Telkom admits to dominance abuse

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A settlement with the Competition Commission will mean lower prices for consumers.
A settlement with the Competition Commission will mean lower prices for consumers.

The Competition Commission and Telkom have reached a settlement agreement to resolve a series of complaints lodged against SA's fixed-line incumbent from 2005 to 2007 by Internet service providers (ISPs).

Telkom CEO Sipho Maseko said this morning the company had reached an "in principle" settlement with the commission on the matter, and he was confident it had "drawn a line", although the Competition Tribunal still needs to sign off on the deal.

The settlement package includes an admission of guilt, a financial penalty of R200 million, functional separation between Telkom's retail and wholesale divisions, monitoring arrangements of its future conduct, and wholesale and retail pricing commitments for the next five years, estimated to yield R875 million in savings to customers.

ISP objections

In March, ITWeb reported Telkom was in talks to settle the matter. The commission served a notice of motion on Telkom in October 2009, in which it referred complaints against Telkom filed by MWeb and Internet Solutions, as well as the Internet Service Providers' Association and Verizon, to the tribunal.

The commission alleged Telkom abused its dominance in various product markets concerning wholesale Internet access between 2004 and 2009. The compliant was referred to the tribunal in October 2009 and pleadings closed last March.

As an outcome of the investigation into the ISP complaints, the commission found Telkom had contravened the Competition Act by engaging in a margin squeeze of its ISP competitors.

Specific aspects listed include charging an excessive price to customers for some services, refusing to give a competitor access to an essential facility when it is economical feasible to do so, engaging in exclusionary acts, and selling services by forcing the buyer to accept a condition unrelated to the contract.

Telkom's confession

The commission says, in the settlement agreement, Telkom agrees the structure of its pricing of wholesale services to first tier ISP competitors resulted in a "margin squeeze" of competitor Internet access and Internet protocol virtual private network (VPN) services in relation to Diginet leased line and ADSL access to these services.

"[Telkom] also agrees that in bundling these services with lower-priced leased line and ADSL access to the services, it engaged in anti-competitive conditional selling to first tier ISPs. Telkom admits that this conduct amounted to a contravention of [the Competition Act]."

The R200 million administrative penalty will be paid over a period of three years.

Offsetting offenses

Going forward, says the commission, Telkom will implement functional separation between retail and wholesale operations - including a transfer pricing programme to regulate transactions in the provision of network services between its wholesale and retail divisions.

"Telkom will also implement a code of conduct for the wholesale division that will ensure non-discriminatory treatment of ISPs and protection of their confidential service information from the competing retail division. In addition, the company will keep separate internal accounts for its own retail corporate VPN and Internet access products to allow for monitoring that it does not engage in a margin squeeze in contravention of the Competition Act in future.

"Furthermore, over the 2014, 2015 and 2016 financial years, Telkom will reduce the prices of wholesale services implicated in the complaint and used by ISPs to deliver their IP VPN and Internet access services (namely undersea cable international lines, national high bandwidth transmission lines, access to ADSL lines via the IP Connect service and Diginet leased line access) and related retail products (Telkom's VPN Supreme and Internet Access)."

The price commission says the said price reductions are weighted more heavily in favour of wholesale services (at least 70% wholesale). Telkom will also ensure any price reductions are not reversed in the 2017 and 2018 financial years.

"In addition to the above penalty and the undertakings to reduce prices, Telkom has undertaken to provide points of presence at strategic locations in the public sector. This, together with the price reductions undertaken by Telkom, is aimed at creating not only a more competitive market in South Africa, but also aiding government in the provision of public services in a digital economy."

Commissioner of the Competition Commission, Shan Ramburuth, says the entity is satisfied with the settlement agreement. "[We] expect that it will lead to a more open and competitive market and translate to lower prices for consumers."

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