Telkom / Business Connexion Group (BCX) - Helanya Fourie & Nicola Theron Annual conference of the Association of Competition Economics, 2016 ...
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Telkom / Business Connexion Group (BCX)
Helanya Fourie & Nicola Theron
Annual conference of the Association of Competition Economics, 2016
1Questions raised by the transaction
Why was the same transaction which was not
approved in 2007, approved with conditions in 2015?
What does convergence in the telecoms market
mean for market definition and foreclosure theories
of harm?
Were the Competition Commission (CC) justified in
imposing stringent behavioural conditions to address
the competition concerns?
2Structure
• Overview of the merging parties
• Rationale & background to the merger
• The telecoms value chain
• 2007 Telkom/BCX proposed merger
• Abuse of dominance complaint against Telkom
• 2015 Telkom/BCX merger
• Relevant markets
• Vertical issues: Foreclosure & bundling
• Conditions
• Proposed by the CC
• Why were these inadequate?
• How were the inadequacies addressed?
3Parties to the merger
Telkom Group
Telkom
Telkom Telkom
Wholesale
Consumer Business
and Networks
• Incumbent fixed line provider • Telkom
Telkom • Telkom
consumer
• Market partially liberalised with entry of Business wholesale
and retail
and
Neotel (second national operator) in 2008 services Telkom networks
Business service
• Telkom
• Decline in fixed line revenues Mobile
Mobile offering
• Entered mobile market through Telkom Cybernest
Mobile – market share remains small
• Want to grow revenue in downstream
enterprise markets in e.g. MNS or ITS
4Parties to the merger
BCX revenue by Technology -
2013
8.0% 6%
5.0%
• Offers a range of fixed line ITS
services to enterprise customers
• Cloud infrastructure
• Communication 81.0%
• Security & network services
• Workspace services
• Professional services Hardware Software
• Application services IT Services Telecommunications
• Service integration and Non-IT/Other
management
5Rationale & background
• Telkom - Rationale • BCX - Rationale
• Fixed voice revenues are under • Convergence strategy, where
significant pressure – fixed-mobile applications, communications and
substitution infrastructure will become cloud-
• Lacks the necessary capacity to based
compete in the ITS market – • Telkom’s infrastructure will
transaction would allow Telkom to facilitate the delivery of these
enter the ITS market with converged services
sufficient scale
• Lacks the “brand and reputation
for service excellence”
• Will give Telkom the opportunity
to provide bundles products
6ICT value chain: Infrastructure layer
Backhaul
••High capacity links ••Local loop/ last mile
between cities ••Connect end-users to the
••Fibre optic ••Links between network network
transmission backbone and access ••Base stations
network ••Local exchanges
••Metro fibre ••Metro fibre
••Copper ••Microwave, etc.
••Microwave
Transmission
Access
7ICT value chain: Convergence of MNS & ITS
“The convergence of
technologies does not
in itself entail new or
unique problems for Communications
market definition …
Communications
the problems that may
be found in the
context of
convergence actually
results from bundling Computing Content
and/or other rapid Computing Content
change associated
with convergence”
EC (2002) Market
definition in the media
sector
8Anti-competitive effects of the 2007 Telkom/BCX merger
“In our view [it is an] • The transaction was prohibited on the horizontal
attempt by an aspects
erstwhile monopolist • Removal of an effective competitor (BCX)
to thwart the • Unilateral effects
beneficial impact of
deregulation in the • MNS is/was a battleground for convergence –
form of greater through the merger Telkom intended to extend its
economies of scale monopoly into the converged space
and scope for rival
• Vertical issues that were raised:
MNS providers and
• Input foreclosure of leased lines
lower costs for
• Telkom owned all infrastructure and access lines
customers”
• Mixed bundling of PSTS, MNS & ITS
Tribunal, p. 8
9Abuse of dominance by Telkom
• Telkom accused of abuse of dominance by SAVA and ISPA
• Admitted guilt in bundling VPN and access links to win business in the
MNS/VPN market through margin squeeze
• Settlement Agreement approved by Tribunal in 2013
• Retail Pricing Policy (RPP)
• Transfer Pricing Policy (TPP) / functional separatiom
• Under the TPP, Telkom Wholesale should, for:
• Common components, price network services to OLOs and Telkom Retail on a non-
discriminatory basis
• Non-common components, price network services to
• OLOs at no more than cost plus reasonable return
• Telkom Retail at no less than cost plus reasonable return
102015: Relevant markets
Upstream markets Downstream markets
• Provision of wholesale leased lines • Retail supply of …
• Telkom has market power in this • MNS (30%)
market; no horizontal overlap • MNS & VANS (29.9%)
• Hosting services (41%, but excess
capacity)
• ITS (24.9%)
• Mobile services
• …to enterprise businesses (incl.
