[kictanet] Dominance issue in the Telco sector

Fri Feb 20 18:17:59 EAT 2015

Listers 
An analysis on the dominance issue with case studies across the world. 

1          The Kenya Information and Communications (Amendment) Act 2013
The Kenya Information and Communications (Amendment) Act 2013 (the Act) states In Section 84W (3) that Communications Authority of Kenya (the Authority) may, by notice in the Gazette, declare a person or institution to be a “dominant telecommunications service provider” for the purposes of this Act.

Section 84W (4) goes further to clarify what the Authority should consider in declaring an operator or institution dominant in subsection (4) as follow: -
(a) the market share of the telecommunications service provider being at least fifty percentum of the relevant gross market segment;
(b) the level of control over the communications infrastructure;
(c) the level of technological advancement of the telecommunications service provider;
(d) the scale of operations of the telecommunications service

The Authority further developed Supplementary Legislation cited as  the Kenya Information and Communications (Fair Competition and Equality of Treatment) Regulations, 2010 “the Regulations”. The Regulations indicate in section 7(1) that the Authority shall from time to time develop and publish, in the Kenya Gazette, guidelines to be followed when determining whether a licensee in a dominant market position in a specific communications market but this is not a precondition to determining an Institution as being dominant and therefore the Authority is mandated to declare an operator dominant under the current available Primary and secondary legislation.

In regards to Dominance, the Regulations in Section 7 (2) and (3) further mentions additional criteria for deciding on dominance which include among others—
(a) the degree of market concentration or the market share of the licensee, determined by reference to revenues, numbers of subscribers or volumes of sales;
(b) the degree to which a licensee’s prices vary over time;
(c) the ability of the licensee to maintain or erect barriers to entry to the market, including, by means of control of essential facilities, access to superior technology, privileged access to resources or capital markets or superior buying or negotiating position, amongst others;
(d) the ability of the licensee to earn supernormal profits;
(e) the global technology and commercial trends affecting market power;
(f) the licensee’s power to make independent rate setting decisions;
(g) the degree of product or service differentiation and sales promotion in the market; and
(h) any other matters which the Commission may consider relevant.

Section 7 (3) A licensee shall be in a dominant market position if;
(a) it has the ability to materially raise prices without suffering a commensurate loss in service demand to other licensees;
(b) it has the ability to erect or benefit from barriers to market entry;
(c) the Commission has so determined a dominant market power report, after considering the circumstances and criteria set in these Regulations.

In reference to the legal instruments cited above, the Authority has the mandate to declare an Institution dominant and our submission is dependent on these cited instruments to make a case for determining Safaricom as a being dominant in the Mobile Retail Voice, Data,  SMS market and also in the Mobile Money Transfer markets.

2          The Relevant Market Segment

In line with best practice worldwide and also based on previous market study done by PWC in 2010 for the Authority (then CCK) it is clear and evident that the Retail Mobile Voice, Retail Mobile Data, Retail SMS and Mobile Money Transfer are relevant market segments. 
Our focus will therefore be on the Mobile Retail Voice, Data, SMS and Mobile Money Transfer market segments.

3          Market Dominance definition in Kenya

Market Dominance in Kenya can be determined based on the Act and the Regulations as identified above in item 2 above. Whereas globally there are other considerations known, we will use what is within the regulatory instruments available in Kenya.  

However for completeness, the Competition Act Chapter 504 Part C section 23. Also defines as dominance as follows: -

Sections 23 (1) “dominant undertaking” means an undertaking which:
(a) produces, supplies, distributes or otherwise controls not less than one-half of the total goods of any description which are produced, supplied or distributed in Kenya or any substantial part thereof; or

(b) provides or otherwise controls not less than one-half of the services which are rendered

This definition by the Competition Act is in harmony with the definition in the Act as it refers to half of total good s which aligns to the 50% market share specified in the Act.

