‘Dominant, anti-competition and unethical’

Study commissioned by CA paints telco – working in cahoots with government officials – as actively and viciously involved in subjugating other players to entrench and retain control

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By Payton Mathau

Establishing the market dominance of mobile and data service providers has, for years now, become – arguably – the most discussed topic in the telecommunications sector.

Yet, a report whose findings and recommendations could have settled the matter has been gathering dust at the Communication Authority of Kenya (CA) for some five months now, apparently because of sustained efforts from people in high places in government to protect Safaricom by scuttling the report’s implementation.

So vicious it has been, the Nairobi Law Monthly has learnt, that at one meeting by top Ministry of Information, Communication and Technology and officials of CA, a top government official did not hide his disapproval of suspended CA director-general Francis Wangusi’s push to have the report implemented.

According to people familiar with the matter, the government official has been the eyes and ears of Safaricom at CA. In that meeting, in the presence of ministry and CA officials, he whipped out his phone and called someone at Safaricom to report of Wangusi’s plan.

CA insiders say the Telecommunication Competition Market Study in Kenya report could have been one of the reasons Wangusi was unceremoniously sent on compulsory leave on January 12, just days after he came back from his Christmas break.

The report makes damning conclusions on Safaricom, the bottom line being that the service provider is dominant and anti-competition. The conclusion could be music to the ears of Safaricom rivals, Airtel Kenya, Equitel, Jamii and Telkom, among others.

The study was done by London-based Analysys Mason Limited (contract CA/LS/RFP/071/004/2016), and the final draft of the report was handed to the Authority on August 17, 2017.

But implementation has been frustrated by hidden hands in the industry.

“Safaricom should be considered as a dominant player in the retail mobile money market” for reasons that the service provider lacks competition and is able to set tariffs independently of its competitors.

The report also says Safaricom has not invested in innovation like its regional counterpart in Tanzania, Tigo.

“Safaricom promotes smartphones heavily on its website and has developed an app for subscribers to manage their accounts. It therefore appears as if the lack of an M-Pesa app (to allow the service to be accessed from any network) may be part of a deliberate strategy to restrict M-Pesa to Safaricom subscribers. Safaricom’s opposition to Equitel’s launch of thin SIM technology could also be viewed as an attempt to stifle innovation in the market, as could the high wholesale charges for third-party providers,” the report states.

The third reason, the report says, is “Safaricom’s position in the mobile-money market also enables the company to maintain its position in the retail mobile communications market and is thus a contributor to the competition issues identified above.”

Competition in the mobile money is also slanted in favour of Safaricom which, as at the time of the study, had 66.5 per cent of all mobile money subscriptions in Kenya.

“Safaricom’s M-Pesa agents also account for 67 per cent of all mobile money agents in Kenya, although … this percentage has slightly fallen from 73 per cent in 2Q (second quarter of) 2014, perhaps because of an intervention by the CA in relation to Safaricom’s imposition of exclusivity obligations on its resellers,” the report notes.

“In the past, Safaricom has threatened M-Pesa agents with loss of accreditation if they acted as agents for other mobile money providers, and has arranged to remove or cover point-of-sale advertising for other providers. Airtel documented a number of examples of these practices in 2015. We understand, based on exchanges with Airtel and Telkom, that the situation has improved since then but the two operators believe that the issue has not been entirely eradicated. When asked for more recent evidence, both companies stated that it is difficult to persuade agents to provide it for fear of action by Safaricom.”

The consultant also found that since the first quarter of 2015, Safaricom’s share of mobile money transactions by value has exceeded 75 per cent, dwarfing its competitors (Airtel, Telkom, MobiKash and Tangaza Pesa, and mobile-centric bank accounts like Equitel MyMoney and MCo-op Cash, who have been left to share amongst them the other 25 per cent.

“We are not aware of any other mature multi-player mobile money markets where one player has as high a market share as Safaricom across the various measures of market share. Given the importance of mobile money in Kenya, it appears very likely that Safaricom’s high share of mobile money transactions is supporting its high share of mobile communications,” the report finds.

The dominance of Safaricom also extends to the wholesale market where the report found that the provider controls between 57 and 65 per cent of the towers (base stations), translating to between 2,500 and 3,450 towers across the country.

Eaton/Kenya Towers, which owns Airtel’s towers, has approximately 1,100 towers across the country while Airtel directly has approximately 100 towers.

“We believe that Airtel retained its rooftop towers and may also have retained a small number of ground-based towers that were unsuitable for sale (to Eaton/Kenya Towers),” the report says.

Telkom Kenya on the other hand owns 677 towers which translates to between 13 and 15 per cent.

The towers game therefore shows that with Safaricom controlling the lions share, it have a wider reach than its competitors.

