Are wireless networks always a substitute for fixed networks?

Why open access fixed line policies matter in South Africa

Prepared by: Ryan Hawthorne*

6th Competition Law and Economics conference, Mandela Institute

* Views reflected here are my views and do not necessarily reflect Neotel’s views

Why should we care about open access fixed line policies when we have multiple mobile networks in SA?

Source: Informa Telecoms & Media

Full-loop and shared loop unbundling

Sub-loop unbundling

Duct access

Access to street poles

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…the US merger guidelines require that supply-side substitutability be taken into account when examining effects, and not at the market definition stage

Would a hypothetical monopolist be able to raise prices by 5-10%?• or would customers use

substitutes?

Would a hypothetical monopolist be able to raise prices by 5-10%?• or would entry by other suppliers be

timely, likely and sufficient?

Relevant market is defined

Assess effects in the relevant market of the merger / abuse of dominance

SSNIP = Profitable

SSNIP = profitable

This leaves out the possibility of “price discrimination” markets, using demand side only analysis

Which means that the anti-competitive effects affecting a

group of customers are missed

This question is addressed through market definition, and specifically whether there are ‘price discrimination markets’ or groups of vulnerable customers

Are there groups of broadband customers in South Africa that are not able to use both fixed and wireless broadband that would constitute “price discrimination markets”?

Industry or public recognition of the submarket as a separate economic entity

The product’s peculiar characteristics and uses

Unique production facilities

Distinct customers

Distinct price

Sensitivity to price changes

Specialized vendors

We could use the “Brown Shoe” criteria to assess this:

Alongside other evidence of customers’ ability to switch

Candidate customer groups for which mobile broadband is not a substitute for fixed broadband are:

Online gaming; 0.6; 0% Video Communications; 7.9; 2%

Web and

other data; 54.7; 14%

File shar-ing;

22.8; 6%

Video; 317.5; 79%

Online gaming; 0.1; 0%

Video Communications; 0.1; 0%

Web and other data; 0.7; 1% File sharing; 0.199999999999999; 0%

Video; 6.7; 8%

Data; 75; 91%

High usage Residential customers

Consumer internet use, 2016

Small and medium enterprises (1-200 employees)

Business IP network use, 2016

Source: Cisco VNI, available at: http://ciscovni.com/, last accessed on 13 August 2012

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Only a very small % of business data and consumer video will be transmitted over mobile…

Fixed internet; 46.1; 61%

Managed IP; 25.9; 34%

Mobile; 3.7; 5%

Fixed in-ternet;

239.7; 74%

Managed IP; 32.5; 10%

Mobile; 53.2; 16%

Consumer video (PB) by network, 2016

Business data (PB) by network, 2016

Source: Cisco VNI, available at: http://ciscovni.com/, last accessed on 13 August 2012

… and there is industry recognition and survey evidence that suggest that wireless is not a substitute for fixed for those customers

“We are focused on increasing the penetration of our ADSL services to retail and high-end residential customers through targeted direct advertising to high internet usage subscribers.”

• Telkom Limited SEC filing (Form-20 F – annual report), p. 73, 2007

According to World Wide Worx:63% of

businesses use DSL for connectivity

73% of businesses use DSL for connectivity

2008 2009

A quick explanation of the DSL product before we look at prices for DSL services…

ADSL access lines, and Analogue line charges are the focus of the next slide

Source: MyBroadband, http://mybroadband.co.za/news/telecoms/39095-telkom%e2%80%99s-access-line-deficit-%e2%80%93-the-info-you-want.html

Telkom’s Residential and Business DSL line charges provide some evidence of price differences being sustained over time

Aug-02 Jan-03 Jan-04 Jan-05 Sep-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-120

100

200

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400

500

600

700

800

900

1000

Residential line rental plus highest speed DSL Business line rental plus highest speed DSLResidential line rental plus lowest speed DSL

Source: Telkom Annual Reports filed with the US Securities and Exchange Commission, available at: http://www.sec.gov/edgar.shtml, last accessed on 13 August 2012, and MyBroadband: http://mybroadband.co.za/news/adsl/11740-adsl-prices-then-and-now.html , last accessed on 10 August 2012

Usage of the Telkom network also bears out the fact that business customers are not switching away from fixed lines

Year to March 2002

Year to March 2003

Year to March 2004

Year to March 2005

Year to March 2006

Year to March 2007

Year to March 2008

0

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1000

1500

2000

2500

3000

20452183

2684

2207

0

412

Total business (Postpaid PSTN plus ISDN channels)Total residential (Postpaid PSTN plus Prepaid PSTN)Total DSL lines

Note: Excludes payphonesTelkom Annual Reports filed with the US Securities and Exchange Commission, available at: http://www.sec.gov/edgar.shtml, last accessed on 13 August 2012.

Various Competition Tribunal decisions highlight the reasons why wireless lines are not substitutes for fixed lines

Thro

ughp

ut(M

egab

ytes

)

Speed (Megabits per second)

MobileFixed

Capped mobile data (Rands per Megabyte)

“Uncapped” mobile data

“Other factors that render WiMAX an unsuitable substitute for fixed line access lines are limited availability to establish high sites, limited bandwidth availability, reliability and quality and large capital investments into

infrastructure. WiMax also operates on the basis of a shared base station. Hence the ability for it to serve large organization’s needs is limited by the number of users utilising the base station at the same time. While radio engineering can ameliorate that problem to some extent this is limited.”

See Competition Tribunal decision in case no. 51LMJun06.

SummaryTwo groups of customers that cannot use mobile broadband instead of fixed

Small and medium enterprises

High usage residential customers

Largely because of the shared nature of wireless networks and their limited physical capacity

Businesses largely use broadband connections for data, and > 95% of data will be over fixed networks in 2016

Only a small proportion of consumer video will be delivered over mobile networks: 16%. The rest will be delivered over data

Industry recognition and sustained price differences suggest that these customers cannot use wireless networks

High margin of business DSL over residential sustained for a long period of time

Business DSL widely recognised in industry as being in a separate market

Telkom targets high usage residential customers with DSL

Usage of Telkom network over time is skewed dramatically towards business customers

SMEs are an important group of customers

Access to broadband linked to higher productivity and greater competitiveness