Economics of dominance, control

David Matende

A visitor to Mwilonje, a small trading centre in Vihiga County, would assume that the people here love green as almost all shops are painted in that colour.
A closer scrutiny, however, will reveal that the shops are actually branded in the colours of the “the better option”, Kenya’s dominant mobile phone provider and regional telecom behemoth, Safaricom. The scene in Mwilonje is replicated in other trading centres and towns across Kenya.

This supremacy is not about to be challenged; if anything, it is expected to escalate, thanks to new laws that cleverly thwarted efforts to declare Safaricom a dominant company by yanking away that power from the ICT regulator, Communications Authority (CA), to the fledging Competitions Authority of Kenya (CAK).

This law, passed surreptitiously alongside others in a controversial omnibus  bill, has not only sparked hue and cry in the telecoms sector,  but also dampened  the spirits of  minor players, notably Airtel and Orange. It will now be even more difficult for them to compete against the Safaricom juggernaut, and some may be forced to rethink strategy.

Already, Airtel has started laying off staff, with the first batch of 60 becoming jobless last month. There is talk that the company, owned by Indian group Bharti Airtel, may fold its Kenyan operations, although the company, which is Kenya’s second biggest mobile phone subscriber, has denied this.

Stripped of powers to independently monitor dominance and act against its abuse, CA has now been left with a narrower mandate of licensing new players and allocating frequencies.
The passing of the Statute Law (Miscellaneous Amendments Bill), 2015, which contains the changes in the regulation of the telecom industry, was the climax of a protracted war pitting regulator CA, the Ministry of Information, Communication and Technology, and Airtel on the one hand, and Safaricom and CAK on the other regarding dominance.

President Uhuru Kenyatta promptly signed the law in December, leaving a defeated CA licking its wounds.  CA, a constitutional authority, will now suffer the embarrassment of consulting CAK before making a declaration of dominance and even when assessing critical industry factors such as Significant Market Power (SMP).

It all began about two years ago when Airtel and other smaller telcos started crying foul, accusing Safaricom of suffocating them.  The cries reached a crescendo mid last year, with Airtel boss, Adil El Youssefi, accusing the giant competitor of “anti-competitive behaviour”.  Youssefi claimed that the market leader’s brawny style had ensured that other players never made profit, leading to the ignominious exit of some, such Essar, the Yu network operator, as well as  France Telecom , which plans to abandon Telkom Kenya.

“We have been trying for over five years and have not made one dollar in profit. Airtel is likely to exit Kenya if the market structure is not addressed in terms of dominance,” he was reported as saying in August last year.

There has always been bad blood between Safaricom and Airtel even before the call to declare Safaricom dominant began. Before CA ordered Safaricom to allow its mobile money agents to host services from other operators, Airtel had persistently complained about the superior telco’s unfair practices. Safaricom boasts over 20 million subscribers on its M-Pesa platform, a success attributed to the close to 100,000 agents the company has across the country.

Bad blood

After winning the battle over the hosting of services, Airtel smelled blood and now started to demand that CA regulates inter-operability costs across networks, accusing Safaricom of charging double the price for cash transfers from M-Pesa to Airtel Money, a practice it said was discouraging transfers between the two networks. Airtel did not stop there; it upped the ante by demanding that Safaricom be split, seeing that it leads by over 60 per cent in all segments of the market.

“It is common sense that Safaricom needs to be split,” Youssefi told a Senate committee in July last year. “Let M-Pesa be a national platform that is independent, for the mobile user to freely choose their mobile network”, he suggested.

Safaricom dominates all segments of the market, controlling 76 percent of voice, 93 percent of short text messages (SMS), 70 pc of mobile data and 67 pc of mobile money.
And when CA announced that it was going to licence Safaricom to roll out high-speed (4G) Internet countrywide, Youssefi was not amused. He charged that giving Safaricom the 4G permit ahead of other telcos would “tie” consumers to one service provider.

