Cellphone Pricing Wars: Regulation Matters, but Ownership Matters More

By Jane Duncan · 2 Apr 2014

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Picture: Greg Laden
Picture: Greg Laden's Blog

Most South Africans are aware of the public spat between South Africa’s largest cellphone operators, MTN and Vodacom, on the one hand, and the smaller cellphone operators and the Independent Communications Authority of South Africa (Icasa) on the other.

The spat relates to Icasa’s attempt to bring down the cost of communications by gradually reducing the Mobile Termination Rates, or interconnection rates, through regulations. These are the rates that one network operator charges another to terminate calls on its network. Many, including Icasa, have blamed excessively highly interconnection rates for MTN and Vodacom’s rampant profiteering at the expense of the public.

These rates have also made it very difficult for the smaller operators, Telkom Mobile and Cell C, to offer lasting competition. The public was disgusted when MTN and Vodacom decided to take Icasa to court to challenge the regulations, as clearly this was an opportunistic move by the cellphone behemoths to frustrate Icasa and continue raking in massive profits.

However, the South Gauteng High Court slapped down Icasa for making sloppy regulations. In fact, the Court had to take on the role of Icasa and insist on the implementation of the regulations for a six month period, allowing Icasa space to produce proper regulations that would withstand judicial scrutiny.

The judge painted a sorry picture of a weak regulator which cannot even follow its own processes. While her decision is probably going to lead to price reductions over this period, which is good news for the hard-pressed consumer, the sustainability of these reductions will depend on whether Icasa can up its game quickly.

There can be no doubt that it is important to support a strong regulator and competitive pricing. Yet in the heat of the moment, the assumptions underpinning the ‘cure’ to the problem of exploitative pricing are often not examined.

The key assumption is that competitiveness is needed to bring down prices, and the recent cost reductions introduced by Cell C shows what is possible if smaller operators enjoy a regulatory environment that levels the playing field. In other words, competitive capitalism will deliver cheaper prices.

A further assumption is that the private sector is an inherently superior provider of services than the public sector. After all, the private sector delivered cellphone connectivity to millions of South Africans, to the point where cellphones are practically ubiquitous, while the landlines provided primarily by Telkom, are used by a fraction of the population, and landline usage is shrinking.

These assumptions are then used by market pundits to portray the private communications sector as fleet-footed and innovative, while the state-owned sector is flat-footed, out of date, an anachronism. They portray support for private-sector led development as the ‘common-sense’ approach, while public sector-led development is ‘ideological’.

But is this a proper account of events? Not really. If the history of cellphone growth is examined properly, it becomes clear that the industry has been built on the backs of the public, through disguised public subsidies. 

Vodacom and MTN were born in sin in the dying days of apartheid. The apartheid regime initially intended to privatise Telkom, but stalled as negotiations with the African National Congress (ANC) were underway. By the early 1990’s, Telkom had, in fact, already been prepared for privatisation through corporatisation, forcing it to operate along business lines. However, according to media academic Robert Horwitz, in its early days, Telkom’s predecessor, the South African Posts and Telecommunications (SAPT) had benefitted from government largesse in the form of treasury loans to finance capital expenditures in white areas; in fact, the organisation received permission to raise its own finance only in 1972.

The apartheid regime did go ahead and licence two cellphone companies on the eve of the transition to democracy: Vodacom and MTN. Telkom received half of the Vodacom licence, and British company Vodafone the other half.

The public nature of these companies was subsequently diluted. Telkom was partly-privatised in the mid 1990’s, and it also sold part of its stake in Vodacom to the British company Vodafone in the late 2000’s, giving the latter a controlling stake in the company. As Telkom partly birthed Vodacom before the former’s privatisation, it would have made significant contributions to its start-up costs. The picture differed somewhat with MTN, though, as the company had much more limited public ownership through Transnet when it was established.

Of course, MTN and Vodacom will argue that their subsequent investments dwarf any initial public investments, but this is to miss the point that the start-up years are the ones that often make the difference between success and failure.

Vodacom and MTN have been opposed to Icasa’s attempt to entrench asymmetric interconnection, where the smaller companies charge higher interconnection rates than the larger ones. They argue that this constitutes an unacceptable form of cross-subsidy of the smaller companies by themselves. The regulatory rationale behind this practice is that smaller companies should pay less as they are terminating fewer calls, whereas the larger companies generate larger call volumes and should therefore pay more, to bring some kind of parity to the industry. 

Vodacom and MTN’s arguments are entirely self-serving. The public has, in fact, subsidised cellphone expansion through extremely high interconnection rates, to the benefit of these very companies. Asymmetric interconnection was practiced in the past to give MTN and Vodacom a head start in establishing their business. This was to the detriment of Telkom, and contributed to the decline of the company’s fixed-line business.

The initial interconnection agreement between Vodacom and MTN set a low interconnection rate. When the third cellular network, Cell C, was introduced in 2001, both cellphone companies increased the interconnection rate massively, which secured Vodacom and MTN’s dominance as a duopoly. So it is ironic that Vodacom and MTN have been resisting the very arrangement that allowed them to become so powerful.

It is a myth that the cellphone industry demonstrates the success of private sector-led growth in South Africa. In fact, it is an example of how public assets are gouged to finance private sector expansion. This is not to say that public companies are angels and private companies devils. After all, in 2012, the Competition Tribunal fined Telkom after finding it guilty of anti-competitive conduct in the early 2000’s. This problem must not be attributed to its public ownership per se, but to the fact that it was a largely public entity that was being made to act like a private entity.

In theory, regulators should protect the public against excessive profit-taking. But in reality, capitalist markets generally do not work like that. All too often, regulators are weak and set up to fail, creating a chimera of public interest regulation that civil society chases after, but never quite wins.

Undoubtedly, it is important to strengthen a weak regulator in the short term. But adopting this as the only strategy diverts attention away from a much-needed debate about the kind of ownership of the means of communication that is needed to ensure that people are put before profits.

Unless the reality is confronted that the private sector is in the business of making profits, and democratic public ownership creates the necessary (but by no means sufficient) conditions for people’s right to communicate, then the roots of the affordability problem in the communications sector will not be addressed.

In this regard, Latin America is streets ahead of South Africa in debating communications alternatives; in fact, local debates are generally timid and lack imagination. And these are the longer-range debates that need to be held as South Africa undertakes an ICT policy review that should shape the direction of the sector for many years to come.

The South Gauteng High Court’s judgement is available on the TechCentral website

Duncan is a Professor of Journalism at the University of Johannesburg.

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