Kenya Needs IoT-specific Laws to Protect Consumers

October 18, 2018 Leave a comment

IoTThe rapid growth of the Internet brings with it new technology and applications. Of these, the most significant is the Internet of Things (IoT) which is bound to transform the Internet and move it from a virtual platform into the real world. The IoT will interconnect many devices to each other via the Internet and in the process, collect, process, store and transfer a large volume of information collected via these devices sensors. This data includes personal data which if misused can lead to personal harm or financial loss. To prevent this from happening, the IoT device end user might need to be protected by use of legislation from unwarranted misuse of their private data. If the current state of Kenyas data protection is anything to go by, the IoT will dig us deeper into the privacy issues that arise due to the sheer amount of data collected.  There is need to have laws in place that will protect the IoT end user’s private data from misuse. Upon my analysis of existing laws, the level of preparedness of the national regulator towards the privacy issues arising from the IoT use and adoption is wanting. Also,  end users and would-be end users are not aware of the privacy concerns surrounding the IoT adoption.

The IoT stands to benefit Kenyas in many ways, the connection of previously unconnected items such as furniture, cars, manufacturing plants and many more will have a huge positive impact on the quality of life for many. An example closer to home of what connecting previously unconnected physical things has on our lives is the advent taxi hailing apps such as Uber and Taxify. A cab on any of these platforms is essentially a car that is connected to the internet (not to be confused with a car that has Internet). The connecting of cars to the Internet has led to the lowering of travel costs for many and increased convenience because of improved economies of scale and efficiencies introduced. Now imagine this at a grand scale where everything we use in our daily lives is connected. The benefits will be immense. Take for example in the health sector, IoT sensors connected to patients will collect vital patient statistics in realtime and share with medical personnel immediately a threshold is reached to enable them take action and save a life.

In January 2018, The Communication Authority of Kenya (CA) said that Kenya’s Internet penetration stood at 112.7%[1] meaning that there are more Internet connected devices in Kenya than there are people. In other words, people own more than one device that is connected to the Internet. Between 2009 and 2010, the number of Internet connected devices in the world outnumbered the world’s human population (Ammar and Samer, 2016). Kenya is therefore a late entrant to the list of countries whose number of internet connected devices outnumbers the human population.

At the moment, most of these are personal computing and communication devices such as mobile tablets, mobile phones and personal computers. However, there is an increasing number of sensors and everyday objects that were previously unconnected that are now connected to the Internet. It is these new entrants into the connected space that will be the focus of this article. The IoT is what we get when we connect Things which are not operated by humans to the Internet (Waher, 2015). These things will not be general purpose devices such as smartphones and Personal Computers but dedicated-function objects such as furniture, vending machines, jet engines, connected cars and a myriad of other devices (Hung, 2017). The International Telecommunications Union defines IoT as “A global infrastructure for the information society, enabling advanced services by interconnecting (physical and virtual) things based on existing and evolving interoperable information and communication”[2]. According to Gartner[3], there is estimated that there will be over 30 billion connected devices by 2020; this is projected to rise to 75 billion devices by 2025. These devices will initially be adopted in commercial and industrial settings before eventual adoption for personal use. One characteristic of the IoT devices is the presence of sensors that can electronically detect the environment and generate data. According to Kenny (2015), the data collected by sensors will exceed 1.6 Zettabytes by 2020. This data will include data of a personal nature that will have been collected with or without consent of the IoT direct users or bystanders.  Six in ten IoT devices don’t properly tell end user how their personal information is being used or even when it is being collected. This leaves the end user in the dark as far as what happens to this data. The privacy risk posed to the end users whose personal data has been collected by IoT sensors. According to Renaud and Aleisa (2015), the percentage level of concerns identified by most scholars on IOT privacy is as below:

  • Location and tracking, this is the threat of determining and recording a person’s location through time and space at 31.5%
  • Identification threats that happen when sharing of un-anonymised data where a person’s identifier such as a pseudonym or an address is user to identify and locate the person in real life at 25.9%
  • Analysis of individuals data by use of data mining techniques for the purposed of profiling them at 21.3%
  • Inventory attacks, where the IoT device is hit by a Denial of Service attack to render it incapable of normal function at 8.3%
  • Interaction and presentation threats which occur when a user’s private data is transmitted through a public medium such as the internet and in the process disclosing it to unintended audiences at 6.5%
  • Life cycle transitions, where an end-of-life IoT device is discarded with it still holding private data at 3.7%
  • Linkage where previously autonomous systems are interconnected such as the combination of data sources creates new information that would have been impossible to create before. This threat is at 3%

It is emerging that users do not have the power to control what data is collected about them and how this data can be used or stored, privacy concerns have been on the rise in recent times.

The government and the Communication Authority need to empower users through primary and secondary legislation to enable them control quantity and types of data collected about them. A starting point would be putting in place IoT device manufacturing best practices to give control to the individual about that data is collected and how it is stored or transmitted. Devices that do not meet this criteria shouldn’t be imported into the country.  The empowered user should be in a position to:

  • Know when and what type of data about them is recorded and transmitted by an IoT device before purchasing or using it
  • Be adequately informed about how the IoT device protects any collected data on the device and also during transmission of this data.
  • Carry out the configuration and customization of privacy preferences on IoT devices to their level of comfort as concerns their security.

