Will Safaricom Be Declared a Dominant Operator?
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.
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