isdistortionary and so less preferable to a raising of the USF contribution.Under the more open competition approach, the likely main competitor forlocal access will be mobile. This being the case, the regulator would need toensure that no cross-holdings exist to limit scope for strategic behaviour bythe incumbent.With both the duopoly and open competition model, the incumbent will haveconsiderable market power and scope to limit entry. The regulator will need tohave tight control of prices by the incumbent (but not the entrant), and adoptmeasures to limit entry deterrance and promote entry. These are discussedbelow.5.2.2 Dealing with Entry DeterrenceAs noted in section 4, the primary means for entry deterrence is throughunfavourable interconnection pricing with the PSTN and customer switchingcosts. The regulator has a difficult task in ensuring fair interconnection qualityand access pricing. Interconnection pricing is dealt with in detail in 5.3.The switching cost issue is more clear. For long-distance network competition,pre-selection of default provider should be available and short access codesfor long-distance service providers. Number portability for local access is afurther support policy. If competition in local access is not expected to besignificant anyway, it may be prudent to delay the implementation of fullnumber portability in local access as it has cost implications for the incumbentand any entrant.5.2.3 To Actively Assist Entry or NotEven a so-called level playing field will not always result in significant entryand competition because the incumbent is starting from a position of 100%market share and they still own a strategic resource – information. Informationabout who the customers are and their behaviour. They also have a largeamount of technological learning behind them. As a result, the entrants willremain at a disadvantage. If the regulator is interested in changing the marketstructure of the industry to lower regulatory costs in the long-run, then theycan try favour entrants to ensure more rapid entry. There are a number ofways of doing this:• Reducing sunk costs – allow entrants in local access or long-distance tomake use of poles and ducts of the incumbent to roll out infrastructure• Reducing interconnection prices – allowing below-cost interconnection toallow entrants to overcome initial learning costs• Favourable access to USF subsidies – the auctioning of subsidies toprovide local access would favour new entrant bidders• Reduce universal service obligations – allow entrants to make a lowerpayment to the USF or in the duopoly model, to have lower contractualdemands.55
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