Working Paper 2/2016 Competition, barriers to entry and inclusive growth: Telecommunications Sector Study Ryan Hawthorne, Pamela Mondliwa, Tamara Paremoer, and Genna Robb1 Centre for Competition, Regulation and Economic Development, University of Johannesburg. [email protected], [email protected], [email protected], [email protected] Abstract Historically South Africa has favoured incumbents/national champions over rivalry (competition) in the telecommunications sector. However, the importance of competition has become more apparent with each new development in the sector. Given the changes in this dynamic sector it is important to evaluate progress on regulating for competition and the obstacles to meaningful participating in the sector by firms. The paper assesses barriers to entry in the market for broadband and voice services in South Africa through focusing on the experiences of Dark Fibre Africa as an entrant in fibre-based broadband, members of WAPA in wireless and Cell C as a challenger in mobile. The paper draws on interviews and publically available documents and data to assess the nature and extent of barriers to entry and expansion in the telecommunications sector. The assessment considers three categories of barriers to entry namely, access to facilities, the slow pace of regulation and strategic responses by incumbent firms. The research finds that though there has been some headway in improving competition, there is still a long way to go. The research finds that entry has a positive impact on competition outcomes and that there are benefits to regulating for competition. Following ICASA’s mobile termination rates decision, competition in prepaid voice services broke out between the mobile operators, however, own-price and cross price elasticities analysis shows that there is considerable scope the incumbent operators’ market power, including through stronger regulation of network open access conditions. The paper concludes by making recommendations on what can be done to facilitate the roll out of broadband to achieve SA Connect targets in terms of access, speed and affordability. JEL Classification L1, L4, L51, L86, L96, L98 1 Pamela Mondliwa and Tamara Paremoer are researchers at CCRED and Ryan Hawthorne and Genna Robb are research fellows at CCRED. 1 Contents 1 Executive summary ........................................................................................................ 5 2 Introduction .................................................................................................................. 10 3 Background to the industry .......................................................................................... 12 3.1 Introduction ........................................................................................................... 12 3.2 Industry development and structure ...................................................................... 19 3.2.1 Fixed .............................................................................................................. 19 3.2.2 Wireless ......................................................................................................... 21 3.2.3 Mobile ............................................................................................................ 23 3.3 Policy context: issues impacting competition......................................................... 24 3.3.1 Spectrum allocation ....................................................................................... 24 3.3.2 Local Loop Unbundling .................................................................................. 25 3.3.3 Facilities leasing ............................................................................................ 27 3.4 Proposed mergers and JVs ................................................................................... 27 4 Fixed - Dark Fibre Africa .............................................................................................. 31 4.1 DFA’s entry experience: barriers to entry and expansion ...................................... 31 4.2 Background to Dark Fibre Africa ........................................................................... 41 5 Fixed wireless .............................................................................................................. 43 5.1 Barriers to entry .................................................................................................... 43 6 Mobile - Cell C ............................................................................................................. 52 6.1 Background to Cell C ............................................................................................ 52 6.2 Barriers to entry/expansion ................................................................................... 55 6.3 Gains from regulating for competition.................................................................... 60 6.4 Competition between mobile operators – voice services (prepaid) ........................ 68 6.4.1 Description of datasets .................................................................................. 70 6.4.2 Results........................................................................................................... 72 6.4.3 Summary of competition between mobile operators ....................................... 75 7 Summary of the barriers to entry in telecommunications in South Africa ...................... 77 8 Policy recommendations .............................................................................................. 79 List of references ................................................................................................................ 81 Appendix A: Neotel’s entry experience: in brief .................................................................. 82 Appendix B: Profile of interviewees for DFA case study ...................................................... 84 Appendix C: Profile of wireless interviewees ....................................................................... 85 Appendix D: Methodology (conditional logit) ....................................................................... 87 Appendix E: Data tables ...................................................................................................... 90 2 List of figures Figure 1: Broadband speeds (Kbps) and prices (USD) in South Africa and peer group countries ............................................................................................................................. 12 Figure 2: Forecasted growth in consumer broadband traffic ................................................ 14 Figure 3: Forecasted growth in business broadband traffic ................................................. 14 Figure 4: South Africa’s broadband speeds compared to those in Brazil, China, India, Russia and Turkey .......................................................................................................................... 15 Figure 5: Broadband network layers .................................................................................... 17 Figure 6: Map of WAPA members in South Africa ............................................................... 22 Figure 7: Digital Dividend .................................................................................................... 25 Figure 8: Number of commercial lease agreements (growth in long-term customers) ......... 32 Figure 9: Other measures of network growth: route kilometres of fibre and number of mobile base stations connected to DFA network ............................................................................ 33 Figure 10: Revenue Growth ................................................................................................ 33 Figure 11: DFA Shareholding .............................................................................................. 43 Figure 12: Possible means of allocating unused high-demand spectrum ............................ 49 Figure 13: Growth of subscriber numbers ........................................................................... 53 Figure 14: Average mobile data speeds (2015) ................................................................... 54 Figure 15: Mobile termination .............................................................................................. 60 Figure 16: Retail prices and call termination rates ............................................................... 62 Figure 17: Growth of outgoing minutes ............................................................................... 63 Figure 18: South Africa vs SADC retail prices ..................................................................... 64 Figure 19: Calculation of welfare benefits from price reductions .......................................... 65 Figure 20: MTN & Vodacom’s revenues .............................................................................. 67 Figure 21: Lowest available off-net prepaid price (Peak), South Africa, 2010 - 2015 ........... 68 Figure 22: Lowest off-net prepaid price (peak), SA & other African countries, 2010 ............ 69 Figure 23: Lowest off-net prepaid price (peak), SA & other African countries, 2015 ............ 69 3 List of tables Table 1: SA Connect targets ............................................................................................... 13 Table 2: SA vs Brazil internet/broadband speeds ................................................................ 16