There is a push in the industry that manufacturers of IoT devices that collect personal data should be able to self-regulate and not wait for external and forced compliance to the above-mentioned privacy best practices. However, history lends that self-regulation has rarely worked. A good example was the need to have all mobile phone handsets charge using a common micro USB charger; it had to take the European parliament to pass laws that forced all European handset manufacturers to have their devices charge through a micro USB port for this to happen. Several countries are proposing regulations around IoT privacy and security. Australia and the United States of America are working towards laws to regulate the IoT devices so that at the minimum all the IoT devices:

  • Have non-default passwords on all manufactured IoT devices. This is because many devices today usually contain a default password to enable initial login in for device configuration purposes
  • All IoT device software must be patchable for discovered vulnerabilities and should be based on standardized protocols
  • Well laid down vulnerability handling and disclosure policies by manufacturers to ensure transparency and proper threat assessment of possible privacy and security weaknesses

One of the key roles of Communication Authority of Kenya is the safeguarding and protection of consumer interests in relation to the provision of ICT services (CA, 2015). This is achieved through the use of various regulatory instruments that are guided by laws. The current consumer protection regulations are as below:

  • The Kenya Information and Communications (Consumer Protection) Regulations, 2010
  • The Kenya Information and Communications (Dispute Resolution) Regulations, 2010
  • The Kenya Information and Communications (Registration of subscribers of Telecommunication services) Regulations, 2012

None of the above regulations addresses the privacy concerns the IoT users have when using the IoT. It is worth noting that the Kenya Information and Communications (Registration of subscribers of Telecommunication services) Regulations were passed in 2012. This was after the fact that it was realized the lack of mandatory legislation-backed mobile subscriber registration hampered the fight against mobile phone-based fraud. Criminals had laid their hands on subscriber details from M-pesa outlet booklets and have been using them to carry out fraud and identity theft.

The lack of a legal and regulatory framework for the protection of consumer right to privacy on the IoT can lead to negative consequences such as those witnessed on the mobile telephony space where criminals perform fraud and identify theft.

 

[1] Communication Authority of Kenya First quarter (July-September 2017) sector statistics report for the financial year 2017/2018
[2] https://www.itu.int/en/ITU-D/Regional-Presence/AsiaPacific/SiteAssets/Pages/Events/2016/Dec-2016-IoT/IoTtraining/IoT%20Intro-Zennaro.pdf
[3] https://www.gartner.com/doc/3659018/iot-global-forecast-analysis-
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The Dominance Debate Should Be About The Consumer’s Welfare, Not Operators

September 5, 2018 Leave a comment

Communication TowerDuring the last Safaricom AGM, the dominance debate came up and all contributors to the discussion at the meeting seemed to agree on one  thing: That the regulator is punishing Safaricom for being successful and that it was not their fault that their competitors have refused to invest and innovate. The recent calls by their competitors to the regulator to have them declared dominant and abusing their dominance are based on a market study report released last year by a consultant. This report found Safaricom to be dominant in both the mobile communication and mobile money markets. The report went further to suggest remedies that include infrastructure sharing, retail tariff controls and the splitting of the company into several independently run companies for mobile money and mobile communications.

In July this year, the parliamentary committee on ICT’s met sector players on the issue of dominance and what came out was other operators still strongly feel that they cannot be able to compete with Safaricom on equal footing. On the other hand the committee members felt that the operators are not doing enough to pry off Safaricom’s grip on the sector. Recent reports also indicate that the regulator is also under pressure to declare Safaricom dominant and in abuse of its dominance. By going ahead and doing so, the operator will not have a free hand in the determination and introduction of new products and services in the market without the regulators direct approval. Another recommendation that is being pushed is the sharing of both active and passive infrastructure by Safaricom with its direct competitors.

A point to note on the above is in all this discussion, no one is looking at the possible effects the implementation of these recommendations will have on the most important person in this debate; the consumer. The focus is mostly on the operators commercial welfare. Also, should the regulator decide to go ahead and implement the recommendations, what laws or framework will be applied? Are the laws also relevant to the current technological and market realities?

The Kenya Communication Act of 1998 and its subsequent amendments (Kenya Information and Communication amendment act of 2013) specify that the regulator shall from time to time develop and publish, in the Kenya Gazette, guidelines to be followed when determining whether a licensee in a dominant market position in a specific communications market. The Act also specifies that for the regulator to determine if a player is dominant, it shall prepare a dominant market power report to determine whether a licensee is dominant in a service or geographic communications markets. This is the report that was released in February this year. Based on the reports findings, the Act specifies that the regulator can declare a licensee dominant by considering the gazetted criteria, One of the critical criteria is if the operator possesses Significant Market Power (SMP).

Upon declaring an operator as dominant, the regulator will also need to show that the dominance is being abused to edge out competition from the market or to generate more profits or even offer inferior quality of service with no consequences. The criteria that can be used to check if there is abuse of dominance are as below. It’s worth noting that Safaricom meets none of the criteria below for abuse of dominance.

  1. Refusal to deal with competitors on the essential facilities doctrine: essential facility is facility supplied on a monopoly basis but is required by competitors but they cannot be reasonable duplicated by competitors for either economic or technical reasons. With new approaches or alternatives to essential facilities sharing such as VNOs and national roaming, and the fact that all mobile networks now have  a packet switched core as opposed to circuit switched, this doctrine cannot be used as a measure of dominance abuse because already Safaricom is sharing and leasing out unbundled services.
  2. Cross subsidization: This is where the dominant firm uses revenues from a market in which it is dominant to cross-subsidize the price of a service or product it provides in other markets. For example, there would be suspicion of cross-subsidization if Safaricom, when recently entering the home internet market (which Zuku was the de-facto player), offered much lower pricing than them by subsidizing home internet user pricing with revenues from their voice business. Entry prices for most markets Safaricom ventures into are often higher than competitors.
  3. Predatory pricing: This is where the dominant operator charges prices below a normal cost standard. At the moment, Safaricom prices are not the cheapest in the market so this also does not apply too. This debate would have made more sense if Safaricom was dominant through the offering of prices well below their competitors price points.
  4. Bundling of services: This is where the operator sells a product at a fairer price on condition that you also buy other services from them. For example, a user who simply wants airtime should be able to buy only airtime and not be forced to buy airtime and data though an offer despite them not having an immediate or future need for the data. If anything, its Safaricom’s competitors who are bundling services leading to wasteful accumulation of unnecessary services such as hundreds of unused SMS’s and talk time minutes that accumulate as subscribers purchase bundled data for internet access.

