South Africa needs more competition in its mobile market In the recent State of the Nation address President Cyril Ramap

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South Africa needs more competition in its mobile marketIn the recent State of the Nation address President Cyril Ramaphosahailed the South African Competition Commission’s ruling todramatically reduce data prices as “an important step to improvelives, bring people into the digital economy and stimulate onlinebusinesses”.Late last year the Commission told dominant operators to reducetheir retail prices by between 30% and 50% within two months. Butwill the proposed interventions produce these outcomes?South Africans do indeed pay some of the highest prices for data onthe continent.The country is ranked 19 out of 46 countries on the RIA AfricanMobile Pricing (RAMP) Index. The prices of the first-entrantoperators – MTN and Vodacom – remain high relative to Cell C andTelkom Mobile, which dropped their prices in the first half of lastyear.But the commission’s cuts in retail prices will not fix poorcompetitive outcomes in the market. That can only be resolved byregulating the underlying bottlenecks in the wholesale market.These include the costs of roaming and facilities leasing.The bottlenecks are correctly identified in the commission’ssummary report. It urges the sector regulator – the IndependentCommunications Authority of South Africa – to remedy the situationurgently.Telecommunications regulators around the world define markets anddetermine dominance to design the appropriate ex-ante regulation topromote competition. Ex-ante regulations are those designed toprotect consumers in the retail market by safeguarding faircompetition in wholesale markets where the bottlenecks occur. Theydesign regulations in the interest of delivering affordable userprices and efficient investments.It’s for this reason that South Africa’s 2005 ElectronicCommunications Act requires the communications regulator toundertake a market review to determine and remedy market dominance.But it has failed to conclude a review for over 10 years. Thiswould have created a more level playing field for late entrants byreducing the negative duopoly effects of MTN and Vodacom on themarket. One such effect is high prices.Prices and profit levels of the incumbents are high, as thebenchmarking by the commission correctly shows. This indicates thatthe operators could accommodate retailprice reductions. But the right price for data ought to result fromeffective regulation and competition in the wholesale market.Regulator’s failuresThe regulator has failed for more than a decade to finalise thiscritical determination. It has undertaken the market review threetimes at enormous public expense, twice to completion. Last year itmade an interim finding on markets but failed to propose remediesfor dominance.Operators should not be penalised for their business success in afair competitive market. But the dominance of the incumbents, MTNand Vodacom, in the wholesale market prevents the late entrants,Cell C and Telkom Mobile, from competing fairly and being able toexert pricing pressure.This is because data quality is as important as price. Probablymore so. At the height of the #datamustfall campaign SouthAfrican’s continue to forgo the far lower prices offered by Cell Cand Telkom Mobile for the more expensive, higher quality network ofthe dominant operators. This while the market share of the dominantplayers continued to increase at the expense of the lateentrants.Vodacom and MTN’s dominance gives them the liquidity to reinvest intheir network infrastructure, extending coverage and improvingquality. Vodacom was swift off the mark a few years ago. It usedthe profits from its successful voice business to invest in itsdata network. It quickly became the most pervasive and best qualitynetwork.This enabled Vodacom (and later MTN when it had woken up to thefact that it could not milk its voice services any longer) toattract more customers, and become more profitable. This placed theoperators in a better position to enhance the quality of theirnetworks by re-engineering their existing networks to offercompetitive 4G services. This was in the absence of the regulatorreleasing this high-demand spectrum allocated for 4G use for oversix years.Even in the absence of anti-competitive practices, this has createda virtuous business cycle for the dominant operators. And a viciousone for smaller operators.Unintended consequencesAs welcome – or as politically expedient – as the commission’sdecision is for cash strapped consumers there are several possibleunintended consequences of the retail price intervention.If the communications authority doesn’t address the wholesaleissues urgently, the outcome could be that Vodacom and MTN, withdramatically reduced prices, will attract price-sensitive usersfrom the late entrant networks. This would leave Cell C and TelkomMobile unable to compete on either price or quality.With dominant operators’ prices more attractive, and late entrantsunable to address critical quality challenges, this will intensifythe factors driving subscribers to the dominant operators’networks.The public focus has been on the mandatory retail price reductionsfor operators and the immediate relief it would provide toconsumers – but policy makers and the regulators should considerpossible unintended consequences of this intervention for thecritical sector to the new economy.Undoubtedly, one possible outcome is the inhibition of criticalnetwork investment. R70 billion of MTN and Vodacom’s significantsurpluses have gone into network investment over the past threeyears. This is despite not receiving any new spectrum during thistime.Although prices are indeed too high – and the profitability of thedominant operators is excessive – their significant role in theeconomy has to be recognised and carefully managed. The lack ofsignalling by the commission of the nature and extent of theremedies imposed hit the share prices of Vodacom and MTN.There is no benefit in this for anyone, least of all the country’sfragile, zero-growth economy. Of particular concern is that it mayresult in negative investor sentiment while still failing toaddress the underlying reasons for the high communication costs inthe country.The commission was at pains to point out that its intervention wasa response to the absence of effective regulation by thecommunications authority in the wholesale market. This included thecritical issues of releasing the high demand spectrum that hasstifled cost-effective 4G deployment in South Africa.(Source:https://www.theafricareport.com/24209/s ... le-market/)2.1 Describe the characteristics of the mobile market structure andidentify the type of market it belongs to. (15)2.2 Taking into consideration the conditions for successfulcollusion, discuss the extent to which collusion is likely in themobile network market. (15)