Regulators face dilemma over telco's grip on market

As consumers await Parliament’s report on competition in the telecommunications sector, regulators have been put on the spot for failing to implement legislation promoting the fair market practice.

Experts now say that the Competition Authority of Kenya (CAK) and the Communications Authority (CA) have abdicated their oversight role, exposing mobile operators and consumers to a regulatory vacuum that threatens to limit innovation in the critical sector.

The CAK has pitched against imposing ex-ante regulations on Safaricom and shot down proposals to have the service provider split into several divisions.

The rules would also have subjected Safaricom to a special regulatory regime including making public some of its strategies before implementation in a bid to level the playing field.

CAK, however, noted that while the firm is dominant in some areas, this did not constitute significant market power.

CAK Director-General Wang’ombe Kariuki who appeared before the Parliamentary Committee on Information and Technology a fortnight ago reiterated this position.

“As much as Safaricom has a bigger share of the market than all mobile network operators combined, it has always reacted to activity by its competitors such as price reductions so as to guard against loss of market share,” he said.

This has been the scenario over a few years since 2010, when Airtel instituted a 60 per cent price cut on calling rates, to Sh3 per minute from Sh8 per minute for calls within its network while calls to other networks reduced from Sh12 to Sh3.

Other telcos - Essar (yuMobile) – which has already exited the market, Telkom (then trading as Orange) as well as Safaricom were sucked into the war much to the reprieve of consumers.

Mr Wang’ombe’s argued that Safaricom does not have significant market power as it has over the years lost market share to competitors and that the firm never abused its market grip.

“Safaricom’s share (of the voice and data market) declined by 13 per cent in the last six years while Airtel’s has expanded by approximately 16 per cent in the last two years,” he said.

“There has been a lot of dynamism in the market shares among all the relevant retail markets. Specifically, Safaricom has been progressively losing its market share over the period analysed,” he said.

The CAK thus ruled that Safaricom does not possess significant market power over any of the markets analysed stressing that dominance is not illegal in its own right but the abuse of one’s dominant position.

Just a day after the CAK boss made these arguments in parliament, Airtel cut its calling rates by 50 per cent. The firm’s subscribers now pay Sh2 a minute for all calls, including those to other networks.

Going by CAK’s arguments, consumers would expect Safaricom to have considered the impact that a 50 per cent price cut would have on its business.

The company, however, said price reductions were not part of its strategy and was not bothered by the customer acquisition attempts that Airtel was making. “We are not going to bring down our prices, we will continue to charge (current prices of about Sh4 a minute) and if we lose market share then it is fine… we have to maintain a sustainable business,” said Safaricom Chief Executive Bob Collymore.

He said a price war would be detrimental consumers and could compromise services as well as investments.

“When I first came to this country, we went down to Sh2 and at some point it was Sh1 but we said if you are charging people this kind of low prices, you will not be able to invest in the industry so we put our prices back so that we could continue to invest,” he said.

“The results of that is that we have 4,800 base stations and they have far fewer because they were not charging the right prices. They are doing that again and will later say they are not making profits.”

This has been the gulf at the centre of the ongoing debate on dominance in the telecommunications sector. Safaricom says it has invested billions of shillings on the network and product development, unlike competitors, thus should not be punished for its success.

Airtel Kenya Managing Director Prasanta Das Sarma, however, said regulatory bodies and lawmakers should make good the work that went into reviewing the competitiveness of the telecom sector through the implementation of the Analysys Mason study.

“In any telecom market, regulators play a critical role in ensuring there is market competitiveness. If a market is competitive, all stakeholders – operators, shareholders and the consumers – are happy,” said Das Sarma. “The regulators are there to ensure customers get the best deal. We have told regulators to do an independent study to ensure all conditions in the market are right. A consultant was hired and found there was dominance in certain segments of the market.”

Service providers - Telkom and Airtel argue that Safaricom’s large market share, by virtue of this investment, makes it difficult for competitors to grow their own market share and operate profitably.

Telkom and Airtel have been criticised for falling behind on network and product investment and thus have no grounds to demand Safaricom be subject to share its infrastructure.

In May, Telkom Kenya announced it was selling 723 towers to a US firm American Tower Corporation - a move meant to enhance quality and reliability on its network.

Airtel Kenya has also in recent years sold off several towers and closed down some regional offices to cut costs. This has weakened the two operators case to have a network infrastructure deal with regulators.

CAK said any player who divests its towers may be compelled to reinvest a minimum amount of money through leasing extra towers.

The Parliamentary Committee saw dominance report dominated the hearings.

The report dubbed: The Telecommunications Sector Competition Market Study undertaken by UK firm Analysys Mason has been unsettling for some players in the sector but welcome by some. It called for intervention by sector regulators.

According to the study, Safaricom’s market share then, standing at 70 per cent and 80 per cent market in the mobile communications and mobile money market respectively.

This has not substantially changed, with only the telco’s subscriber base reducing to 67 per by end of March this year.

Industry players say the CA did not have to hire the research firm to look into the telco market or make recommendations since most of these were already captured in the communication and competition laws.

According to the Kenya Information and Communications Act, a player with over 50 per cent market share should be declared dominant and be under the scrutiny of regulators.

The Competition Act, however, lowered the threshold to 40 per cent share of the market.

The onus of policy intervention rests with regulators who have the resources and legislative mandate. This was demonstrated in 2013 when CAK of Kenya ruled in favour of Airtel Kenya on mobile money agents.  

financial@standardmedia.co.ke