SPLIT IT UP

Nairobi Law Monthly - - Con­tents - Writer is an Ad­vo­cate of the High Court of Kenya

With the cur­rent trend, un­less the com­pe­ti­tion agency takes im­me­di­ate ac­tion to re­move the bar­ri­ers to en­try and other an­ti­com­pet­i­tive be­hav­iour, it may (in the not dis­tant fu­ture) have to con­sider im­pos­ing price con­trols to counter the mo­nop­o­lis­tic ten­den­cies of Sa­fari­com. The only vi­able so­lu­tion avail­able to the com­pe­ti­tion agency is to split up Sa­fari­com

IAB­DI­WAHID BIRIQ

t is a fun­da­men­tal ob­jec­tive of com­pe­ti­tion pol­icy that a coun­try at­tains eco­nomic ef­fi­ciency. One way of do­ing this is by in­tro­duc­ing statu­tory reg­u­la­tions meant to stim­u­late eco­nomic growth, en­hance com­pe­ti­tion and em­ploy­ment, and cre­ate a vi­brant sec­tor that pro­vides qual­ity ser­vices at a low cost. The ob­jec­tive is to cre­ate an open and vig­or­ous com­pe­ti­tion – good for con­sumers be­cause com­pe­ti­tion re­sults in lower prices, new prod­ucts of a bet­ter qual­ity and more choice.

One fac­tor of im­por­tance is the ex­is­tence of a reg­u­la­tory struc­ture de­signed to de­ter and rem­edy anti-com­pet­i­tive harm. It is in con­sid­er­a­tion of this fac­tor that the gov­ern­ment is in­tro­duc­ing new reg­u­la­tions that could lead to the break-up of Sa­fari­com, the lead­ing tele­com com­pany in Kenya. Sa­fari­com is the premier brand in this coun­try; it is Kenya’s Mi­crosoft, Google, Coca Cola, and Gen­eral Elec­tric. It has sweep­ing and un­fet­tered con­trol of the com­mu­ni­ca­tions ter­rain in Kenya such that it has thwarted com­pe­ti­tion and run roughshod over the con­sumer.

Sa­fari­com ar­gues that its dom­i­nant po­si­tion was achieved through ef­fi­cient busi­ness prac­tices, in­no­va­tion, su­pe­rior prod­ucts, dis­tri­bu­tion meth­ods and greater en­tre­pre­neur­ial ef­forts. The smaller play­ers in the in­dus­try be­lieve that such ar­gu­ments do not give the true pic­ture of Sa­fari­com’s phe­nom­e­nal growth in the tele­phony in­dus­try. Sa­fari­com is par­tially owned by the gov­ern­ment of Kenya, and has abun­dant con­nec­tions with po­lit­i­cal of­fi­cials. This may ex­plain its stran­gle­hold on the tele­com in­dus­try and why it man­aged to bully other play­ers out of busi­ness. It may be the rea­son why Com­mu­ni­ca­tions Author­ity, the in­dus­try reg­u­la­tor, and the Com­pe­ti­tion Author­ity have been cowed by the gi­ant com­pany from tak­ing any anti-trust law ac­tion.

At the beck of dom­i­nant player

Anti-trust laws are gen­er­ally es­tab­lished to ad­dress mar­ket dom­i­nance and abuse of such dom­i­nance. The law plays im­por­tant role in ad­dress­ing an­ti­com­pet­i­tive prac­tices, in­clud­ing re­stric­tions on ac­cess to dis­tri­bu­tions sys­tems in lo­cal mar­kets.

The smaller mo­bile op­er­a­tors say Sa­fari­com is abus­ing its dom­i­nance. They have also been com­plain­ing that the gi­ant tele­com com­pany has placed high en­try bar­ri­ers into the mar­ket and has re­fused to deal with them or al­low them ac­cess to its es­sen­tial fa­cil­i­ties.

In most coun­tries, in­clud­ing Kenya, the law spec­i­fies that a dom­i­nant po­si­tion can be in­ferred largely or en­tirely on the ba­sis of a large mar­ket share (The Kenya In­for­ma­tion and Com­mu­ni­ca­tions Act pro­vides the reg­u­la­tor with the pow­ers to de­clare a ser­vice provider to be dom­i­nant if its mar­ket share is at least 50 per cent of the rel­e­vant mar­ket seg­ment). In oth­ers, statute would re­quire con­sid­er­a­tion of en­try con­di­tions and other fac­tors that in­flu­ence the abil­ity of firms with large mar­ket shares to ex­er­cise mar­ket power. In yet oth­ers, the mere car­ry­ing out of ex­ploita­tive acts such as charg­ing high prices may be treated as abuse. In some other ju­ris­dic­tions, the law fo­cuses on ex­clu­sion­ary con­duct by a firm that harms the com­pet­i­tive process – that is, con­duct pre­vent­ing com­pet­ing firms from en­ter­ing or ex­pand­ing or re­strict­ing room for fair com­pe­ti­tion in the mar­ket. It is worth not­ing that the dom­i­nant com­pa­nies are sub­jected to a va­ri­ety of sanc­tions, in­clud­ing fines and forced as­set sales or splits.