Innovation and Operations

There is this notion that the mobile sector is vendor driven, that the telecom equipment vendors often dictate the pace of innovation in the market. This is partly true and therefore also means that competitors in the sector have access to similar technology because the vendors in the sector supply all operators. Nokia, Huawei, Cisco, Ericsson all supply to the operators the same products. The difference however comes in on how these products are monetized. The dominance report recommends that Safaricom, upon being declared dominant should not sell services that are not replicable by the competition. This is to say, they cannot come up with a product that their competition, using their resources and infrastructure cannot come up with easily. The Kenyan ICT talent pool is very large and any operator worth their license can afford to hire the best brains in the country. The fact that all operators have equal access to technology and talent means that its not hard to replicate competitors products. But why then isn’t this happening? The answer lies in company culture. Safaricom cannot be punished for cultivating a culture of innovation as their competitors sit and wait for the regulator to give them a piece of the innovation pie. All operators have the necessary ingredients to succeed.

One business model that has been adopted by Safaricom’s competitors is outsourcing of functions. Ideally, firms are supposed to outsource their non-core functions so as to enable them focus on their core function. If its a hospital for example, it can outsource its transportation, cleaning, etc but isn’t expected to outsource core functions like diagnostics and patient care. However, many firms that adopt the outsourcing path end up over outsourcing even core functions. The reason is purely to make the financial statements look better because most of the costs will be classified as variable and not fixed costs. When a firm outsources both core and non-core functions to third parties, it loses control over quality of service and also fails to clearly see any inefficiencies in the operations.  The result is outsourcing will make the books look good but affect customer experience through inefficient service delivery.

What are the alternatives?

With telecommunication services now permeating all sectors of our lives, it has become a critical catalyst for socioeconomic development. drastic actions such as declaration of dominance and splitting up Safaricom will have far reaching effects on the Kenyan economy all in the name of giving it’s competitors an equal footing. So far, several regulatory actions aimed at leveling the playing field have not yielded much. First it was Mobile Number Portability (MNP) which according to analysts didn’t work well because subscribers were afraid to change operators due to M-pesa. For MNP to work, many felt that Mobile Money Interoperability (MMI) had to be in place. The regulator managed to bring all operators on the table and effect mobile money interoperability. So far since implementation, there has been no effect on the market dynamics. There are also a raft of measures put in place by the regulator to create a level playing field. Many of these measures have actually helped Safaricom’s competitors make slight gains in their market share. I believe these gains could have been more if these operators improved their operational efficiencies first.  Splitting Safaricom when the competitors operations are inefficient as they are will only do more harm to the sector as the supposed benefits will not be realized at that level of efficiency. The regulator in addition to playing its current role, should also demand accountability from operators on actions it takes to enable them gain market share but the operators fail to take up these opportunities. A good example is there was a very big push to effect mobile money interoperability, but when it was done, there was very little in terms of marketing this development bu those who were asking for it. At the very least there should have been a major marketing campaign that coupled MNP and MMI.

Another approach would be to offer tax breaks to Safaricom’s competitors on investment in network and services. This would lower their CAPEX on network roll out and services. Tax breaks can also be applied as a motivating factor when these operators reach certain predetermined targets. For example, if an operators revenues or market share hits a target, the government gives them a tax break. This will push them to be innovative in revenue generation and market share gaining activities.

The consumer

All the discussion around dominance has been mostly about operators gaining market share. There seems to be very little concern on the most important stakeholder: the consumer. At the end of the day the consumer should be able to make the decision on which provider to subscribe to based on the value they get. There is a general assumption that the consumer is always price driven. That all his decisions are based on price. This assumption is what has led to the many price wars we have witnessed in the market which have yielded little in terms of market share gains. Consumers buy convenience and experiences. operators who want to be successful must start looking at the consumer experience and convenience when they are on their network.

The focus of this debate should be the improvement of consumer welfare. All actions by the regulator should take into consideration the consumer, consumer welfare is the regulators biggest mandate. The best approach would be for the regulator to look at how best citizens will be served telecom services. The recommendation for Safaricom to share its infrastructure with competition can be shelved in favor of the Universal Service Fund. The USF can be used to lower the cost of rolling out services by operators in under served areas. This approach has worked very well in Latin America.

According to an analysis by the Institute of Economic Affairs (IEA), should the regulator implement the dominance report  recommendations, consumer prices for services would actually rise and not fall. This will hurt the consumer despite the fact that the leveling of the playing field for all operators is supposed to lead to lower prices. The declaration will serve the operators but not the consumer. So in the interest of the consumer, I believe other approaches listed above can be implemented, splitting Safaricom is not one of them.

Is Universal Access/Service a Government or Operator Obligation?

April 1, 2018 4 comments

ruralSecond to creating a level playing field for all ICT operators, one of the widely accepted objectives of regulation of the ICT sector in developing countries is to promote universal access of basic ICT services. In developed economies, the objective changes from universal access to universal service. The difference is that access promotes the notion that every person should have reasonable means of accessing basic ICT services (like a phone booth at the local shopping center) while universal service is about promoting and maintaining availability of a variety of ICT services to individuals and households. Both these terms are combined into what is known as universality.

It is clear that that universal access definition has been overtaken by events based on the recent developments especially in the wake of mobile communication boom in many developing countries. To a very large extent, its no longer about ensuring access but ensuring that a variety of services are delivered to the end user.

