Drawing the Line for Ex-Ante Regulation by the Communications Authority

The recent release of the Analysys Mason report, which apparently is quite concise in depicting the state of the mobile market in Kenya continues to conjure an emotive issue for the telecommunication companies in Kenya.

The report was based on the European market framework, with the surveyor claiming it presents the best global basis for the establishment of dominance in the Kenyan market. It is this same criterion that was employed in arriving at price regulation as a means of dealing with the dominance issue.

Among the issues tackled in the report includes the susceptibility of each market to ex-ante regulation; and the significant market power, in other words, dominance.

The report identified 8 wholesale and 5 retail markets. The retail market is defined as the points of interaction between the network operators and their users through products and services; whereas the wholesale market defines the interaction between the network operators and infrastructure providers.

So, what does ex-ante regulation mean? Normally, when there is a presumption of the occurrence of a bad conduct by an entity in the market or when the bad conduct actually happens, the regulation applies. Usually, when there is a likelihood of the bad conduct occurrence, market regulators apply preventive measures or what is known as ex-ante regulation.

However, the anticipatory nature of the market renders the regulation subjective. This is the reason why it involves lots of assumptions by the regulator.

When the bad conduct materializes or has happened, the regulator has enough evidence to apply remedial measures, this is referred to as post-ante regulation. In Kenya, the ex-ante regulatory domain body is the Communications Authority (CA) while the Competition Authority of Kenya (CAK) is the domain of the post-ante regulatory body.

By Susceptibility to ex-ante regulation, Analysys Mason meant that the regulator, if it sees ineffective competition and/or existence of higher and non-transitory barriers to entry to a specific market segment, should apply anticipatory intervention. This is particularly the case if one player is holding significant market power.

Moving on to the recommendations by the Analysys Mason report on issues subject to the regulation. It made some recommendations on wholesale markets.

Regarding Call and SMS termination on mobile networks, the report concluded that each mobile operator should continue to provide termination services on its network to any other network operator on a nondiscriminatory basis with rates set by the CA. It further directed that each operator should prepare an RAO detailing the commercial and technical terms that apply to call and SMS termination.

The recommendations also touched on call termination on fixed networks saying that “each fixed operator should continue to provide termination services on its network to any other network operator on a non-discriminatory basis with rates set by the CA. Analysys Mason also stated that each operator should prepare a Reference Interconnection Offer (RIO) detailing the commercial and technical terms that will apply to call termination by dominant operators.”

Lastly, on the wholesale market, Analysys Mason said that on USSD and STK access on mobile networks, “all licensed mobile operators should be required to provide USSD access on request to all licensed content service providers on a nondiscriminatory. Prices should be based on LRIC but, given the cost and time required to prepare a suitable cost model, if each operator were to agree voluntarily to a price below 1 shilling per session (or if charged per hop, a price reaching the equivalent result) then the CA should give due consideration to accepting this offer as a short-term alternative.”

The report claims that STK access for third-party providers would be desirable in terms of ensuring a ‘level playing field’ for all market players and proposed a more intrusive remedy that should not be made immediately since it could “raise practical implementation difficulties.”

The major findings of the report, prior to making the recommendations are that Safaricom enjoys a dominant position and there is a need for regulation. However, although we know it is for the good, it totally overlooked other factors. In scrutiny, the recommendations seem to make sense. The only problem is if the telecoms say no to them and if the ex-ante regulations extend to the retail market.

The sharing of infrastructure, well, of course, is no problem. In fact, it will be the solution to the disparities between the dominant company and its competitor’s sites. One thing to take note of is that the sharing, if it is agreed upon, should solely be on a commercial basis and should not, in any way, accrue whatever subsidies to the tenant.

In terms of dominance in both the mobile communications and mobile money markets, one of the recommendations is already in place; the wallet-to-wallet interoperability. The issue is what the above-mentioned recommendations in the wholesale markets could lead to, and that is the regulation of the retail market.

The prohibition of on-net discounts might come as a joy to the consumers but not the communications company. Kenya is among the countries offering the lowest calling rates in the world. Perhaps this is the reason why some feel that the existence of price differentials in the wholesale market shouldn’t be there at all.

On-net discounts usually mean that Tier-1 operators lower their tariffs when their subscribers call within the network but charge more for calls and texts from other networks. Scrapping off such discounts might lead to companies making losses, particularly the ones that have been struggling to keep up with the dominant operator.

The prohibition of individually tailored loyalty schemes and promotions as well as the replicability of the retail tariffs and placing them under the susceptibility of the ex-ante regulation means one thing, and anyone who has a keen eye can tell that the report is, in a subtle way, suggesting price control.

What Analysys Mason is implicitly saying is that other telecommunications companies cannot effectively match with Safaricom, which has engaged in margin squeeze, without losing money. The issue of price control in the country isn’t new.

Airtel had tabled the issue in 2016 by urging the Ministry of ICT to issue a pricing floor on Safaricom’s retail tariffs. What this means is that Safaricom cannot price its products below a certain level.

This why the issues of price controls in the Kenyan market doesn’t hold water. It never will and the answer is right there before your eyes, Kenya’s telecommunication market is, for all intents and purposes, price inelastic.

As a matter of fact, empirical evidence shows the same. Gitonga (2014), so far, the only analysis with a focus on empirical findings for the price elasticity of demand in the telecoms space, gave a report on the demand elasticities for both price and income of mobile telecommunication services in Kenya. It showed that the demand for mobile telecommunication services is price inelastic and demand elastic.

Gitonga’s conclusion was that even if the there is a reduction of prices by mobile telecommunication operators in Kenya, it won’t necessarily result mean that there will be an increase in the minutes of usage. Instead, it can only result in losses if it is the only strategy being relied on by the firm to increase revenue. See? That is why this remedy by the Analysys Mason is bound to tumble before it even begins.

What the report should have focused on is value-addition through better innovations and rolling out of products and services that will be well received by the consumers. The focus on the price control will not achieve much.

The best recommendation is that the regulator sticks to the wholesale market, for apparently, though it has its quibbles, does seem to make sense. If it extends to the retail market, as touched by the Analysys Mason, it is bound to fail in its mandate.