Answer Happy

South Africa needs more competition in its mobile market In therecent State of the Nation address President Cyril Ramaphosa hailedthe South African Competition Commission’s ruling to dramaticallyreduce data prices as “an important step to improve lives, bringpeople into the digital economy and stimulate online businesses”.MASTER OF BUSINESS ADMINISTRATION – ACADEMIC AND ASSESSMENTCALENDAR - DISTANCE REGENT BUSINESS SCHOOL (RBS)- JANUARY 2022 64Late 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? SouthAfricans do indeed pay some of the highest prices for data on thecontinent. The country is ranked 19 out of 46 countries on the RIAAfrican Mobile Pricing (RAMP) Index. The prices of thefirst-entrant operators – MTN and Vodacom – remain high relative toCell C and Telkom Mobile, which dropped their prices in the firsthalf of last year. But the commission’s cuts in retail prices willnot fix poor competitive outcomes in the market. That can only beresolved by regulating the underlying bottlenecks in the wholesalemarket. 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 definemarkets and determine dominance to design the appropriate ex-anteregulation to promote competition. Ex-ante regulations are thosedesigned to protect consumers in the retail market by safeguardingfair competition in wholesale markets where the bottlenecks occur.They design regulations in the interest of delivering affordableuser prices and efficient investments. It’s for this reason thatSouth Africa’s 2005 Electronic Communications Act requires thecommunications regulator to undertake a market review to determineand remedy market dominance. But it has failed to conclude a reviewfor over 10 years. This would have created a more level playingfield for late entrants by reducing the negative duopoly effects ofMTN and Vodacom on the market. 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 retail MASTER OF BUSINESSADMINISTRATION – ACADEMIC AND ASSESSMENT CALENDAR - DISTANCE REGENTBUSINESS SCHOOL (RBS)- JANUARY 2022 65 price reductions. But theright price for data ought to result from effective regulation andcompetition in the wholesale market. Regulator’s failures Theregulator 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 businesssuccess in a fair competitive market. But the dominance of theincumbents, MTN and Vodacom, in the wholesale market prevents thelate entrants, Cell C and Telkom Mobile, from competing fairly andbeing able to exert pricing pressure. This is because data qualityis as important as price. Probably more so. At the height of the#datamustfall campaign South African’s continue to forgo the farlower prices offered by Cell C and Telkom Mobile for the moreexpensive, higher quality network of the dominant operators. Thiswhile the market share of the dominant players continued toincrease at the expense of the late entrants. Vodacom and MTN’sdominance gives them the liquidity to reinvest in their networkinfrastructure, extending coverage and improving quality. Vodacomwas swift off the mark a few years ago. It used the profits fromits successful voice business to invest in its data network. Itquickly became the most pervasive and best quality network. Thisenabled Vodacom (and later MTN when it had woken up to the factthat it could not milk its voice services any longer) to attractmore 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, thishas created a virtuous business cycle for the dominant operators.And a vicious one for smaller operators. MASTER OF BUSINESSADMINISTRATION – ACADEMIC AND ASSESSMENT CALENDAR - DISTANCE REGENTBUSINESS SCHOOL (RBS)- JANUARY 2022 66 Unintended consequences Aswelcome – or as politically expedient – as the commission’sdecision is for cash strapped consumers there are several possibleunintended consequences of the retail price intervention. If thecommunications authority doesn’t address the wholesale issuesurgently, 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 dominantoperators’ prices more attractive, and late entrants unable toaddress critical quality challenges, this will intensify thefactors 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 possibleoutcome is the inhibition of critical network investment. R70billion of MTN and Vodacom’s significant surpluses have gone intonetwork investment over the past three years. This is despite notreceiving any new spectrum during this time. Although prices areindeed too high – and the profitability of the dominant operatorsis excessive – their significant role in the economy has to berecognised and carefully managed. The lack of signalling by thecommission of the nature and extent of the remedies imposed hit theshare prices of Vodacom and MTN. There is no benefit in this foranyone, least of all the country’s fragile, zero-growth economy. Ofparticular concern is that it may result in negative investorsentiment while still failing to address the underlying reasons forthe high communication costs in the country. MASTER OF BUSINESSADMINISTRATION – ACADEMIC AND ASSESSMENT CALENDAR - DISTANCE REGENTBUSINESS SCHOOL (RBS)- JANUARY 2022 67 The commission was at painsto point out that its intervention was a response to the absence ofeffective regulation by the communications authority in thewholesale market. This included the critical issues of releasingthe high demand spectrum that has stifled cost-effective 4Gdeployment 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