The need by governments to make universality a reality stems from increasing evidence that access to ICTs improves the overall socioeconomic well being of its citizens. However, with the wave of privatization of ICT services such as telecommunications, the operation of telecoms moved from social welfare minded government ministries to profit minded private entities. When privatization took place in the early 1990’s new entrants focused on providing services to profitable market segments based on geography, disposable income and population density (which improves economies of scale and scope). The result is that regions or populations that were not profitable were at the risk of being left our in the ICT revolution. To prevent this from happening, regulators were quick to include mandatory service obligations (MSOs) in the licenses issued to new entrants. These obligations mandated the operators to extend their networks (and in effect their services) to areas where the cost of providing the services and maintaining the networks was higher than the revenues realized from the same areas. This seemed to be the only practical solution to connect the ‘unprofitables’. Other solutions were available and open to use by the operators such as cross-product subsidies (which haven’t worked well due to the fact that on the other hand the regulator enforces cost-based pricing making cross-product subsidies difficult to implement). It is worth noting that the definition of Universal Service varies from country to country, in Finland for example, universal access includes the right for every individual to access 1Mbps of broadband internet in addition to other services.

In addition to the measures above, the regulator in Kenya also developed a Universal Service Fund (USF) framework which according to them on page 1 of the framework draft document was to “to complement private sector initiatives towards meeting universal access objectives”. The document title and the aim I have quoted above are conflicting to a keen eye.

If indeed the aim of the USF was to complement private sector, why is the same private sector being obligated by regulatory instruments to fund it?

The International Telecommunications Union (ITU) lists many way in which USF can be funded,  one of the more popular ways is by budgetary allocation from the government. Other ways are by use of Access Deficit Charges (ADCs) and the levying of  a percentage of monies collected by operators in their business operations towards the USF kitty. The ITU states that should a regulator go the revenue levy way, it must not place a unfair burden on the operator on how these levies can be collected. For example the regulator cannot say that it will levy a percentage for every call minute  or every MB of data used by subscribers, this would make accounting difficult and hence the approach of levying the total revenues of the operators which is easier and more transparent.

Several countries have implemented USFs that are beneficiaries of government budgetary allocations. Such countries include Chile and Peru. Incidentally the same countries are hailed as success stories of how universality has improved lives of its citizens. This is because the desire to offer universal service or access is a social obligation of the government and not private firms. Its in the governments interest to connect these otherwise unprofitable regions/people and it can easily do it from budget.

Chile’s approach has been an interesting case study of how, if done right, the USFs can work to meet government objectives. The regulator there took the concession path by having operators bid to provide services on a concession basis. The regulator would then pick the lowest bidder. The results were that most of the bids were 50% below the budgetary allocations meaning that the approach was financially efficient. Proper policies were put in place to define the penalties, rights and obligations of each winning concessionaire to ensure they delivered.

This is the approach the Kenyan regulator should take. Instead of levying operators a percentage of their hard earned revenues. The operators, through the ITU definition can claim that the regulator has placed an unfair burden on them from the perspective of them not being directly responsible for economic development of the citizens (whether through ICTs or other means). Universality is a social program and it therefore squarely falls on government arms. Profitability or lack thereof  from universality is a secondary consequence whose impact cannot be directly measured.

Proponents of operator-funded USFs argue that unseen benefits such as multiplier effect of connecting the unprofitable directly benefit the operators, if that is the case then this decision to connect these people should be a commercial decision by the operators and not a license requirement. An example of the multiplier effect is when for example I (being of better economic means and living in the city) can now use airtime (read revenues) to call my rural relatives who are now connected thanks to supposedly the implementation of universality. My act of calling them in addition to other people I normally call adds revenues to operators. The operator should therefore connect my rural relatives because I will call them and not because they will call me. This is a straightforward  commercial decision.

Obliging ICT operators to fund the USF is unfair because social economic benefits accrued from connecting the population are felt across several fronts such as improved health, education and increased commercial activities and not just by way of improved profits by operators if any. Universality’s key outcome is not purely an ICT one and making only ICT players fund it is tantamount to the unfair burden on the operators mentioned by ITU.

It is my opinion therefore that the current approach to universal service funding should be re-looked at and if possible a new method of funding it through direct government budget allocation be adopted.  This is already happening in providing roads, hospitals and schools.   The regulator needs to revisit this because of the following reasons:

  • The current market structure where one operator is making most of the revenues is unfair to this operator as they will be contributing the most to this fund. There are no clear guidelines on how these funds will be utilized leaving room for abuse.
  • Failure for the law to accommodate ICT industry players in the Universal Service Advisory Council meaning they have no say on monies they contributed. This technically makes it a tax.
  • Already, operators are extending their networks to seemingly unprofitable regions without the need for government to push them. Advancement in technology and convergence is making what universality defines as unprofitable now seemingly commercially viable because its now much cheaper to build and scale networks. USF objectives need to be reviewed or done away with altogether

Should the regulator be adamant about maintaining the USF due to various unreasonable and political ends, then operators have recourse at the international courts as Kenya is a signatory to the WTO  General Agreement on Trade in Services (GATS) especially the agreement on basic telecommunications.

My Thoughts on the Proposed Retail Tariff Controls in Kenya

February 28, 2018 1 comment

telecoms-13The Communication Authority of Kenya is mulling on introducing retail tariff controls in the Kenyan mobile telephony sector. As you would imagine, this has elicited mixed reactions depending on who you ask. This move it is said is part of a raft of recommendations by the recently released report that studied the Kenyan telecommunication competitive landscape. The introduction, according to the regulator is aimed at correcting market failures that are as a result of one operator being dominant over the rest. The proposed retail price controls aim at limiting Safaricom’s freehand in determination of loyalty schemes and promotions, prohibition of on-net discounts, mobile money fees charged to unregistered and cross-platform money transfers. Tariff  control is a regulatory mechanism that can be employed to correct market failures in a market. The main motivation for price control is to protect consumers’ rights and interests in circumstances where market forces alone have been unable to do so.