The Com­pe­ti­tion Author­ity ap­pears to be do­ing Sa­fari­com’s bid­ding when it

claims that the gi­ant tele­com com­pany does not abuse its dom­i­nant po­si­tion. It is gen­er­ally ac­cepted that the ac­tion of a reg­u­la­tory author­ity will, more of­ten than not, heav­ily in­flu­enced the mar­ket. The reg­u­la­tor has a wide ar­ray of pow­ers to curb com­pa­nies’ con­trol of mar­kets, while open­ing more room for com­pe­ti­tion in the mar­ket­place. It has the man­date to pre­vent, in­ves­ti­gate and com­bat abuse of dom­i­nant po­si­tion, an­ti­com­pet­i­tive prac­tices, con­cen­tra­tions and other re­stric­tions of ef­fi­cient mar­ket func­tion­ing and take steps to guar­an­tee com­pe­ti­tion. In­ac­tion would mean that the mar­ket play­ers are left to fight out be­tween them­selves. It would also mean that abuses would go un­in­ves­ti­gated and un­pun­ished.

Un­reg­u­lated regime

En­force­ment of abuse of dom­i­nant pro­vi­sions of com­pe­ti­tion law is chiefly about en­sur­ing wider ac­cess to eco­nomic op­por­tu­ni­ties than if such con­duct went unchecked. As such, ad­dress­ing abuse of dom­i­nance un­der com­pe­ti­tion law re­lates to the dy­namic and creative role of com­pet­i­tive mar­kets, as part of rules-based frame­works for in­creased eco­nomic par­tic­i­pa­tion.

Sa­fari­com pro­vides mul­ti­ple ser­vices in­clud­ing mo­bile money trans­fer – Mpesa is the world’s largest mo­bile money busi­ness. Eighty-seven per­cent of the coun­try’s US$55 bil­lion GDP passed through M-pesa in 2014, which trans­lates to US$23 bil­lion (Sh2.3 tril­lion). Ac­cord­ing to the Busi­ness Daily, Sa­fari­com leads all seg­ments of the tele­phony mar­ket, thus crush­ing its com­pe­ti­tion – Voice (75.6pc), SMS (93pc), mo­bile data (70pc) and mo­bile money (66.7pc). It is the only player in the tele­phony in­dus­try that has con­sis­tently made profits, giv­ing it un­ri­valled mar­ket power, which in turn af­fords it the power to con­trol the tele­com in­dus­try to way it de­sires.

70 per cent of the Sh2.3 tril­lion (Sh1.6 tril­lion) that was trans­acted through Mpesa money re­mit­tance in 2014 was han­dled by Sa­fari­com. M-pesa en­tails the de­posit, pay­ment and with­drawal of money by cus­tomers. Banks and hawalas are in such busi­ness. How­ever, banks and hawalas are reg­u­lated by the Cen­tral Bank of Kenya (CBK) mean­ing they are sub­ject to the CBK’S Pru­den­tial Guide­lines and strict anti-money laun­der­ing and anti-ter­ror­ism fi­nanc­ing regimes. It would mean that the com­pany that han­dles more money than the ma­jor­ity of banks in Kenya is not reg­u­lated as a fi­nan­cial in­sti­tu­tion by CBK. There­fore the ap­pro­pri­ate rem­edy would be struc­tural mea­sures which should in­clude the break­ing up of Sa­fari­com to sep­a­rate M-pesa mo­bile money busi­ness from the rest of its op­er­a­tions. The Mpesa busi­ness ought to be a sep­a­rate and in­de­pen­dent en­tity reg­u­lated by CBK. The cur­rent sit­u­a­tion favours only the dom­i­nant player, Sa­fari­com.

