Tribunal fines Telkom R449m for 'bullying'

The Competition Tribunal has fined fixed-line operator Telkom R449 million for abusing its monopoly between 1999 and 2004, in what is the first competition decision to be handed down against the telecoms group.

According to the judgement, the tribunal found Telkom had refused to supply essential facilities, which limited competition in the sector. It did not find enough evidence to support an excessive pricing argument.

The penalty is substantially less than the R1 billion the Competition Commission wanted to be imposed on Telkom for its alleged refusal to provide essential services, but is 65 times higher than the fine Telkom submitted would be appropriate should the tribunal find against it.

The tribunal's decision, which has taken eight years to be handed down after the commission referred the matter to it in 2004, has been marred by several delays, including a legal battle over jurisdiction that was sorted out by a November 2009 Supreme Court ruling. Telkom has six months to pay half of the penalty, while the balance is payable within 12 months of that.

The case stems from a complaint submitted by the then South African Value-Added Network Services (SAVA) group and 20 other Internet service providers to the commission in 2002 around alleged price fixing and Telkom's alleged refusal to provide access to essential facilities.

The providers accused the fixed-line operator of abusing its market dominance by refusing to supply them with backbone and access facilities, unless they met Telkom's conditions. SAVA was subsequently incorporated into the Communications Users' Association of SA, which later disbanded.

The tribunal concluded that Telkom leveraged its upstream monopoly in the facilities market to advantage its own subsidiary in the competitive value-added network market. “Telkom's conduct caused harm to both competitors and consumers alike, and impeded competition and innovation in the dynamic VANS [value-added network services] market,” it says in a statement.

The commission wanted Telkom to be fined the maximum penalty of R3.5 billion, equivalent to 10% of Telkom's 2003 revenue, for alleged price fixing. It asked, as an alternative, for a fine of R1.1168 billion for the alleged refusal to provide essential facilities.

The tribunal found the commission did not present sufficient evidence to prove the allegations of excessive pricing or price discrimination. Telkom submitted that, if a fine is imposed, it should be no more than R20.5 million for the alleged excessive pricing complaint, and R6.8 million for the essential facilities matter.

During closing arguments, Telkom said a fine of R3.5 billion would have disastrous consequences for the South African economy and government. “It is no secret that Telkom's financial performance has been under extreme pressure over the past few financial years.”

Telkom reported an operating profit of R179 million from continuing operations in the year to March. Profit from continuing operations in 2010 was R3.3 billion, and in 2011 it was R2.4 billion.

In its complaint referral, the commission alleged Telkom would not supply essential access facilities to independent VANS providers, induced their customers not to deal with them, charged their customers excessive prices for access services, and discriminated in favour of its own customers by giving them a discount on distance-related charges which it did not advance to customers of the independent VANS providers.

Through this conduct, the commission alleged, Telkom sought to expand its exclusivity to services over which, in law, it did not enjoy a monopoly. Moreover, through the use of these contractual terms, Telkom sought to bypass the regulator, which was entrusted with enforcement of the Telecommunications Act - then in force - to give itself the additional protection of private law remedies.

The tribunal found that Telkom had refused to supply access to essential services and induced VANS' customers not to deal with them, which resulted in a “substantial” lessening of competition in the VANS market, the tribunal found.

Instead of competing on the merits, Telkom devised a strategy claiming the independent VANS were conducting business illegally, notes the tribunal. Through this strategy, which involved the freezing of its competitors' networks, Telkom impeded the growth of its competitors and retarded innovation in the marketplace, it finds.

“While Telkom bullied its downstream competitors into line, it exploited, to its advantage, the very alleged grey area in the regulatory framework by integrating voice and data, and bypassing the regulator's requirement of separate accounting for PSTS [public switched telecoms services] and VANS services,” the tribunal stated in its judgment.

Although the commission referred this matter to the tribunal in February 2004, Telkom challenged the referral on various fronts, including jurisdictional grounds, in the High Court. After five years of litigation, in November 2009 the Supreme Court of Appeal rejected Telkom's argument that the competition authorities did not have jurisdiction over it and referred the matter back to the tribunal for a hearing.

The matter was finally heard by the tribunal between 17 and 28 October last year, and presentation of evidence was wrapped up last December. Arguments from both sides were heard in February.

ITWeb requested Telkom to comment on the ruling, but it was not immediately able to provide a response. In its annual results for the year to March, it said it had been advised by external legal counsel that the tribunal has not, so far, imposed the maximum fine on any offender.

“Telkom has consistently held that the conduct complained of was fully justified in terms of the regulatory and legislative environment prevailing at the time,” it argues in its published results.

During hearings, Telkom argued that the market, at the present time, bears almost no resemblance to the market when the complaint was laid. It said any penalty imposed in the current environment would not act as a deterrent because the market has opened up so much since the period being discussed. “A penalty can have no deterrent effect on Telkom's behaviour.”

Dominic Cull, owner of Ellipsis Regulatory Solutions, says, more important than the fine, is the precedent that there is still an abundant amount of vertical market integration in the local market, and the case is still as relevant as when the complaint was lodged in 2002.

Telkom also faces another referral from the commission, which was filed with the tribunal in 2009 and has yet to be heard. The full judgment handed down today in the 2004 referral is available on the tribunal's Web site.