Our submission will therefore concentrate on the criteria in the Act and Regulations (which are yet to be amended in line with the Act) together with the Competition Act.
4          A case for Declaring Safaricom Dominant
4.1         Degree of Market Concentration or Market Share
The Commission through its consultation paper on the intention to declare regulated services, found that there was high market shares, concentration ratios and Herfindahl-Hirschman Index (HHI) 5,230 on Subscriber base and 6,758 on revenues against best practice of 1,800 which was a clear demonstration of lack of effective Competition in the mobile voice termination market and hence the need for regulatory intervention to correct market failure. While we appreciate that the market shares, concentration ratios and HH index might have changed since the consultation was done, we strongly feel that the mobile voice market is not effectively competitive and hence the need for regulatory intervention by the Commission. The current HHI based on number of subscribers remains well over 4000 which is still double the threshold for a concentrated market.

The HHI thresholds in US and EU are defined as follows: -
HHI below 1000 – a competitive market.  There are no dominant competitors in this market.
HHI between 1000 and 1800 – a moderately concentrated market
HHI above 1800 – a concentrated market.  There are one or more dominant competitors in this market.

This HHI though not reflected as a requirement to determine dominance in the Kenya goes to reinforce our submission that Safaricom is dominant.

Safaricom’s market share has remained over 63% on the basis of mobile subscribers as can be seen from Table 2 and 78 % in traffic volumes for the period of January to March 2014. In terms of revenues it is about 80%. These figures are above the threshold that would lead to a rebuttable presumption of dominance. In established competition cases and also in line with the Competition Act chapter 504 in Kenya, sustained market shares of over 50% gives rise to a rebuttable presumption of dominance, while market shares of over 40% are suggestive of possibility of dominance. On the basis of market share alone, Safaricom holds a position of Dominance in retail voice, Retail Data, SMS and Mobile Money market and should be declared dominant. As per data provided below and also slide 30 in SFC H1 ’15 presentation, SFC holds: 68%, 78%, 97% and 72% market shares in subscribers, voice minutes, SMS traffic and data users. Moreover, they control 88% of total revenues of the market. (See extracts below)

In summary, Safaricom has retained highest market shares as follows: -
Market share by Subscription (voice) 80% in 2010 to 68% in 2014
Market share by Subscription (Data) 99% in 2010 to 71% in 2014
Market Share by Voice Minutes (Voice) 80% in 2012 to 79% in 2014
Market Share by number of SMS (SMS) 84% in 2012 to 96% in 2014
Market Share by Revenues (Voice) 86%  in 2012 to 88% in 2014 well over 80% market share in each Mobile voice, SMS and Mobile Data

4.1.1        Market Shares by Subscriptions
Number Mobile Subscriptions per Operator in Millions
Month
Safaricom Ltd
Airtel Networks Kenya Ltd
Telkom Kenya Ltd
Essar Telecom (K) Ltd
Totals
2009/10
16.24 
1.83 
0.55 
1.49 
20.12 
2010/11
17.35 
3.61 
2.73 
1.58 
25.28 
2011/12
19.01 
4.91 
3.12 
2.66 
29.70 
2012/13
20.15 
5.22 
2.13 
3.05 
30.55 
2013/14
21.93 
5.07 
2.69 
2.56 
32.25 
Table 1: Number of mobile subscriptions since 2010 to Jun 2014
Source: Extracted from CCK/CA published reports

Market Share by Subscriptions since 2010                
Month
Safaricom Ltd
Airtel Networks Kenya Ltd
Telkom Kenya Ltd
Essar Telecom (K) Ltd
Totals
2009/10
80.7%
9.1%
2.7%
7.4%
100%
2010/11
68.6%
14.3%
10.8%
6.3%
100%
2011/12
64.0%
16.5%
10.5%
9.0%
100%
2012/13
65.9%
17.1%
7.0%
10.0%
100%
2013/14
68.0%
15.7%
8.3%
8.0%
100%
Table 2: Market Share by mobile subscriptions since 2010
Source: Extracted from CCK/CA published reports