Air­tel, Orange and Yu the other play­ers in the tele­phony in­dus­try are hav­ing dif­fi­cul­ties break­ing into the mar­ket. They com­plain of high in­ter­con­nec­tion fees and in­ac­ces­si­bil­ity of Sa­fari­com’s in­fras­truc­ture. In com­pe­ti­tion law, high en­try bar­ri­ers send red flags in­di­cat­ing a need for closer reg­u­la­tory scru­tiny. But the com­pe­ti­tion agency has al­lowed Sa­fari­com to pre­scribe and de­ter­mine the rules in the in­dus­try. It is about a mar­ket race but also about deal­ing fairly with the com­pe­ti­tion. It pro­hibits anti-com­pet­i­tive be­hav­iour.

The mar­ket needs re­silience. But Sa­fari­com has man­aged to lock con­sumers to its net­work, and if its ser­vices go off­line, this coun­try would be in big trou­ble. It is my con­sid­ered view that this dom­i­nance, left unchecked, will in­evitably lead to mo­nop­oly, at the ex­pense of Kenyan peo­ple.

In any case, the “bet­ter op­tion” is any­thing but that. Mak­ing a sim­ple phone call has be­come some­thing akin to a game of chances. Mo­bile users have be­come ac­cus­tomed to high call charges, net­work con­nec­tiv­ity and voice qual­ity prob­lems. The mo­bile ser­vices are un­re­li­able and un­pre­dictable. Phones be­have as if they are switched off or en­gaged when they are not. The most com­mon words you are likely to hear when mak­ing and re­ceiv­ing calls are from an au­to­mated voice telling the caller that there is a net­work prob­lem or the num­ber called is wrong or in­com­plete. When you make a call, your call drops or goes to a wrong num­ber or straight to a voice­mail be­cause ei­ther there is no mo­bile sig­nal, or where a sig­nal may be present, it is not pos­si­ble to con­nect or sus­tain a call. Most users will tell you they have ex­pe­ri­enced dropped calls, in­com­pre­hen­si­ble speech and voice qual­ity that mim­ics speak­ing from the bot­tom of a water tank.

The abil­ity to make or re­ceive calls or text mes­sages is the most im­por­tant as­pect of mo­bile phone re­cep­tion. But is Sa­fari­com mak­ing su­per­nor­mal profit by cut­ting cor­ners, com­pro­mis­ing qual­ity, charg­ing calls it ought not to? How does it ex­plain the rou­tine calls break ups, glitches or mis­con­nec­tions, mis­di­rec­tion of calls, the in­abil­ity of the users to sus­tain con­ver­sa­tion for more than five min­utes? Be­cause of its mar­ket power, Sa­fari­com has man­aged to get away with its abuse of dom­i­nance in the mar­ket.

Let us con­sider the def­i­ni­tion of dom­i­nant po­si­tion, in­clud­ing the fac­tors that are taken into ac­count to de­ter­mine dom­i­nance, and what con­sti­tutes an abuse of dom­i­nance.

A dom­i­nant po­si­tion is cre­ated when one or more firms in a par­tic­u­lar mar­ket use their po­si­tion to de­ter­mine eco­nomic pa­ram­e­ters such as price, sup­ply, the amount of pro­duc­tion and dis­tri­bu­tion, and by act­ing in­de­pen­dently of their

com­peti­tors and cus­tomers with the aim of pre­vent­ing ef­fec­tive com­pe­ti­tion.

The abil­ity of a firm to have sub­stan­tial in­flu­ence on the con­di­tions un­der which com­pe­ti­tion will de­velop and act largely in dis­re­gard of is an in­di­ca­tor of the dom­i­nance of such firm. There­fore the abil­ity of a com­pany to be­have in­de­pen­dently of its com­peti­tors, cus­tomers and con­sumers proves dom­i­nance.

Courts have equate dom­i­nance with the abil­ity to raise prices above those that would be charged in a com­pet­i­tive mar­ket, or the power to con­trol prices or un­rea­son­ably re­strict com­pe­ti­tion or the abil­ity to raise prices above the sup­ply cost with­out ri­vals tak­ing away cus­tomers in due time. It is the power that en­ables a firm to be­have in­de­pen­dently of com­pe­ti­tion and of the com­pet­i­tive forces in a mar­ket.

It is worth not­ing the fac­tors that are of­ten taken into ac­count to de­ter­mine whether a par­tic­u­lar mar­ket player is dom­i­nant. Mar­ket share is one of the most im­por­tant in­di­ca­tors from which the ex­is­tence of a dom­i­nant po­si­tion may be in­ferred. A find­ing of dom­i­nance is more likely if en­try is dif­fi­cult or there are no other firms of com­pa­ra­ble size or ca­pac­ity to counter the leader’s strate­gies. For ex­am­ple, a 40 per­cent mar­ket share, in the pres­ence of sig­nif­i­cant bar­ri­ers to en­try, can con­sti­tute dom­i­nance, and firm with 50 per cent of a mar­ket share or more is pre­sumed to have dom­i­nance.