The competitive landscape report implies that Safaricom’s price differentiation between on-net and off-net calls leads to tariff-mediated network effects. By this I mean that subscribers on a network find it cheaper to call others who are on the same network than calling people on a different network, the effect of this the emergence of the ‘club’ effect where subscribers decide which network to join based on which network the people they call mostly are on. If most of my family and friends subscribe to a network X, I am more likely to subscribe to network X because by being on network X and not on network Y, my overall calling costs will be lower due to cheaper on-net pricing. This it is argued is abuse of its dominance. But this is only true if the interconnection rates are high between Y and X meaning it will cost me more if I chose network Y where none of my relatives and friends subscribe to. As we speak, interconnection rates are already regulated by CA. This fact alone means that the regulator found and enforced an interconnection rate that was cost based and reflected the market realities. The Safaricom on-net call rates are above the regulator-set interconnection rates  and are similar to the rates its competition provides its customers to call into the Safaricom network, in short, Safaricom’s subscribers pay the same rate as competitors subscribers when both call another Safaricom subscriber. CA would be justified in imposing tariff controls if indeed Safaricom’s subscribers paid less to call their counterpart than when competition subscriber calls. The fact that the report found that each operator was dominant on its own network also means that the club effect can easily be replicated by competition through aggressive marketing and innovation.

Individually tailored tariffs

Another proposal by the regulator is the prohibition of individually tailored loyalty schemes and promotions. The CA 2010 Tariff regulations specify that all promotions or loyalty schemes must be approved by the regulator prior to commencement. Any promotion, offer or scheme currently in operation has the direct approval of the regulator, the details of each promotion or loyalty scheme structure were available to CA before approval and these include individually tailored schemes and promotions. When an operators behaviour due to regulation causes it to become successful, it cannot be punished for successes it encountered while operating within the laid down regulatory framework. If there is any discriminatory behaviour, then CA failed in detecting and stopping this even with the existence of regulations. When that happens, it is clear that regulation is not the solution to the perceived market failures and the only remedy is let competitive forces determine customer choice.

What would happen if call tariffs are regulated?

Most people assume tariff regulation leads to the lowering of retail rates. This would only be true if CA had a way of accurately measuring the costs involved to provide service to additional customers on their network. At the moment, due to the fact that Safaricom has invested more in network infrastructures geographical and population reach, it costs them less to bring in a new customer and provide service to them than its competitors. The proposal to use Long Run Incremental Costs (LRIC) method would mean that because of the massive economies of scale enjoyed by Safaricom owning a large network and technology convergence, the cost of offering an extra minute of termination on the network is virtually zero in the short-term and LRIC is applied to give a realistic cost over the long term. How long is ‘long term’ will determine the price point.
A regulated tariff price should imitate the prices that would have arisen in a market with effective competition, both because this provides incentives to produce the requested service at the lowest possible cost and because the operators requesting the service have the incentive to optimize their own investment decisions. In this way price controls can contribute to efficient utilization of social resources. The problem however is that LRIC works very well in legacy circuit switched networks where it was easy to link network utilization with the provision of a service (if a switched circuit is in use, it is providing a directly attributable service), in a converged environment, the relationship between network resource utilization and provision of services is not that straightforward and an LRIC model applied to it would fail to efficiently allocate costs. As networks evolve into Next Generation Networks (NGNs), LRIC approach to service cost allocation becomes inefficient and LRIC starts to resemble the Full Allocated Costing (FAC) model. The result? higher prices to the consumer.

Replicable retail tariffs

One of the recommendations by the study is that Safaricom’s Tariff must pass the ‘replicability test’.  In order for a product or service to be considered replicable, it must be commercially and technically capable of being replicated by Safaricom’s competitors. By this we mean that any new tariffs that Safaricom comes up with should take into consideration the capability or state of competitors infrastructure and services especially at the wholesale level. If for example, Safaricom comes up with a tariff that takes advantage of a new innovation they developed, then competition should have similar innovations on their networks or should be allowed by Safaricom to access this new innovation at wholesales prices to enable them offer similar tariffs. In order for competitors to be able to compete with Safaricom in retail markets, it is necessary for them to have access, either via their own networks or through access to Safaricom’s network, to the wholesale components that enable those retail prices to be offered. This as you can imagine will slow down the pace of innovation by Safaricom or change the main focus of innovation from the customer to competition, anytime Safaricom wants to innovate, they will think of ways through which competition will not benefit much from it as opposed to spending their time and knowledge on how the innovation will first benefit the customer.

Tower sharing

The report found that Safaricom is dominant in the tower market owning about 65% of telecommunication towers in Kenya and recommends that it shares it towers with competition. To do this effectively, Safaricom has to let a 3rd party manage the towers on its behalf. Safaricom owns its towers while competition has a mix of owned and outsourced/leased towers. With rapid advancement in technology, there is a saying in the industry that it is always cheaper to build a network tomorrow. Any new entrant or existing operator rolling out new retail services and infrastructure such as towers will do it cheaper today than those who did it in the past. See how easy it was for Finserve Africa (Equitel) to get market reach by the flick of a switch riding on an MVNO license? Older operators didn’t get to enjoy these benefits and had to put in sweat and blood to get where they are.
In the Safaricom 2017 sustainability report, the operator spent close to 10 million litres of fuel and about KES 48,000 per month per tower location on energy costs. The report also shows that fuel and power costs are coming down and that Safaricom has also embraced green energy initiatives to power the active components at the tower stations, it is becoming cheaper by the day to setup and manage tower locations but the increase in the number of towers makes the management of the same a challenge.  Outsourcing of tower management is used by some operators to shift a large element of their fixed costs to the variable costs column of their financial books, in doing so the operators financial health improves. Tower outsourcing has little to do with improved efficiency in actual operations and management of these towers but more to do with improving the books. Due to this, the global trend in the telecom sector is the outsourcing of tower management to independent 3rd parties, something Safaricom should consider for its own benefit and not due to regulatory requirement. Safaricom should then decide to lease its towers to competition on a purely commercial basis.

