Competition, barriers to entry and inclusive growth: Telecommunications Sector Study June 2016 Prepared by: Ryan Hawthorne, Pamela Mondliwa, Tamara Paremoer, and Genna Robb 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 Table 3: Costs associated with the broadband network layers ............................................ 18 Table 4: Fixed operator market shares, revenue ................................................................. 20 Table 5: Fixed operator markets shares, kms of fibre .......................................................... 20 Table 6: Mobile operator market shares .............................................................................. 23 Table 7: Spectrum Allocations ............................................................................................. 24 Table 8: Impact of FibreCo on cost of transmission between Bloemfontein and Johannesburg ..................................................................................................................... 46 Table 9: Voice network quality ............................................................................................ 54 Table 10: Cost of contract cancellation ............................................................................... 58 Table 11: Mobile call termination rates history – 1993-2010 (regulated) .............................. 61 Table 12: Mobile call termination rates history – 2011-2016 (regulated) .............................. 61 Table 13: Welfare improvement due to call termination rate intervention............................. 66 Table 14: Prepaid, post-paid and hybrid customers (AMPS, 2010 - 2013) .......................... 70 Table 15: Operator market shares, prepaid customers (AMPS, 2010 - 2013) ..................... 71 Table 16: Average age and income by operator chosen (AMPS, 2010 - 2013) ................... 71 Table 17: Voice prices for Telkom Mobile, Cell C, MTN, Virgin Mobile and Vodacom ......... 72 Table 18: Estimation results – conditional logit .................................................................... 74 Table 19: Voice prices for Telkom Mobile, Cell C, MTN, Virgin Mobile and Vodacom (conditional logit model 1) ................................................................................................... 75 Table 20: Share of AMPS respondents, by race (2010 - 2013) ..........................................