Source: Derived from Table 1 above.
Chart 2: Market Share by Number of Subscriptions

Mobile Data Subscriptions by Operator
Operator
2009/10
2010/11
2011/12
2012/13
2013/14
Safaricom Ltd
2,959,906
3,584,283
5,262,307
9,332,995 
9,974,377 
Airtel Networks Kenya Ltd
10,000 
496,509 
1,074,764
1,597,481 
1,880,644 
Telkom Kenya Ltd
-   
108,926 
674,255 
795,513 
1,574,168 
Essar Telecom (K) Ltd
-   
-   
644,250 
614,016 
501,505 
Totals
2,969,906
4,189,718
7,655,576
12,340,005
13,930,694
Source: Compiled from CCK/CA published reports

Mobile Data Market Shares by Operator by Number of Subscriptions
Operator
2009/10
2010/11
2011/12
2012/13
2013/14
Safaricom Ltd
99.7%
85.5%
68.7%
75.6%
71.6%
Airtel Networks Kenya Ltd
0.3%
11.9%
14.0%
12.9%
13.5%
Telkom Kenya Ltd
0.0%
2.6%
8.8%
6.4%
11.3%
Essar Telecom (K) Ltd
0.0%
0.0%
8.4%
5.0%
3.6%
Totals
100%
100%
100%
100%
100%

Mobile Data Market Share by Subscription

Source: CA Reports Extracts

Source: Safaricom Half-Year Results Presentation 2014/2015

4.1.2        Market Shares by Traffic or Transactions

Mobile Traffic Volumes by Operator since 2012 in Billion Minutes
Operator
Year 2011/12 
Year 2012/13
Year 2013/14
Safaricom Ltd
21.75 
22.61 
23.88 
Airtel Networks Kenya Ltd
2.93 
3.38 
3.06 
Telkom Kenya Ltd
0.21 
0.38 
0.92 
Essar Telecom (K) Ltd
2.07 
2.43 
2.38 
Totals
26.96 
28.80 
30.24 
Source: Compiled from CCK/CA published reports

Mobile Voice Minutes Market Share by Operator over a three year Period
Operator
Year 2011/12
Year 2012/13
Year 2013/14
Safaricom Ltd
80.7%
78.5%
79.0%
Airtel Networks Kenya Ltd
10.9%
11.7%
10.1%
Telkom Kenya Ltd
0.8%
1.3%
3.0%
Essar Telecom (K) Ltd
7.7%
8.5%
7.9%
Totals
100%
100%
100%

Chart 3: Market Share by Traffic Volumes in Minutes (2013/14)

The above numbers clearly supports our submission to declare Safaricom as dominant in the Retail Voice, Data and SMS market.

Mobile SMS Traffic by Mobile Operator in Millions SMS’s
Operator
Year 2011/12
Year 2012/13
Year 2013/14
Safaricom Ltd
3,626.14 
12,386.16 
23,502.51 
Airtel Networks Kenya Ltd
494.01 
632.10 
731.61 
Telkom Kenya Ltd
75.02 
74.25 
92.35 
Essar Telecom (K) Ltd
100.21 
140.58 
117.55 
Totals
4,295 
13,233 
24,444 
Source: Compiled from CCK/CA published reports

SMS Market Shares by Operator by number of SMS’s
Operator
Year 2011/12
Year 2012/13
Year 2013/14
Safaricom Ltd
84%
94%
96%
Airtel Networks Kenya Ltd
12%
5%
3%
Telkom Kenya Ltd
2%
1%
0%
Essar Telecom (K) Ltd
2%
1%
0%
Totals
100%
100%
100%
5          Benchmarking – Case Studies
5.1         Dominance Declarations in African Countries
Recently the Nigeria Communications Commission declared MTN Nigeria and Globacom dominant following a study conducted by KPMG Professional Services. MTN was declared dominant in two market segment-Mobile Voice Market and Wholesale leased lines and transmission capacity whereas Globacom (Nigeria’s second National Operator) was declared the leader in wholesale leased lines and transmission capacity market.