government)
112015: Anti-competitive effects
• Input foreclosure
• Merging parties argue that it is not possible due to them not being dominant in the
upstream market for fibre access à but this depends on how you disaggregate the
fibre market
• Conglomerate effects (anti-competitive bundling)
• The transaction places Telkom in a unique position to offer a full suite of downstream
services without procuring anything from a third party.
• Counterarguments of the merging parties:
• There are multiple competitors to the merging parties, who would be able to easily re-
enter the market if the merged entity increases its prices
• Few customers would derive a significant benefit from sourcing a bundle
• Test: would it increase the prospects of winning business?
• The merging parties contended that the Settlement Agreement was
sufficient to prevent anti-competitive behaviour, but the CC disagreed
122015: Behavioural conditions proposed by the CC
• TPP expanded to explicitly include fibre access
• Settlement Agreement extended from 18 July 2018 to 31 December 2020
• Quality of fibre access services provided to OLOs should be “substantially
similar” to that provided to Telkom Retail.
• Where fibre access is included in a bundled offer:
• Prices for bundled offers must adhere to the TPP
• Must keep separate internal accounts for downstream retail offerings to allow
profitability to be monitored
• Revenues from supplying the bundle must exceed the input costs
13Inadequacy of the proposed conditions (1)
• The TPP required non-discriminatory pricing for common components, but
these did not have to be cost based
• Charging above cost prices for wholesale products still allowed margin squeeze
• Telkom made significantly larger margins at the wholesale than the retail level
• Telkom implicitly forced OLOs to purchase connectivity from Telkom Retail by
only providing SLAs with infrastructure purchased from Telkom Retail,
thereby engaging in anti-competitive tying
14Inadequacy of the proposed conditions (2)
• The level of disaggregation of services which the TPP requires does not
allow the profitability of individual products to be monitored
• There remains large variability in the profitability of products supplied by Telkom at
the retail level, as well as the wholesale level
• Under the RPP, only IP VPN and internet services had to have positive margins
• Functional separation disallows Telkom to cross-subsidise between Wholesale and
Retail, but not between product categories
• Including fibre in the TPP is insufficient; Telkom can rely on its copper
infrastructure to during the transition to fibre
• Redundancy requirements
• Telkom will be able to win contracts by bundling broadband and voice, and offering
discounts on voice minutes
15How were the inadequacies addressed?
• TPP expanded to:
• Incorporate all fixed network products (i.e. not only fibre)
• Telkom will not increase the prices of the affected (wholesale) products
above their price as at the Implementation Date (“price freeze”)
• Telkom Wholesale will offer SLAs on common components to OLOs and
Telkom Retail on a non-discriminatory basis
• Where fixed network products are supplied as part of a bundle, Telkom
will:
• Keep separate accounts for its downstream retail offerings (MNS, VANS, hosting, ITS)
to permit the profitability of these products to be monitored
• The pricing of the bundle will be such that the revenues from supplying the bundle
exceed the associated input costs
16Final remarks
• The CC had to impose stringent behavioural
conditions as a result of poor telecoms regulation
• Input foreclosure in SA’s telecoms sector is of
specific concern
• The Integrated ICT White Paper calls for open
access which might mitigate some of the problems
that were brought to the fore by this merger
17t: +27 21 887 5678 76 Dorp Street e: admin@econex.co.za Stellenbosch www.econex.co.za 7600
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