Conclusion

Although well meaning, the CA needs to explore non-tariff based remedies to the perceived dominance of Safaricom. Tariff control is a very intrusive approach to handling abuse of dominance whether real or perceived. As markets evolve to become competitive, ex ante regulation should reduce as the regulator forebears regulation in favour of competitive forces. The challenge however is that customer inertia can mask the existence of competition in the market leading to the regulator applying regulatory tools to correct this perceived market failure. Market forces should be let to dictate the market tariffs.
The tariff control ocean floor is littered with shipwrecks of tariff control attempts by various countries that  tried to correct market failures by  employing it. One of these countries is Mexico who in 2012 introduced tariff controls by baring America Movil from charging interconnection fees to its competitors. Movil controls 70% of Mexico mobile market. As of 2015, mobile call charges had dropped by about 17% but investment in the sector dropped 30% during the same period, for a developing country like Kenya, a drop in ICT investments will have far reaching effects across multiple sectors of the economy. Whereas the intended outcome of tariff control is to  protect the consumer from a dominant operators actions, the question that remains is whether tariff control is the only viable market correction tool available.

 

Building Owners Impeding Telecom Services Roll-out Due To Lack Of Laws

January 21, 2018 4 comments

strctured-cabling-system-1There is this new building in Nairobi that is now inviting new tenants to occupy it after being recently completed and opened with much fanfare. As usual, new tenants were expected to fit suitable furniture and fittings into their new premises. But there was one problem: The building; in all its glory, lacked suitable telecommunication raiser ducts and conduits and occupants could neither pull cable to create Local Area Networks nor could they easily connect any floor to the basement where a local ISP had placed its fiber optic switch. The building owners also asked the tenants to bear any costs related to the modification of the building to enable the setting up of telecommunication infrastructure.

I searched the Kenya building code of 2009 and the National Construction Authority Regulations of 2014 to see if any of them compel building designers to incorporate telecommunication ducts as part of a buildings services in a similar manner it specifies requirements for  plumbing, electrical cabling, ventilation and heating/cooling. Sadly both do not make it mandatory for designers to incorporate into their designs paths, risers, ducts, trays or any other cable containment mechanisms that will enable the easy pulling, organizing and routing of telecommunication cables to any part of the building.

For buildings that have incorporated telecommunication cabling space and paths in their design and construction, the MDF or telecommunication room is usually small, poorly ventilated, poorly supplied with power and mostly located on the basement of most buildings which can sometimes be a long distance to the top floor depending on the building height. Building owners are also charging telecommunication companies hosting charges to host their switches and other equipment in the MDF room. These charges vary from a low of KES 3,000 to a high of KES 25,000 a month with or without electric supply. In the same breath, utility companies providing water and electricity are not charged rent for their equipment and fixtures such as electricity meters by the building owners to avail their products and services to the same tenants. In fact, its the building owners who pay the utility companies for them to bring in services to them.

With nearly every office needing internet connectivity for normal operations just like they need electricity, water and drainage, why do building owners create barriers for telecommunication companies by not making their buildings  cable ready and if they do,  go ahead and levy monthly rent for the cabinet hosting the equipment? Some building owners have also gone ahead and signed exclusivity agreements with one provider to host their equipment and avail internet connectivity in the whole building, locking out competitors. I know of operators who have been denied building entry to avail services to potential customers because competition locked them out with an exclusivity agreement between them and the building owner.

Outside buildings, telecom operators also have to apply and pay for wayleaves and permits from county governments and the Kenya National Highways Authority (KeNHA) to trench, lay cable, and do back-filling. It takes an average of three weeks to obtain a permit from any of these bodies and at a significant cost too. Permits to cross major highways by way of micro-tunneling can take several months to obtain.

The above challenges exist because there is no clear legal framework in which the telecom operators can work in to avail their services which can now be considered as utility services similar to electricity and water supply. There is need to do the following so as to make it easier for the operators and consumers of their services:

  • Amend the Kenyan building regulations to ensure that all commercial an multi-dwelling residential units such as apartments have suitable and standardized telecommunication cable pathways and containment fixtures. MDF room location should also take into consideration the transmission distance limitations of some technologies such as electrical/copper based cable maximum transmit distances.
  • Make it illegal for building owners to sign exclusivity agreements with a single or a select number of providers and baring the rest from building entry. Every operator should be given equal and reasonable access to their potential customers in any building. The proposed Kenya infrastructure sharing act can incorporate a section that outlaws exclusivity agreements as they also effectively bar infrastructure sharing.
  • The Kenya wayleave act cap 292 should be amended and modernized to reflect the current realities. The act assumes that the government is the sole provider of utility services and does also not incorporate the provision of utilities by private enterprises.
  • All road designs where necessary and possible, should incorporate buried ducts and manholes along the entire stretch of the road and suitable micro-tunnel crossings to carry any operators fiber-optic and coaxial cables at a small monthly fee payable to the road owner (KeNHA or county government). This will avoid instances where each operator has to trench and bury their own cable. This is sometimes done on the same side and section of the road and often leads to accidental cutting of a competitors cable as an operator trenches to lay their own cable. In the last 3 months, I’ve heard of about 4 instances of this happening in Kenya. Other than this, frequent trenching of roads inconveniences other road users and pedestrians. This is especially true in cities and towns.
  • County governments should be compelled by law to not charge telecom operators for permits to lay cable, this can be done by amending the Kenya Information and Communication act section 85 and 86 to explicitly state that no fees should be levied by local authorities and also specify timelines within which permits should be granted. The overall economic effect of letting the operators lay cable without many barriers such as fees and delays in approvals far outweigh the financial gain from permit fees by the county governments.
  • Physical planning departments in both national and county governments should incorporate telecommunication infrastructure real estate current and future needs when designing cities and towns.
  • The Kenya Information and Communication act should specify harsher punishment to telecom infrastructure vandalism acts such as fiber optic cable cutting or destruction of a mobile/wireless base station. In the same breath, it should also compel operators to conduct awareness campaigns to citizens living near telecommunication infrastructure on the dangers of tampering with the infrastructure.