Sa­fari­com is un­doubt­edly in a dom­i­nant po­si­tion con­sid­er­ing its share of the rel­e­vant mar­ket, and its fi­nan­cial power [it made US$320 mil­lion (Sh32 bil­lion) in profit in 2014]. The telco can sin­gu­larly sup­ply the mar­ket at lower costs than the two other com­pa­nies can be­cause of its large eco­nomic scale.

Struc­tural/be­havioural bar­ri­ers

In gen­eral, the greater the mar­ket share of a dom­i­nant com­pany, the more likely it is to ex­er­cise mar­ket power, and es­pe­cially if sig­nif­i­cant en­try bar­ri­ers ex­ist and de­pend­ing on the size of the other firms in the mar­ket. Sa­fari­com has stran­gled the com­pe­ti­tion due to the high en­try bar­ri­ers and the size of the com­pe­ti­tion. It has man­aged to de­ter en­try by po­ten­tial ri­vals, ef­fec­tively uses re­stric­tive busi­ness prac­tices, sup­presses com­pe­ti­tion by re­fus­ing to deal with the com­pe­ti­tion, raises the com­peti­tors’ cost of en­ter­ing the mar­ket, in­clud­ing strate­gi­cally ad­ver­tis­ing to such de­gree that it raises sunk-cost in­vest­ments for the small ri­vals and po­ten­tial en­trants, and uses ex­clu­sion­ary abuses to en­sure that there is no al­ter­na­tive for con­sumers.

Al­though Sa­fari­com has over the years built an im­preg­nable brand, it also has mas­tered the art of de­ter­ring en­try through be­havioural as well as struc­tural bar­ri­ers. There ex­ists the ar­gu­ment that Sa­fari­com has in­vested heav­ily in in­no­va­tion and in de­vel­op­ing su­pe­rior prod­ucts. Com­pa­nies in­vest in re­search and de­vel­op­ment, in­no­va­tion and cre­ation of new prod­ucts when there are in­cen­tives for such in­vest­ments, in­clud­ing fair com­pe­ti­tion and equal­ity treat­ment.

With the cur­rent trend, un­less the com­pe­ti­tion agency takes im­me­di­ate ac­tion to re­move the bar­ri­ers to en­try and other an­ti­com­pet­i­tive be­hav­iour in the tele­com in­dus­try, it may (in the not dis­tant fu­ture) have to con­sider im­pos­ing price con­trols to counter the mo­nop­o­lis­tic ten­den­cies of Sa­fari­com. The only vi­able so­lu­tion avail­able to the com­pe­ti­tion agency is to split up Sa­fari­com, not un­like the break­ing down of AT & T’s Bell Sys­tem that was bro­ken down into seven dif­fer­ent com­pa­nies in the 1970s, as well as Amer­ica Movil of Mex­ico, and sev­eral Euro­pean com­pa­nies. Sa­fari­com’s dom­i­nance in Kenya is akin to that of UK’S dom­i­nant tele­coms provider, the 169-year-old Bri­tish Tele­com Plc (BT). Un­like in Kenya, the reg­u­la­tor Of­com (Of­fice of Com­mu­ni­ca­tions) is now con­tem­plat­ing break­ing up BT af­ter its ri­vals ac­cused it of abus­ing its mar­ket po­si­tion and fail­ing to in­vest in the broad­band net­works they rely on. Un­like Sa­fari­com, BT has given its ri­vals un­fet­tered ac­cess to its in­fras­truc­ture.

The reg­u­la­tor and the com­pe­ti­tion author­ity must spin off the data, voice and M-pesa ser­vices into sep­a­rate in­de­pen­dent en­ti­ties. They must also force Sa­fari­com to give its ri­vals ac­cess to its fa­cil­i­ties, in­clud­ing its out­lets around the coun­try, and zero rate the in­ter­con­nec­tiv­ity rates. Mo­bile users must be able to call other net­works with­out in­cur­ring ex­tra cost.

We must have a com­pe­ti­tion pol­icy that max­imises the scope of the mar­ket forces to work and en­sure that reg­u­lated firms do not en­gage in an­ti­com­pet­i­tive prac­tices.

Bri­tish Tele­coms, the largest player in the UK, has given its ri­vals un­fet­tered ac­cess to its in­fras­truc­ture.

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