“Effective competition in the tower market, particularly in rural areas, is unlikely to emerge so long as the mobile market comprises one very large player that has already rolled out its network and two much smaller players that struggle to make a business case for geographical expansion,” the consultant notes in the report.

The study found that in seven counties – Isiolo, Garissa, Mandera, Marsabit, Samburu, Turkana and Wajir – the current number of Safaricom sites is more than three times the total number of sites for Airtel and Telkom Kenya combined. Collectively across these counties, the report adds, Safaricom has more than four times the total number of sites operated by Airtel and Telkom.

According to the study, Safaricom’s dominance in the tower market means that its competitors are prevented on economic grounds from accessing its towers in low density areas, thereby preventing them from extending their coverage. As a result, it reduces the level of competition in the retail mobile market.

Further, the report points out that “Safaricom is able to set the price for tower sharing at a level that prevents the other Tier 1 operators from profitably extending their coverage in areas of low population density, thus entrenching Safaricom’s dominant position in the retail mobile communications and retail mobile money markets.”

Safaricom’s dominance in the tower market, the report continues, also has the potential to delay or deny sharing requests.

“Safaricom’s process for accepting and implementing requests for tower sharing lacks transparency and could be used to delay or frustrate the expansion plans of other operators.”

Recommendations

The report therefore recommends that Safaricom should share its sites with its competitors in designated counties selected on the basis of the relative number of base station sites for Safaricom and the other two operators.

The price for site sharing at these sites should be based on the long-run average incremental cost (LRAIC) of providing these sites. Access should be provided on a non-discriminatory basis via a Reference Access Offer (RAO) detailing the commercial and technical terms that apply to regulated site sharing. The regulated prices should be available on all new site shares agreed in the next five years in the designated counties, and the regulated price shall apply for a minimum of five years at each individual site. Where it is demonstrated that a site needs strengthening or other essential work to accommodate additional operators, the access seeker should be responsible for the associated capital expenditure.”

In sum, the study states that the wholesale remedies that CA has applied to date, including regulation to reduce mobile termination rates and the licensing of Mobile virtual network operator (MVNOs), or even the new wholesale obligations proposed, such as regulated access to sites in rural areas, are not sufficient to address the competition concerns.

The retail mobile communications market, the study found, is also slanted in favour of Safaricom, so much so that there is lack of competition intensity, and higher mobile tariffs.

Because of its reach and anti-competition tendencies, the consultants say Safaricom is potentially able to set tariffs independently of its competitors.

“The benchmarking that we carried out … indicates that Safaricom tariffs are higher than Telkom’s, although Airtel’s headline tariffs are the same as Safaricom’s,” the report states.

Lack of competition, especially in the rural areas, also means that consumers suffer from lack of choice which results into worse service in rural areas.

“It is likely that there are more ‘notspots’ (i.e. locations with no coverage) in rural areas than there would be if all three operators offered similar levels of coverage. Moreover, since mobile spectrum is allocated on a national basis, Airtel’s and Telkom’s spectrum is unused in areas where these operators have not rolled out. Consumers experience worse quality of service in these areas than they would if the same number of subscribers were spread across two or three networks. This is an important consideration for mobile broadband where download and upload speeds are very dependent on the number of simultaneous users on each base station,” the report notes.

In the long term, the consultants raise the concern of the viability of other operators.

According to the study, Essar (yu) has already exited the Kenyan market and Orange Group has sold its majority stake in Telkom to a private equity fund.

“Airtel and Telkom cannot be expected to sustain annual operating losses indefinitely. We consider there is a risk of a further reduction in the number of mobile operators, resulting in less competition and less choice for consumers,” the report states.

The implementation of the report as it is could be a major blow to Safaricom which has often claimed that its rivals were looking for ways to punish success.

Safaricom would operate in a more restricted business environment in terms of marketing, pricing and in extreme cases, be required to split the business into separate and independent units.

Section 84W of the Kenya Information and Communications Act (KICA) gives CA powers to declare a service provider to be dominant if their market share is at least 50 per cent of the relevant gross market segment, something that the consultant, Analysys Mason, has found in the report which is now with CA.

However, given its financial and political influence reaching such a drastic decision to declare Safaricom dominant has been an uphill task.

CA insiders said that after the consultant handed over the final draft of the report in August, a stakeholder engagement was planned but was cancelled at the last minute on a directive from the Executive.

The cancellation of the meeting came after CA spent millions buying air tickets for the consultants, booking hotels and other logistics.

From reliable sources, the findings of the report and attempts to have the same implemented could have been one of the reasons Wangusi was sent on a three month compulsory leave.

It is understood that some people in government have vowed that they will not allow the report to be adopted in its current format, as it is unfavourable to Safaricom. ^

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