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Splitting up Telkom

The Competition Commission ruling that will see Telkom split its retail and wholesale arms could have a very big impact on the sector.

Read time 6min 20sec

The Competition Tribunal acceptance of the settlement between the Competition Commission and Telkom in the case between Telkom, ISPA and several ISPs will have a far-reaching impact on the local sector and telecoms pricing. All things being equal, that is.

The settlement reached and presented to the Tribunal contains an admission by Telkom that it priced various of its products to its competitors at a higher rate than it bundled said products and made them available to its own customers during the period the complaints were filed in 2005 to 2007. This margin squeeze made it impossible for ISPs to compete with Telkom. The fact that they were forced to use Telkom's services to build their own networks exacerbated this situation.

The right of ISPs (and/or VANS) to provide their own infrastructure, granted through the Altech court case in August 2008, will have alleviated some of this pricing pressure, but not all of it.

In terms of the settlement between Telkom and the Competition Commission, Telkom has, among other things, committed to:

ICASA was apparently not consulted about the agreement.

Dominic Cull, Ellipsis Regulatory Solutions

* cease its anti-competitive conduct, where it has not already done so, within six months of the date of the confirmation of the ruling - 18 July 2013;
* pay an administrative penalty of R200 million to the Competition Commission;
* R66 666 666 within 30 days of the confirmation date, R66 666 666 exactly a year later, and a further R66 666 668 another year later;
* within six months of the ruling, implement a functional split of its wholesale and retail operations. This involves treating competitors and its retail arm in a non-discriminatory fashion, and protecting confidential competitor information that its wholesale division is privy to from its retail operation;
* also within six months, adopt and implement the Transfer Pricing Programme that includes the following commitments:
* pricing services to its competitors and its retail arm in a non-discriminatory manner (ie charging the same price) for common components (ie components that Telkom Retail and competing operators have to both source from Telkom);
* pricing non-common components to competitors and its retail arm at cost plus a reasonable return;
* Telkom Retail will implement a pricing policy that covers its costs, including the cost Telkom Wholesale charges it plus its own costs;
* regulate transactions between Telkom's wholesale and retail arms;
* keep separate internal accounts of its IP VPN and Internet access products so that the Competition Commission can monitor them;
* reduce the prices of the wholesale products implicated in the complaint in 2014, 2015 and 2016 to the value of R875 million;
* implement a competition law compliance programme.

Not consultative

Competition Tribunal chair Norman Manoim congratulated Telkom on the outcome and stated: "It's certainly the most impressive consent agreement that I have seen here in my years at the Tribunal and, no doubt, it took a lot of hard work and many hours of negotiation."

Industry members were not so pleased, however. Says Ellipsis Regulatory Solutions head (and ISPA regulatory advisor) Dominic Cull: "ICASA was apparently not consulted about the agreement. It has a concurrent jurisdiction arrangement with the Competition Commission and you'd think it would make sense for the sector regulator to be consulted when imposing pro-competitive measures on an incumbent.

"You would also think they would engage with the operators and customers affected, as you would think they'd be able to offer insight into how they were affected and where interventions need to be made," he comments.

We're going to be dependent on the Competition Commission to strictly enforce the remedial mechanisms.

Marc Furman, Internet Solutions

An industry player who did not wish to be quoted commented that neither the Competition Commission nor Tribunal gave interested stakeholders very much time to conduct an in-depth review of the agreement (they had just over a week) and provide their view on the terms. This meant the final version was the same as the draft agreement.

There was a lack of sufficient consultation with the complainants, says Cull, and as a result, there are errors in the settlement that could have been avoided.

That notwithstanding, he says, the settlement is significant in that it provides for substantially greater transparency in the relationship between Telkom Wholesale and Retail. A lack of transparency is what resulted in the complaints and it is this the settlement seeks to address, he notes.

Greater transparency can only be a good thing as it will make it far harder for Telkom to engage in predatory pricing practices, levelling the local playing field substantially. Provided the settlement is strictly enforced, of course.

In a nutshell

Complainants: ISPA, Verizon, Internet Solutions, MultiChoice Subscriber Management Services
Complaint period: 1 January 2005 to 31 December 2007
Number of complaints filed: Five
Products involved: High bandwidth transmission lines, diginet lines, international private leased circuits and IP Connect
Findings: That Telkom engaged in margin squeeze and that it engaged in anti-competitive behaviour by bundling products and selling them at a cheaper rate than they were made available to its competitors as individual offerings.

Says Internet Solutions' legal manager, Marc Furman: "We're going to be dependent on the Competition Commission to strictly enforce the remedial mechanisms contained in the agreement, in particular robust audits of Telkom to ensure compliance with non-discriminatory pricing."

Cull concurs, noting that the ISP and alternate telcos will need to play an active role in this by reporting breaches to the Commission as they arise.

For its part, a Telkom spokesperson, responding to written questions from Brainstorm, stated: "The functional separation required in terms of the settlement agreement means, among other things, that Telkom will implement a number of policies designed to ensure that Telkom Wholesale will treat other licensed operators (OLOs) and Telkom Retail on a non-discriminatory basis. The programmes that will facilitate this are a transfer pricing programme and code of conduct, which were attached as part of the agreement reached with the Commission. The operational implications will include the regulation of transactions between Telkom's Wholesale and Retail business divisions, as well as restrictions on sharing of information between these business units. The expected impact, particularly of the cost of the functional separation envisaged in the settlement agreement, will only become clear as Telkom embarks on these processes."

Structural separation?

The functional separation imposed on Telkom has led to a flurry of speculation in the market as to whether structural separation - where Telkom's Wholesale and Retail arms are split into separate companies - would soon follow.

Furman says it's hard to say whether this agreement paves the way for structural separation, but that it is mentioned in the National Development Plan put forward by the National Planning Commission, and that government may like having it as an option.

An industry source has said that Telkom has plans to put its copper infrastructure into a Special Purpose Vehicle, MyBroadband reported recently, commenting that this didn't include any civil infrastructure like ducting and could be a precursor to Telkom unbundling its local loop and making it accessible to other players. No formal announcement or comment from Telkom had been released by time of going to print, however, and this could be just another rumour.

First published in the September 2013 issue of ITWeb Brainstorm magazine

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