Recent research shows that access to telecommunication services such as the Internet and telephony has a great impact on the socioeconomic well being of citizens especially in developing countries such as Kenya. It is therefore important that operators get all the support from the government in their quest to roll out services to the citizens because in dong so, they help the government in meeting its socioeconomic objectives.

 

The Internet of Things is about to change how we live and work

January 2, 2018 Leave a comment

intel_iot-m1Last week, the Communication Authority of Kenya released its sector statistics report for July to September 2017 showing that Internet penetration has hit 112.7% in the country. This is higher than the mobile penetration rate which stood at 90.4% for the same period.

The availability of Internet access presents a great opportunity for individuals and businesses to improve their lives and operations through efficiencies gained by adopting the Internet as a tool in their daily activities.

As the technology evolves, the Internet as we know it is also rapidly changing, it is now no longer restricted in virtual interfaces such as web browsers and apps such as WhatsApp or Youtube. The Internet is now moving out of the screen and into the real world and will soon be part and parcel of our living and working environments. Many items in our environment from the clothes we wear, furniture to electric appliances and homes will become part of the Internet in what is now known as the Internet of things or IoT in short.

By connecting all these items to the internet (and ultimately to each other), The IoT will present us with endless possibilities to better our lives from an individual perspective and also lower costs and create new revenue streams for businesses.

Take for example the idea of connected fabrics and wearables which will connect all your clothes and other attire to the Internet. This will enable your shirt for example to detect the chemicals in your sweat and send this information to your email or WhatsApp telling you that based on the chemicals in your sweat, you are about to come down with an infection, the shirt or wearable will also be able to take your heart rate and blood pressure constantly and warn you or even share this information directly with your doctor. Another example in IoT connected fabrics is wearing your favourite football jersey that immediately glows when your team or favourite player scores a goal. Connected homes will also present a great opportunity for families. Take for example a fully connected home where the fridge detects that butter is running out and automatically adds this to the your shopping list that is resident in your phone or tablet. The phone or tablet will then send you a reminder when it detects you approaching a supermarket that stocks that particular brand of butter that you love. Imagine also getting an early morning meeting appointment in your calendar and this automatically adjusts your wake-up alarm to an earlier time than normal bases on traffic conditions of the route you intend to use to the meeting from your house. This same alarm will also send a signal to switch on the water heater slightly earlier than normal.

On the business front, organizations stand to benefit a great deal from the IoT. Using the butter and connected shirt example above, the supermarket can place small screens on shopping trolleys that automatically display your shopping list when your phone is near the trolley and automatically deletes each item you pick and place in the IoT-enabled trolley, the screen can also have shopping floor navigation aids to help you easily locate shelves hosting the items in your shopping list. They can also place sensors at the shelves that will make your shirt give you a signal (this can be vibration or change in colour of the shirt) when you pass by the frozen display area where butter is kept. Businesses can also adopt IoT in their processes to improve efficiency. For example, insurance companies can use sensors embedded in cars they insure to accurately gauge driver behaviour on the road and offer lower premiums to good drivers and higher premiums to reckless ones. County governments can also leverage the IoT to improve efficiency in parking space management in cities and towns. For example, sensors under each parking slot can be connected to mobile app or to IoT-enabled cars to indicate free or occupied slots and automatically navigate the drive to the nearest free slot, they can also measure how long a particular car has parked and automatically bill the car owner on time spent basis. The county government can also implement different parking rates based on demand for space and for traffic control too (e.g slots farther from the CBD would be made cheaper than those in CBD.

The IoT can also bring significant efficiencies into the agricultural sector. Aquaculture farmers in Vietnam are already using IoT sensors to detect pond water salinity and automatically switching on fresh water pumps to dilute the pond water to the correct salinity, the pump switching system is also connected to an IoT-enabled mini weather station that will delay switching on if rains are forecasted.

Despite great strides made on the internet penetration in Kenya, more needs to be done to create a conducive environment for the growth and adoption of the IoT. This could include passing the necessary legislation on cyber security and privacy, two major concerns in the adoption of the IoT. It is estimated that there will be over 75 billion IoT devices in the world by 2025 making IoT enabled devices ubiquitous, this presents a great opportunity for Kenya to once again lead its peers on new technology adoption.

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Will Safaricom Be Declared a Dominant Operator?

April 23, 2016 1 comment

 

lion

Last week, The Communication Authority said that their self-imposed March deadline to create clear guidelines on how it handles dominance of an operator had lapsed. This was occasioned by the failure to get a suitable international consultant to carry out a research study which would assist the Communication Authority in identifying and developing several key market interventions that would have assisted in managing the effects of a dominant player in the market. It is worth noting that the issue of dominance cuts across broadcasting, postal and telecommunications sectors. The finding of dominance must be based on the context  and circumstances of the relevant market and this is why the Communication Authority is engaging a consultant to study the market. They cannot go ahead and declare an entity as dominant or abusing its dominance without this study.

Is dominance a bad thing?

Before I answer that question, I would first like to define what is dominance. Unfortunately, because of a lack of local guidelines in place, there is no clear and detailed definition of what dominance is from a Kenyan perspective other than a brief mention in section 84W of the Kenya Information and Communication Act (KICA). However, internationally recognized definitions do exist.

