KOKETSO MOETI AND LASWET SAVADYE: Consolidation in telecom sector poses risk to consumer welfare

Fibre service providers have since 2017 been expanding their services to low-income communities, and this accelerated since 2020. A survey by fibre provider Vumatel reportedly found that township dwellers are “embracing fibre at increasing rates”.

As fibre becomes more accessible, mobile network operators are joining the race to consolidation in the telecom sector, but this poses a risk to consumer welfare.

The race towards consolidation in the sector has been heating up for years now. In 2022, Vumatel bought a 45% noncontrolling stake in HeroTel, one of the largest providers of fixed wireless access (FWA) broadband services in SA, with the aim of increasing its share.

Right now, mobile network front-runner Vodacom and Remgro are preparing to face the Competition Commission to defend their proposed merger at the Competition Tribunal. The merger would be of the fibre infrastructure assets of Vodacom and Maziv, which owns Vumatel and Dark Fibre Africa (DFA), creating one of the largest fibre providers in the country.

However, the deal was dealt a blow when the Competition Commission recommended prohibiting the project because the merger casts a shadow over the landscape of SA’s telecom industry owing to apprehension about its adverse effects on competition in the sector.

The regulator’s apprehension is not misguided. With a combined entity resulting from the merger, consumers in SA could face significant effects. Specifically, a merged entity controlling more than 60% of the mobile market and a significant share of the fibre infrastructure market could significantly influence pricing dynamics.

A study in 33 OECD countries from 2002 to 2014 found that “more concentrated markets lead to higher end-user prices”. While this can be mitigated, given the exploitive history of SA’s big players in the sector it simply cannot be trusted that this will happen.

In the past Vodacom, alongside MTN, was found to be actively engaging in exploitive price discrimination to push up margins and prices of mobile data. It is likely to have continued in the absence of any intervention. DFA, on the other hand, operates a wholesale, open-access fibre network totalling more than 13,500km. The combined resources of Vodacom and Maziv, including extensive fibre infrastructure, would give the merged entity significant control over essential infrastructure.

The risk this poses is the possibility of the entity dictating terms to other telecom providers who rely on this infrastructure for their services. This could include charging high access fees or prioritising its own services over competitors’ traffic, leading to anticompetitive outcomes. This is a concern shared by smaller internet service providers and even larger players that are pro-consolidation like MTN and Rain.

SA has first-hand experience of the consequences of limited competition in the telecommunications space. For years mobile networks skewed data prices to disadvantage low-income consumers. This greed helped fortify inequality in SA by making it harder for low-income consumers to access the information, education, jobs and income opportunities that internet access could help unlock.

Price competition has been an essential part of driving down mobile data prices for “more connected” consumers — that is, consumers with alternatives for internet connectivity. The merger would significantly reduce the competitive rivalry between the two entities, which could result in low-income consumers not experiencing the same benefits as “more connected” consumers, despite rollout plans to low-income communities that precede the proposed transaction.

Another risk this poses is reduced consumer choice by offering a limited range of products or services, as the companies will have no need to cater to diverse consumer preferences. This is affirmed by industry’s own findings, which show many SA consumers already have limited choice of fibre service providers, leaving consumers unable “to enjoy the pricing and quality benefits of infrastructure or service based competition”. This underscores the importance of regulatory oversight to safeguard consumer interests and promote competition in telecommunications markets.

Alarm

Similar mergers, such as the attempted merger between AT&T and T-Mobile in the US, have faced opposition due to concern about reduced competition and negative effects on consumers. For instance, analysis of the potential effects of the AT&T-T-Mobile merger projected a market concentration increase, with the Herfindahl-Hirschman Index rising by more than 1,000 points in some regions.

This alarmed regulators and consumer advocacy groups, leading to extensive scrutiny and eventual opposition to the merger. The US department of justice filed a lawsuit to block the merger between AT&T and T-Mobile in 2011, citing concerns about its potential negative effect on competition. The merger was finally abandoned due to regulatory opposition.

To be sure, there’s no doubt that consolidation will offer some efficiencies such as the pooling of resources, which can enable faster network rollout. But the potentially significant long-term risks to consumer welfare should be prioritised.

A different democratic model of connectivity, rooted in internet connectivity as a public good in service of improved lives and communities, is sorely needed. But until that happens people need access and the means of doing so at the moment should be safeguarded against those whose only interest is profit. This will require a policy and regulatory environment that galvanises robust competition and improved standards, including minimum speed requirements.

Without improvements in meaningful accessibility and usability for low-income people, we face a future in which current inequalities are not only deepened, but new ones will also emerge.

• Moeti is executive director, and Savadye finance & operations manager, at amandla.mobi.