“We do not agree with the way the valuable 800HZ spectrum was allocated to the dominant player to deploy the 4G network without a clear agreement with other players on commercial terms …. If the dominant player launches the 4G network across the country, consumers will not have a choice and will be limited to only one provider,” he said.
Assurances by the CA that 30 per cent of Safaricom’s 4G spectrum would be shared with other telcos did not seem to assuage his fears.

“We have tried to talk to the dominant player (Safaricom) about the commercial modalities, but they are not interested. I do not trust them even one second. They will not allow us to use the 30 per cent spectrum diligently,” he was quoted complaining.

Faced with these complaints, the regulator, alongside the mother ministry then under the indefatigable Dr Fred Matiang’i, moved with unusual alacrity to reign in the run-away Safaricom. It announced that it was going to introduce regulations that would declare Safaricom a dominant player which would lead to the breaking up of the company into three units.

The proposed set of 14 rules included a Fair Competition and Equality of Treatment clause that would have empowered CA to automatically declare any telecommunication firm with a market share of more than 50 per cent as dominant.  Matiang’i then explained that this was part of an effort to protect against monopolies.

“Telecommunication firms need to be regulated to ensure some players are not strangled,” he said at the time.

Safaricom, which is partly owned by British mobile giant Vodafone but which has significant local shareholding, among them the shadowy Mobitelea Ventures, currently has more than 60pc of Kenya’s 33 million mobile users.

Had they seen the light of day, the regulations would have forced the mobile giant to separate its mobile money unit, M-Pesa, from its mobile phone services (voice and data) and infrastructure businesses, potentially weakening its position in the market.

Safaricom would also have operated in a more restricted business environment in terms of marketing and pricing, with the regulator having powers to set prices. It would also have been subjected to at least a 45-day tariff approval process. On the contrary, its weak rivals would be allowed to change their tariffs within a day’s notice.

There were also going to be consequences for any operator found to have abused its dominance or engaged in anti-competitive conduct – such an operator would be liable to a fine not exceeding the equivalent of 10 per cent of its gross turnover in the preceding year, for each financial year that the breach persists.

Piqued by these apparent efforts to clip its wings, Safaricom hit the roof, shouting that the regulator was out to punish success. Through CEO Bob Collymore, it accused CA of crafting legislation that would automatically declare it a dominant operator without any evidence to show that it was abusing its dominant position, contrary to international best practices. It lashed out at the regulator for ignoring its suggestions when drafting the law.

As adamant CA and ICT ministry declared they were going to take the proposed legislation to Parliament, Safaricom received support from an unlikely quarter: The Competition Authority of Kenya (CAK), another constitutional agency of government came to its defence, saying that market dominance alone did not result in monopoly.

“The CA should aim at being proportionate in appropriating ex-ante remedies on to the dominant licensee, considering that the dominance position may have been acquired through innovation,” CAK chair Francis Kariuki was quoted saying.

The authority went further and wrote to Matiang’i, asking for revision of the proposed set of 11 regulations, which it described as drastic. Sensing an ugly scenario, the Attorney-General Githu Muigai stepped in early August and asked Matiang’i to withdraw the regulations from Parliament. In a letter, the AG has also hit out at the minister and the CA for drafting the controversial regulations without his input contrary to the laid down law-making procedures. .

“Accordingly, I advise that the Ministry withdraws the regulations from the National Assembly and subject them to discussions in all aspects as contemplated by the MoU (between CA and CAK),” the AG wrote.

It was at this stage that the CA beat a retreat and withdrew the proposed laws. Its Director-General Francis Wangusi announced that the authority was going to first hire an international firm to analyse the telecommunications and broadcasting sectors before making further suggestions. The study would identify which firm was dominant in which market segment in a market power report, and then find out which company was abusing its dominance.

Wangusi had said it would take time to complete the market analysis and market power reports, giving 18 months as the shortest possible time. That was in August and it would therefore not be until March 2017 that any dominance regulations would be enacted.
But Parliament had ideas of its own.  Towards the end of the year, the House passed Statute Law (Miscellaneous Amendments) Bill, 2015 which practically stopped CA from independently monitoring dominance and punishing abuse.