The European Commission defines dominance thus: “A position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained in the relevant market by affording it the power to behave, to an appreciable extent, independently of its competitors, customers and ultimately consumers”. An operator can become dominant by virtue of a well implemented growth strategy and there is therefore nothing wrong being a dominant player. However, it is the abuse of this dominance that attracts attention from regulators. If an operator occupies a dominant position and is declared dominant by way of a gazette notice as per the KICA, several tests can be conducted to see if they are likely to abuse this position. One of the key tests is existence of barriers to entry of new operators into the market the operator is dominant, it could be that they are dominant because of high barriers to entry for new entrants to offer effective competition. It could be also that they are dominant because no other investor is interested in that market because they can get better returns elsewhere, this is despite low barriers to entry into the market the dominant player is in. The other test is if the operator possesses what is known as Significant Market Power (SMP). The European Commission recognizes SMP when an operator controls more that 25% of the market it operates in, this assumes a fully competitive market, In countries that are transitioning from a monopoly (like Kenya) this is usually set at 65% of market share (KICA section 84W however mentions 25% in relation to determining the dominance of an operator and not in explicitly defining if an operator has SMP). However, it should be noted that  SMP designation is simply a trigger for the application of behavioral or structural conditions by the regulator and not necessarily a prerequisite condition for dominance.

The abuse of dominance can only occur if the dominant operator engages in behavior that is anti-competitive as recognized by law. This abusive behavior should be harmful to competition or consumers or both.

Competition Authority or Communication Authority?

Mid last year, there was confusion on who between the Competition Authority and Communication Authority should deal with anti-competitive behaviors of a dominant operator in the telecommunications sector.  I did some research on this and came to a conclusion that its the Communication Authority’s mandate to deal with any ICT operator abusing their dominance. Below are my reasons for coming to this conclusion.

Whereas the Competition Authority deals with all commercial forms of competition across all sectors, their mandate can be said to forbear when it comes to telecommunications, postal and broadcasting. The main difference in how the Competition Authority and Communications Authority deal with competition is that the Competition Authority mostly acts on a retrospective basis on raised complaints of anti-competitive behavior (Ex Post regulation), on the other hand the Communications Authority behaves in a forward looking manner and tries to prevent anti-competitive behaviors by implementing government policy by use of regulations that modify the behavior of operators (Ex Ante regulation). Competition policy is typically aimed at preventing market participants from interfering with the operation of competitive markets while telecommunications, postal and broadcast regulation often manipulates market circumstances and operator behavior to achieve public goals. In short, Competition Authority controls the market for commercial interests while Communication Authority controls the market for public interest.

One point worth noting is that telecommunications, postal and broadcast operators in a regulated environment can use what is known as ‘the regulated conduct defense’ to not be under the control of the Competition Authority. In this defense, operators are regulated by regulations that are deemed to be in public interest and any activities they carry out within this regulated environment cannot attract liability under common competition laws. This defense is however not very applicable in situations where the telecommunications, postal or broadcast sector is highly competitive and the regulator forbears from regulation and lets market forces do most of the self regulation, in such circumstances, the Competition laws can be applied to telecom and broadcast operators as is the case in USA and EU.

An Analysis of Safaricom’s position in the market

As per the 2015 Q4  sector statistics, Safaricom controls 64.7% of mobile voice subscribers, 63% of mobile data subscribers and 71.7% of mobile money users. The first step in the process of determining if Safaricom is a dominant operator involves defining and looking at the market it operates in and if the same market possesses barriers to entry by others  that could have caused them to become dominant. The nature of our licensing regime means that Safaricom’s geographical and product market is the same as that of its fellow licensees in the same category of license. It is very clear from the figures above that Safaricom’s large market share triggers the need to analyze if it is dominant by evaluating if it  possesses Market Power, a key factor in dominance determination. Market power can be see in the following:

  • Profitability. Safaricom’s profitability is much higher than the rest of the competitors combined.
  • Pricing behavior. Safaricom’s prices are not the lowest in the market and they do not react to competitor price reductions, promotions or offers.
  • Vertical integration of its operations. Safaricom tightly controls nearly the entire value chain in delivering its products and services.
  • Bundling: Safaricom bundles both competitive and non competitive products, it also bundles its local loops and essential facility capabilities with its products (e.g. Selling Internet access (a product) via a Wimax/fiber network it owns and controls (local loop) and the inability of competitors to use this Wimax/fiber network to sell their internet services)
  • Barriers to market entry by competition to take advantage of their high prices. This is the point that I want to focus on below.

Barriers to Market entry

One of the key factors in determining if an operator is dominant is what happens if they increase prices of their products and services. If barriers to market entry are high, then no new entrant will easily come in and offer lower prices and take customers away from them. If barriers are however low, new entrants can easily come into the market and offer cheaper pricing and make them regret increasing their prices by loss of customers to them. In my analysis, barriers to market entry in Kenyans mobile telecommunication sector are very low especially with the advent of Mobile Virtual Network Operators  (MVNO’s) and the proposed infrastructure sharing regulations that are coming into place. This means that the Communication Authority has done a splendid job of making it easy for competition to be offered to Safaricom on voice, data and mobile money should an investor find it attractive to do so. This factor alone I believe is sufficient to prevent the regulator from declaring Safaricom dominant or even term some of their actions (like bundling) as abuse of their dominant position. The fact that end users can take advantage of Mobile Number Portability (MNP) and move to competition and enjoy lower priced  services makes it even easier for competition to overcome customer inertia and get customers to move to them. The big question is then why isn’t competition significantly eating into Safaricom’s market share?

The answer could lie in Safaricom’s extensive network coverage which is unmatched. But the new infrastructure sharing laws will poke holes into this answer as it will allow any other mobile operator to use Safaricom’s network in a national roaming agreement that will enable them offer affordable services across the country where there is Safaricom coverage, It will also allow competitors to use Safaricom’s local loops to offer service. This means that any operator competing with Safaricom will now be able to cover the country just like them. So there will be no excuse for any customer to not move to any competing operator for better or cheaper service should they wish to.

So with the availability of MNP, infrastructure sharing regulations, MVNO licensing, and many other playing field leveling regulations set by the regulator, I believe it will be very hard for the Communication Authority to declare Safaricom a dominant operator or one who is also abusing their position of dominance.

 Lion image (c) http://www.daler-rowney.com

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