During 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.
- 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.
- 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.
- 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.
- 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.
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.