Wholesale services: Telecommunications
The role of wholesale services in the telecommunications sector lies at the heart of the NBN (New Broadband Network) outlined in the South Africa Connect policy published by the Minister of Communications in December, 2013.
This policy reflects the well-founded belief that a wholesale regime in the telecommunications sector, whether for fixed or mobile services (or both) may be necessary to stimulate retail competition where some operators’ network infrastructure far outstrips that of rival operators. They may also be necessary where some operators have superior interconnections – whether national or international – that may unfairly advantage them.
Regulators typically pay close attention to wholesale providers to ensure that no operator is afforded a position where it can conspire to exclude others from being able to provide the same end-to-end service, under reasonable conditions. The goal of any sound regulator is to ensure the consumer can choose between operators and expect to receive equivalent services and service levels, while also ensuring consumers aren’t unreasonably prejudiced based on their location.
Moreover, wholesale service offerings may be justified if one or more operators benefit from public funds or subsidies to deploy their networks. Otherwise there is an obvious, unfair competitive advantage over operators that are not being subsidised, along with the risk of an effective monopoly existing in some regions (or regions that are economically undesirable for operators and hence underserviced).
Historically, and today, wholesale services remain a key factor in the effectiveness and efficiency of competition in markets for network services. The most extreme manifestation of this is the wholesale-only network, which may exist to combat the “natural monopoly” that an access or backhaul network may represent, or to encourage efficiency and reduce costs in the case of scarce resources, like radio frequency spectrum.
One of the biggest challenges when regulating wholesale services is setting prices at a level high enough to encourage those operators capable of investing in their own infrastructure to do so, while keeping them low enough to be attractive and economically feasible to those operators who need them.
Operators that offer both retail and wholesale services (whether mandated to or not) over their networks have to manage the relationship between their wholesale and retail businesses so that their wholesale customers do not perceive (or find in practice) that the retail operation of their wholesale provider is benefitting from an unfair competitive advantage.
This advantage can arise if the costs to the wholesale provider’s retail operations to transport traffic are set significantly lower and/or the quality of its network transport significantly higher than those of the wholesale services offered to other operators. Effective competition in the provision of wholesale services, which may require regulatory intervention, mitigates this risk.
An effective regime for wholesale services is a necessary, although not sufficient, condition for ensuring effective competition in the retail broadband market in particular. Without it, broadband provision will be limited to very few facilities-based operators that will have strong incentives to abuse their positions. This abuse may come in the shape of charging unjustifiably high retail prices, while eroding competition and inhibiting innovation from third-party services providers that may threaten their sources of revenue, yet depend on their facilities for access to customers.
The US and EU have differing views on the importance, or even necessity, of wholesale regimes to ensure effective competition, with the latter tending to take a more interventionist approach. However, the EU has also recognised that differing degrees of intervention may be required in different areas, depending on how well each is served by existing infrastructure and services.
In South Africa, meanwhile, Telkom’s dominance in the operation of fixed-line networks presents a similar challenge in ensuring all South Africans have affordable access to broadband (whether fixed or mobile) services.
There are several examples of countries (including Australia, Singapore, Malaysia and Brazil) where the government has taken the initiative to stimulate the development of a new national broadband network, which it partly funds, and/or new broadband access networks that will in principle be available to all service providers on an open-access, wholesale basis.
The justification advanced for these initiatives is that, in their absence, there will be significant gaps in the broadband facilities deployed by existing operators and considerable duplication of inferior backbones, while larger operators will use their strength to pursue anti-competitive practices to hinder smaller, and perhaps more innovative, new players.
The investment, governance and operational models of these various government-inspired initiatives vary significantly, and there is as yet insufficient experience to judge whether any of them constitute a model worthy of emulation. For example, while Australia’s National Broadband Network represents a significant government-driven structural change to the country’s telecommunications industry, aimed at encouraging vibrant retail competition, the shape of its implementation remains controversial and is unclear after the change in government in the elections held late last year.
The principles and operational goals expressed in the South Africa Connect policy are unexceptionable. The open question is whether they will be effectively and efficiently implemented. The most pertinent lessons for a wholesale regime in South Africa can be found in Europe. Despite the goal of a “Common Market” national practices in regulation and competition still differ widely within the EU with comparable differences in the conditions of broadband markets. Comparisons of France, the UK and some Scandinavian countries on one side compared with Germany, Spain and Greece on the other would be instructive.
Author – Martyn Roetter