Telkom / Business Connexion Group (BCX) Helanya Fourie & Nicola Theron. Annual conference of the Association of Competition Economics, 2016

Transcription

1 Telkom / Business Connexion Group (BCX) Helanya Fourie & Nicola Theron Annual conference of the Association of Competition Economics,

2 Questions raised by the transaction Why was the same transaction which was not approved in 2007, approved with conditions in 2015? What does convergence in the telecoms market mean for market definition and foreclosure theories of harm? Were the Competition Commission (CC) justified in imposing stringent behavioural conditions to address the competition concerns? 2

3 Structure Overview of the merging parties Rationale & background to the merger The telecoms value chain 2007 Telkom/BCX proposed merger Abuse of dominance complaint against Telkom 2015 Telkom/BCX merger Relevant markets Vertical issues: Foreclosure & bundling Conditions Proposed by the CC Why were these inadequate? How were the inadequacies addressed? 3

4 Parties to the merger Telkom Group Incumbent fixed line provider Market partially liberalised with entry of Neotel (second national operator) in 2008 Decline in fixed line revenues Entered mobile market through Telkom Mobile market share remains small Telkom Consumer Telkom consumer and retail services Telkom Mobile Telkom Business Telkom Business Telkom Business Mobile Cybernest Telkom Wholesale and Networks Telkom wholesale and networks service offering Want to grow revenue in downstream enterprise markets in e.g. MNS or ITS 4

5 Parties to the merger BCX revenue by Technology % 6% 5.0% Offers a range of fixed line ITS services to enterprise customers Cloud infrastructure Communication Security & network services Workspace services Professional services Application services Service integration and management Hardware IT Services Non-IT/Other 81.0% Software Telecommunications 5

6 Rationale & background Telkom - Rationale Fixed voice revenues are under significant pressure fixed-mobile substitution Lacks the necessary capacity to compete in the ITS market transaction would allow Telkom to enter the ITS market with sufficient scale Lacks the brand and reputation for service excellence Will give Telkom the opportunity to provide bundles products BCX - Rationale Convergence strategy, where applications, communications and infrastructure will become cloudbased Telkom s infrastructure will facilitate the delivery of these converged services 6

7 ICT value chain: Infrastructure layer High capacity links between cities Fibre optic transmission Transmission Backhaul Links between network backbone and access network Metro fibre Copper Microwave Local loop/ last mile Connect end-users to the network Base stations Local exchanges Metro fibre Microwave, etc. Access 7

8 ICT value chain: Convergence of MNS & ITS The convergence of technologies does not in itself entail new or unique problems for market definition the problems that may be found in the context of convergence actually results from bundling and/or other rapid change associated with convergence EC (2002) Market definition in the media sector Computing Communications Content Computing Communications Content 8

9 Anti-competitive effects of the 2007 Telkom/BCX merger In our view [it is an] attempt by an erstwhile monopolist to thwart the beneficial impact of deregulation in the form of greater economies of scale and scope for rival MNS providers and lower costs for customers Tribunal, p. 8 The transaction was prohibited on the horizontal aspects Removal of an effective competitor (BCX) Unilateral effects MNS is/was a battleground for convergence through the merger Telkom intended to extend its monopoly into the converged space Vertical issues that were raised: Input foreclosure of leased lines Telkom owned all infrastructure and access lines Mixed bundling of PSTS, MNS & ITS 9

10 Abuse of dominance by Telkom Telkom accused of abuse of dominance by SAVA and ISPA Admitted guilt in bundling VPN and access links to win business in the MNS/VPN market through margin squeeze Settlement Agreement approved by Tribunal in 2013 Retail Pricing Policy (RPP) Transfer Pricing Policy (TPP) / functional separatiom Under the TPP, Telkom Wholesale should, for: Common components, price network services to OLOs and Telkom Retail on a nondiscriminatory basis Non-common components, price network services to OLOs at no more than cost plus reasonable return Telkom Retail at no less than cost plus reasonable return 10

11 2015: Relevant markets Upstream markets Provision of wholesale leased lines Telkom has market power in this market; no horizontal overlap Downstream markets Retail supply of MNS (30%) MNS & VANS (29.9%) Hosting services (41%, but excess capacity) ITS (24.9%) Mobile services to enterprise businesses (incl. government) 11

12 2015: Anti-competitive effects Input foreclosure Merging parties argue that it is not possible due to them not being dominant in the upstream market for fibre access à but this depends on how you disaggregate the fibre market Conglomerate effects (anti-competitive bundling) The transaction places Telkom in a unique position to offer a full suite of downstream services without procuring anything from a third party. Counterarguments of the merging parties: There are multiple competitors to the merging parties, who would be able to easily reenter the market if the merged entity increases its prices Few customers would derive a significant benefit from sourcing a bundle Test: would it increase the prospects of winning business? The merging parties contended that the Settlement Agreement was sufficient to prevent anti-competitive behaviour, but the CC disagreed 12

13 2015: Behavioural conditions proposed by the CC TPP expanded to explicitly include fibre access Settlement Agreement extended from 18 July 2018 to 31 December 2020 Quality of fibre access services provided to OLOs should be substantially similar to that provided to Telkom Retail. Where fibre access is included in a bundled offer: Prices for bundled offers must adhere to the TPP Must keep separate internal accounts for downstream retail offerings to allow profitability to be monitored Revenues from supplying the bundle must exceed the input costs 13

14 Inadequacy of the proposed conditions (1) The TPP required non-discriminatory pricing for common components, but these did not have to be cost based Charging above cost prices for wholesale products still allowed margin squeeze Telkom made significantly larger margins at the wholesale than the retail level Telkom implicitly forced OLOs to purchase connectivity from Telkom Retail by only providing SLAs with infrastructure purchased from Telkom Retail, thereby engaging in anti-competitive tying 14

15 Inadequacy of the proposed conditions (2) The level of disaggregation of services which the TPP requires does not allow the profitability of individual products to be monitored There remains large variability in the profitability of products supplied by Telkom at the retail level, as well as the wholesale level Under the RPP, only IP VPN and internet services had to have positive margins Functional separation disallows Telkom to cross-subsidise between Wholesale and Retail, but not between product categories Including fibre in the TPP is insufficient; Telkom can rely on its copper infrastructure to during the transition to fibre Redundancy requirements Telkom will be able to win contracts by bundling broadband and voice, and offering discounts on voice minutes 15

16 How were the inadequacies addressed? TPP expanded to: Incorporate all fixed network products (i.e. not only fibre) Telkom will not increase the prices of the affected (wholesale) products above their price as at the Implementation Date ( price freeze ) Telkom Wholesale will offer SLAs on common components to OLOs and Telkom Retail on a non-discriminatory basis Where fixed network products are supplied as part of a bundle, Telkom will: Keep separate accounts for its downstream retail offerings (MNS, VANS, hosting, ITS) to permit the profitability of these products to be monitored The pricing of the bundle will be such that the revenues from supplying the bundle exceed the associated input costs 16

17 Final remarks The CC had to impose stringent behavioural conditions as a result of poor telecoms regulation Input foreclosure in SA s telecoms sector is of specific concern The Integrated ICT White Paper calls for open access which might mitigate some of the problems that were brought to the fore by this merger 17

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