National regulators essential

OvumIn the past few months regulators from various jurisdictions have found their respective incumbent telcos to have breached national antitrust law and have imposed hefty penalties.
The preservation of fair competition and the protection of consumer welfare are two primary goals of most national regulatory authorities (NRAs) and recent activities have sought to achieve these objectives. Effective competition can benefit consumers and industry alike through lower prices, improved quality, product differentiation, and greater innovation.
However, the free market is not always optimal, and ex-ante regulation can help facilitate fairer competition in traditionally monopolized markets. Well-designed ex-ante regulation can work to protect the process of competition and prevent abuses of dominance. However, as more markets are deemed sufficiently competitive not to warrant ex-ante regulation, it is equally important to have a functioning, ex-post competition law framework in place.
The NRAs which have intervened recently have done well to act quickly on anti-competitive conduct and levy fines to dissuade others from considering similar practices. Further action will need to be taken to ensure that competition is maintained, but many countries, especially those which are less developed economically, can learn from these interventions when attempting to foster a competitive environment within their own communications markets.
Benefits of competition
Competition between firms is often viewed as fundamental for effective markets and it can lead to an array of benefits, particularly for consumers. Firstly, in a competitive market, there can be significant downward pressure on prices. Basic economic theory suggests that an increase in the supply of goods available will pull prices down.
This is good news for consumers as their spending power becomes greater, but increased demand for goods and services also gives businesses the incentive to raise output and the economy can be boosted as a whole. Competition can also increase the quality of goods and services being sold since as competition increases, quality will also improve as firms work harder to retain customers or even expand market share.
Similarly, greater rivalry can mean greater incentives to differentiate the products on sale. As the number of competitors in the market rises, firms are encouraged to make their own goods or services more heterogeneous to attract consumers. This improvement in choice benefits consumers as they can find the product more suited to them in terms of price and quality. Finally, competing businesses drive innovation as each firm looks to better the other by creating new products or by inventing more efficient work processes.
Several regulators have recently acted to challenge some practices that could be detrimental to market players. In the British Virgin Islands, the Telecommunications Regulatory Commission concluded that Digicel and Lime had both acted unlawfully by charging retail prices to customers for calls to affiliated mobile network operators in other Caribbean jurisdictions below the wholesale charges available to their competitor Caribbean Cellular Telephone for the termination of calls on those affiliates’ networks.
In Uzbekistan, the State Committee of Uzbekistan on De-monopolization, Support of Competition and Entrepreneurship imposed a fine of $80 million (€65.15 million) on MTS for violations of anti-monopoly, consumer protection, and advertising laws. This fine represents over 18% of its annual revenues for 2011.
Meanwhile, in South Africa, Telkom SA has been fined ZAR449 million (€44.37 million) for abusing its dominant position between 1999 and 2004. The Competition Tribunal concluded that Telkom had leveraged its upstream monopoly at the wholesale level to provide an advantage to its subsidiary in the retail market. Telkom’s conduct was judged to have caused harm to competitors and consumers, and to have impeded competition and innovation in the value-added network service market.
In each case the regulator was correct to step in and halt the anti-competitive conduct. “Perfect” competition is rarely found in practice, with markets usually exhibiting some kinds of imperfections. When certain firms’ behavior has the potential to hamper competition, regulators must be ready to act credibly, either ex-ante or ex-post, in order to protect the interests of consumers and other agents in the market.
The fines imposed represent a significant proportion of these firms’ revenues and will likely have a deterrence effect on other undertakings. The legal action in Uzbekistan has even resulted in MTS sustaining a $700.9 million loss in 2Q12.
Regulator vigilance necessary
NRAs in these countries have taken positive steps to tackle anti-competitive behavior and have imposed fines on those found to be in breach of antitrust law. Yet it is likely that additional efforts will be needed from regulators in order to foster a sustainable competitive environment within their respective communications markets. The free market does not always deliver the socially optimum outcome, but when competition is encouraged in parallel with appropriate regulation the result can be a competitive industry which delivers real benefits to consumers.
Regulators will need to keep an eye on market conditions and take effective action on firms who engage in abuses of dominance or other unlawful conduct. South Africa’s National Planning Commission has already suggested splitting Telkom into two separate businesses – one focusing on backhaul operations and the other functioning as the retail arm.
A similar event occurred [in the UK] in 2006 when, following the Telecommunications Strategic Review (TSR), Openreach was created to provide wholesale access services to the entire telecom industry. The Commission has also recommended that the conflict of interest between the government’s role as policy maker and major shareholder of Telkom should be reconciled.
Regulators that oversee less mature communications markets can also benefit from the experiences of supra-national bodies such as the EC which has, to a large extent, successfully regulated communications while enabling the growth of markets and competition between operators.
James Robinson is an associate analyst for regulatory telecoms at Ovum. For more information, visit