It sent the share prices of Vodacom and MTN plunging. It raised howls of indignation and threats to litigate from the operators. The final Competition Commission Data Services Market Inquiry Report and Recommendations can hardly be accused of soft-peddling on the issues or of mollycoddling the operators.
The Commission has been accused of regulatory ‘over-reach’ and its findings labelled ‘populist’ and ‘quixotic’. Indeed, the sound and the fury reminds one of nothing so much as the furore that accompanied ICASA’s foray into mobile termination rates - an intervention that ultimately delivered substantial benefits for consumers and led to cheaper mobile calling.
While some have lauded the findings, the dominant operators themselves have responded with a flurry of counter-information, releasing figures purporting to show that data pricing ain’t really that bad, or deflecting the pricing blame onto the shortage of spectrum. Others have even challenged the right of the Competition Commission to pronounce on data prices.
It is, therefore, important to examine both the substance of the issues, and the reasonableness of the solutions.
Is there market dominance problem?
First off, what is the data services market, and do we have a problem with one or more dominant operators exercising significant power in that market?
It was in late 2017 that the Competition Commission was asked to make recommendations on how to reduce the prices of data services to consumers. It is a complex value chain, and the Commission looked at some 16 different market segments impacting on retail prices for consumers.
The Commission’s findings, however, zone in on two areas in particular: the retail supply of mobile data services (with Vodacom and MTN under the spotlight), and the wholesale supply of Internet connectivity (which brings Telkom’s IP interconnect into the picture).
It is hard to dispute the fact that South Africa’s mobile market is highly concentrated. The most commonly-accepted measure of market concentration, the Herfindahl-Hirschman Index (HHI), applied to mobile services data revenues for the four major mobile operators, gives South Africa a score of 3 373, well above the threshold of 2 500 that is the benchmark for a highly concentrated market in the USA.
In a concentrated market some firms will be dominant, having enough customers (formally benchmarked at 45% share of the market) so as to be able to exercise undue influence on prices and products.
In South Africa, Vodacom and MTN, with their huge subscriber bases, are thus considered dominant. For example, the recent ICASA discussion document, looking at the mobile broadband market, shows that only a mere 42 out of South Africa’s 234 municipalities (just 18%) do not have either Vodacom or MTN (or both) in a dominant position.
Spare a thought here for the ailing Cell C, dominant in only one municipality, and Telkom Mobile, dominant in none. Indeed, the struggles of the smaller players, Telkom Mobile and Cell C, in the market bear witness to the dominance of the two big players.
The data services market is thus a highly concentrated one, effectively a duopoly, a situation that may require pro-competitive intervention.
Is there a pricing problem?
The data suggesting that data services prices in South Africa are higher than they need be is overwhelming, ranging from the strident to the analytical. South Africa’s mobile broadband coverage reaches over 95% of the population, but yet nearly half of the population do not use the Internet, and those that do so, overwhelmingly use mobile data to do so.
But access to data services mirrors the country’s GINI co-efficient, the highest in the world, with lack of access largely due to data services being unaffordable to the majority of our population. Local public-interest think-tank, Research ICT Africa, for example, currently ranks South Africa a lowly 27 cheapest out of 45 African countries for benchmark of 1GB of data. Indeed, even were the price of data to fall by the 50% targeted by the Commission, South Africa would only climb 10 places to 17 out of 45.
It is true, that these are raw prices in US dollars for a gigabyte of data, and do not measure affordability. And, while the Alliance for Affordable Internet has South Africa on the cusp of its affordability yardstick (2% of gross national income for 1 GB of data), it still ranks South Africa 15 out of 48 countries in Africa in terms of affordability. Moreover, the poor do not consume data in 1 GB mouthfuls, but rather in 20 MB morsels, which are some 300% more expensive per GB - 1GB would cost R 500 consumed piecemeal, rather than R 149 in a single chunk.
So, we have a pricing problem when it comes to data services, one that impacts poor consumers disproportionately.
Does the Commission have the authority to intervene?
A competition regulator operates largely ex post - to address the deleterious effects of markets that are not functioning effectively. Its enabling legislation gives the Competition Commission and its associated Tribunal extensive powers to do so.
Dealing with excessive prices charged by firms that are dominant in the market is one of the focus areas of the Commission’s mandate. And the data services market has not, it is widely agreed, and as we can see above, been functioning optimally. The Ministerial Gazette that initiated the current inquiry back in 2017, went beyond interventions by the Commission alone to include recommendations to both government and ICASA.
The sound and the fury reminds one of nothing so much as the furore that accompanied ICASA’s foray into mobile termination rates - an intervention that ultimately …led to cheaper mobile calling.
One may disagree with the findings and the remedies proposed, but one would be hard-pressed to show that they are ultra vires (ie beyond legal power or authority).
But what of the substantive remedies proposed by the Commission, and the big-stick threat of the Competition Tribunal that the report brandishes? It is important to look at some of the recommendations in rather more detail.