In its determination, Nigeria Communications Commission found that the mobile voice market was not effectively competitive and therefore ordered MTN (which has 44% of the mobile voice market) to charge same amount for on-net and off-net calls. We further wish to share with the Authority a list of countries in Africa which have declared some mobile operators dominant.

Country in Africa
Name of Dominant Operator in country
Market Share of Dominant Operator
Year Operator declared Dominant
Nigeria
MTN
44%
April 28, 2013
Congo B
MTN
Airtel
40%
38%
March 2013
Niger
Airtel
61.4%
2013
chad
Airtel
53%
2013
Rwanda
MTN
57%
2013
Burkina Faso
Airtel
Telmob
39.24%
38.36%
2012
Senegal
Orange
62.06 %
2012
Gabon
Airtel
45%
2013

We wish to highlight to the Authority that Safaricom has more market shares than most of the operators declared dominant as per the table above. We therefore request the Authority to proceed with speed to declare Safaricom dominant just like the other regulators have done in their jurisdictions.

5.2         IFT (Federal Telecommunication Institute) Mexico
In early 2014 America Movil and its operating subsidiaries- Telecel (Mexico’s wireless market leader) and Telemex (the dominant fixed line player) were declared by the IFC as a dominant economic interest group in the telecommunications market. 
Telecel’s market share at the time stood at 69 % and Telemex’s market share stood at around 85%.  The market concentration stood at 6382 points on the HHI with Mobile Market standing at 5334 point and the fixed telephony market stood at 4761 points on the HHI. According to the IFT a HHI score of more than 2000 points can affect competition. As the Authority will note the HHI scores are very much in line with the market concentration levels in Kenya.
The regulator subjected them to the following regulations on the wholesale level:
·         Asymmetric interconnection rates
·         Access to passive infrastructure
·         Local loop unbundling
·         Mandatory National roaming Access

The regulator subjected them to the following regulations on the retail level:

·         End to SIM locking of handsets
·         All services sold in bundles were required to be sold separately
·         Certain retail prices were to be reviewed.
5.3         Summary of obligations Imposed on Dominant Operators in other countries
The following is a summary of Dominance Remedies implemented in various countries. It is important to note that Asymmetric Interconnection is one of the remedies, Account separation, infrastructure sharing and on-net/off-net equalization.

Country
Obligations
Ghana 
•       Accounting Separation
•       Collapse of On‐net and Off‐net Retail Tariffs. The tariff for on‐net and off-net will be the same, and subject to periodic review.
•       Submission of Required Details: The Commission may require the dominant operator to submit details on specific aspects of its operations from time to time as the need arises.
•       Asymmetric interconnect termination rate regime applies to new entrants as well as Operators with less than 5% of subscriber market share
Gabon
•       Interconnection
•       Obligations of the quality of service, Obligation of non-discrimination  transparency;
•       Publication of the catalog of infrastructure sharing;
•       Accounting separation obligation and duty on the cost accounting of all benefits
Nigeria
•       Collapsed of on-net and off-net retail tariffs to discourage calling club effect;
•        Accounts Separation;
Mexico
•       Asymmetric interconnection rates
•       Access to passive infrastructure
•       Local loop unbundling
•       Mandatory National roaming Access
•       End to SIM locking of handsets
•       All services sold in bundles were required to be sold separately
•       Certain retail prices were to be reviewed.

 Ali Hussein

+254 770 906375 / 0713 601113

Twitter: @AliHKassim
Skype: abu-jomo
LinkedIn: http://ke.linkedin.com/in/alihkassim
Blog: www.alyhussein.com

"I fear the day technology will surpass human interaction. The world will have a generation of idiots".  ~ Albert Einstein

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