[dropcap]T[/dropcap]he recent study by Analysys Mason on competition in Kenya’s telecommunications market has rekindled the emotive issue of dominance in the mobile communications market. The report itself is quite concise in painting a picture of the competitive dynamics in this market.
They have employed a European approach – what they are considering as global best practice) – to identify and define retail as well as linked wholesale (upstream) markets. They have also employed the same approach to determine two other things: (i) susceptibility of each market to ex-ante regulation; and (ii) significant market power (or dominance).
The approach employed to arrive at these determinations, in my assessments, are fine as it represents global best practice. Consequently, the report identifies five retail and eight linked wholesale markets. The retail market describes the interaction points between the network operators and their customers via products and services; while the wholesale market describes the interaction between the network operators and infrastructure providers.
What is ex-ante regulation?
Usually, regulation is applicable in two scenarios; a presumption of the likelihood of bad conduct by market players and when bad conduct materialises. In the first case, regulators resort to preventive measures or ex-ante regulation. But due to its anticipatory nature, it is subjective and not fool proof and often requires a lot of estimations (and projections) by a regulator.
In the second case, also referred to as post-ante in industry jargon, regulators, armed with sufficient qualitative evidence, unveil remedial measures. In Kenya, ex-ante regulation is the domain of Communications Authority while post-ante regulation is largely the domain of Competition Authority of Kenya, with the exception of merger reviews which is generally considered to be ex-ante in majority of competition law jurisdictions.
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Susceptibility to ex-ante regulation means the regulator sees ineffective competition and/or existence of higher and non-transitory barriers to entry to a specific market segment – and therefore will require an anticipatory intervention. Usually, in most cases, this is due to a player holding significant market power. Applicability of ex-ante regulations has so far been limited to the wholesale markets and it should be so.
Let’s now get back to Analysys Mason. There are two major findings in the report. In the wholesale market, Analysys Mason found significant market power in the towers market – one of the eight wholesale markets – and Safaricom has been found to be dominant.
Towers are the tall metallic structures built by network operators to hold telecommunication antennas (or aerials). Following that declaration, the report has recommended a raft of tower-sharing arrangements between Safaricom and other tier-1 mobile operators in seven designated counties with the largest disparity between the number of Safaricom sites and the number of sites deployed by the other Tier-1 operators.
This, in my view, shouldn’t be a problem as long as the sharing is on a commercial basis and devoid of any form of subsidies accruing to the tenant.
In the retail market, Analysys Mason has found significant market power in both the mobile communications and mobile money markets. Once again, Safaricom has been designated as the dominant player. However, dominance in the mobile money market is already being addressed by way of wallet-to-wallet interoperability. While it is still in testing stage, it should be able to establish a merchant switching scheme whose benefits will accrue to the consumer.
When it comes to addressing dominance in the mobile communications market, the report somehow triggers a bloodrush. It has always been a dicey affair, anyway.
Analysys Mason has three-pronged recommendations. First, prohibition of on-net discounts. Basically, Tier-1 operators have this penchant to lower their tariffs when their subscribers call within the network – but ‘premiumize’ tariffs when they acquire calls/texts from other networks. The report recommends scrapping of such discounts. This is a fair call.
Mobile terminal rates in Kenya are among the lowest in the world, and there shouldn’t be price differentials between on-net and off-net rates. All operators, and not just Safaricom alone, should be compelled to have uniform on-net and off-net tariffs.
Second, prohibition on individually tailored loyalty schemes and promotions. Sometimes, Tier-1 operators offer loyalty bonuses or promotions for which qualifications require certain levels of usage by different subscribers in the same category.
For instance, pre-paid subscribers can be told that they stand to win monetary gifts (or even extra voice minutes for free) if they spend above a certain preset threshold. Analysys Mason says such programs are often riddled with lack of transparency and an operator can use its significant market power to discriminate against its own subscribers. I agree. Consequently, they are recommending that the Communications Authority should have a say in the categorisation of customers. This is fair.
Finally, replicability of retail tariffs. Analysys Mason says Safaricom’s standard tariffs, permanent loyalty schemes and promotions (including non-tariff promotions such as lotteries) should be capable of being profitably replicated by a reasonably efficient competitor.
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Implicitly, they are saying that Safaricom has engaged in margin squeeze to the extent that other Tier-1 operators cannot effectively match without losing money. Essentially, the report subtly suggests price controls and this will not be the first time the idea of price controls is being touted.
In January 2016, Airtel proposed to the Ministry of ICT a pricing floor on Safaricom’s retail tariffs. Pricing floors mean Safaricom cannot price its products below a certain level. In regards to price controls, I have to say that price is not a value proposition in the Kenya’s telecoms market. It has never been. In fact, empirical evidence shows that Kenya’s telecoms market is price inelastic.
Gitonga (2014) analysed demand elasticities for both price and income of mobile telecommunication services in Kenya – so far the only attempt to empirically analyse price elasticity of demand in the telecoms space. Results of his analysis showed that demand for mobile telecommunication services is price inelastic and demand elastic.
Shaky competitive edge
He then concluded that this price inelasticity of demand means that reduction of prices by mobile telecommunication operators do not necessarily increase the minutes of usage and can only result in losses if it is the only strategy being relied on by the firm to increase revenue, which is the case in the Kenyan market.
Price should, therefore, not be a competitive point and this fixation with price is unnecessary. Instead, operators may need to focus on value-addition through roll out of innovative and exciting products/services.
Finally, it is my considered view that the Communications Authority should restrict its interventions to the wholesale market, and avoid direct interventions in the retail market.
Editor’s Note: A summarised version of this opinion piece appeared in the Business Daily’s Market Curve Column on March 23, 2018.