Cut data services prices
The call by the Commission for data services prices to be cut by between 30% and 50% lies well within the reasonable ballpark, and is indeed less stringent than the cuts that accompanied ICASA’s mobile termination rate regulations in 2010.
Cuts, in any event, are likely to follow a similar ‘glide path’, incorporating a set of phased, negotiated reductions over a number of years, and are closely bound up with some of the other recommendations discussed below, including bundle tiering and lifeline data.
Tiered bundle pricing
It is on the smaller, prepaid data bundles - data that is largely consumed by the poor - that the Commission’s main emphasis in price reductions is focused. Their demand for a standard per-megabyte price in all data bundles below 500MB may well limit the scope for price reductions on larger bundles, but is surely to be welcomed as a major universal access and service intervention, one that will substantially stimulate Internet demand and uptake.
Lifeline daily data
The Commission’s proposal for the introduction of lifeline data for all consumers - along the lines of the allocation of free basic water to households - is rather more controversial. It is certainly likely to be more costly, and the exact daily quantum and other parameters are likely to be the subject of much hard-nosed haggling.
But it too is ultimately likely to stimulate Internet demand and uptake to the long-term benefit of the operators, in a way analogous to how free PleaseCallMe messaging drove call volumes. And there are already commercial models out there - such as Project Isizwe - that use free data allocation to stimulate paid-for data purchases.
Unfortunately, the Commission neglects to point to the Universal Service and Access Fund, whose long-neglected ‘subsidies to needy persons’ mandate could well be used to support such an intervention, and, for once, deliver value for money off the universal service levy.
Mandatory zero-rated content
The Commission’s proposal for free access to certain content, picks up what has often been used by operators as a marketing tool to attract subscribers - for example, by making WhatsApp a free add-on, sometimes leading to unexpectedly massive volumes of network traffic. While the parameters of the model are once again subject to negotiation, it too is likely to stimulate demand and uptake, ultimately to the benefit of the operators.
Zero-rating is seen by some as a violation of net neutrality, and the creation of a zero-rated, walled garden may create perverse incentives for service providers wanting to be inside the wall. But the Commission has proposed a gate-keeping structure, to be done according to objective criteria, applicable to ‘public benefit’ and educational organisations.
The cost of this intervention too is likely to limit the scope for price reductions to consumers of larger volumes of data, but is ultimately likely to stimulate demand and grow uptake.
Community networks
The Commission’s proposal to support the development of community-based networks, is a logical extension to existing interventions in favour of TV White Spaces and dynamic spectrum allocation. Support for innovative, bottom-up initiatives like these - Zenzeleni, Peebles Valley, Siyakhula and others - is an important universal access and service stimulus.
Other interventions
Many of the other more medium-term recommendations of the Commission are close to the regulatory mainstream, and will benefit both data service providers and consumers alike.
Some of the proposals are already part of the ICASA process to license high-demand spectrum and introduce a wireless open-access network (WOAN) operator into the market. These include limits on the amount of spectrum that may be held by a single licensee (spectrum caps), and regulations to stimulate the MVNO market and manage national roaming.
Importantly too, the Commission calls for the parameters of the WOAN licence to be designed in such a way that the award produces a commercially viable new operator able to benefit the market (rather than an under-serviced area licensee (USAL) rerun).
Further regulatory medium-term proposals from the Commission include:
- Better regulation of facilities leasing, to promote open access and cost-orientated pricing;
- Development of the long-overdue and much-bewailed rapid infrastructure deployment framework, to facilitate efficient and cost-effective access for operators to wayleaves and rights of way;
- The reintroduction of Chart of Accounts / Cost Allocation Manual (CoA/CAM) regulation to ensure separation of accounts between wholesale and retail for operators;
- The promotion of free public WiFi;
- Subsidised FTTx rollout in rural areas.
Many of these interventions are part of the standard international good-practice toolkit of regulators around the world, and thus less likely to be controversial. The latter two require funding, but both are clear candidates for support from the Universal Service and Access Fund (USAF).
Conclusion
As with the highly successful regulatory intervention to reduce mobile termination rates and reduce the price of calling, the operators may choose to litigate the findings of the Competition Commission. Hopefully, however, saner heads will prevail beyond the cries of indignatio. Hopefully, negotiated arrangements will be hammered out in respect of the various proposals from the Commission, settlements that will reduce consumer prices, protect the profitability of the operators, and ensure the more effective functioning of the data services market.
Cheaper prices and more affordable access to online content may provide the kind of stimulus to consumer broadband demand and uptake that was envisaged by SA Connect. A thriving data services market can only serve to bring economic benefits, improve the quality of life and provide cultural enrichment to all South Africans. Let us work to make that happen.
Click here to access the Summary of Finding and Recommendations in the Data Services Market Inquiry.
Click here to access the full Data Services Market Inquiry Final Report.
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