The amendments to the Kenya Information and Communications Act, 1998 contained in the Miscellaneous Amendment Act 205 dilutes the meaning of a dominant telecommunication service provider  as described in the former Act by adopting the weaker meaning contained in  Sections 4 and 23 of the Competition Act, 2014.

Worse, the amendments,  which  specifically targeted sections 84W (4) and 84W (5)  of the Communication Act effectively  transfer telecoms sector regulations-making role back to the ICT Ministry, which many perceive as unconstitutional. Article 34 of the Constitution requires the CA to be free of government and political control and independent of commercial interests.

It therefore did not come as a surprise when CA immediately criticised the amendments, with Wangusi complaining that transferring the power to regulate competition in the ICT sector from Communications Authority, whose responsibility is to manage competition ex-ante, to the Competition Authority, which is established to manage the competition for the entire economy ex-post, would eventually undermine the CA’s ability to assert itself as the ICT sector regulator.

He also expressed worry that the new laws would make it difficult to implement the outcome of a study by the international firm the authority had sought t to hire to examine Kenya’s telecommunication and broadcasting sectors for market dominance and anti-competitive behaviour.

Unfair competition

State Law office’s Senior Deputy Solicitor General Muthoni Kimani agrees that Safaricom is a dominant provider by any definition but opines that it does not matter who is charged with the responsibility of monitoring abuse. She says CA and CAK should find a way of working together to protect the consumer. She, however, doubts that CAK has the capacity to carry out that mandate.

“Do they even have the technical capacity to monitor the telecommunication sector?” she poses.

She thinks that the fair competition regulations are not observed properly in Kenya, leaving dominant players like Safaricom to run amok and behave in monopolistic fashion.

“Safaricom tried to stop Equity Bank from entering the mobile money transfer business, yet Equity was going to give the service at no cost to the consumer, unlike Safaricom which charges expensively for the same service. This shows that the company has a monopolistic attitude and does not believe in fair competition”, she says.

She challenges CA to “take the battle to the next front” now that it has been given mandate to monitor competition in the lucrative but cut-throat telecommunications sector.
In other jurisdictions such as the UK and the US, failure to comply with competition laws can have very serious consequences. In the UK, the Competition and Markets Authority (CMA) ensures robust enforcement of the competition rules, with higher fines and more criminal prosecutions in appropriate cases.

How others do it

Firms involved in anti-competitive behaviour may find their agreements to be unenforceable and risk being fined up to 10pc of group global turnover for particularly damaging behaviour as well as exposing themselves to possible damages actions. Furthermore, individuals could also find themselves facing director disqualification orders or even criminal sanctions for serious breaches of competition law.

In the US, Microsoft, the world’s largest and dominant computer software company, was at one time in the 1990s forced end its illegal monopolistic practices after the Department of Justice charged that the company used unfair contracts that choked off competition and preserved its monopoly position.

The company was accused of building a barricade of exclusionary and unreasonably restrictive licensing agreements to deny others an opportunity to develop and market competing products.

Commenting on the amendments, some consumers are of the view that failure to stem dominance in the telcos sector would impact negatively on the sector.

Media personality Rose Lukalo Owino wrote on a social media network:  “The question that must be asked is whether that success of the tech sector is encouraging or stifling the emergence of others, and future growth and expansion, and in so doing serving the public with newer, better, shinier opportunities. Behind the scenes conversations within the tech sector suggest to me that emergent players choose to play safe and stay out of sight of the dominant players lest they be whacked into oblivion for daring to demand a piece of the cake. That doesn’t serve the new players in terms of freedom to contribute, nor does it serve the public in terms of availability of choice, competitive pricing and service.”

Ahmed Mohamed Maawy concurred, saying that dominant players in the telcos sector were out to kill innovation. “We were hailed for being a “hotbed of innovation” recently. But if innovators will be constantly suffocated – there is little to hope for innovation to have prosperity. Overall the tech sector is a major backbone of our recent economic prosperity.”
As Orange, Airtel and other struggling mobile phone providers stare at another year of measly returns, an emboldened Safaricom will continue painting towns and markets, villages and hamlets green, and smiling all the way to the bank.