The MTN acquisition of Smart Village led to an interesting competition condition imposed by the Competition Commission – namely that MTN needed to introduce an open access model for Smart Village. The ruling does raise an interesting question about access to telecommunications infrastructure in gated communities. This note explores the Competition Commission ruling, looks at the issue of competition in gated communities, and considers possible future operator strategies.
The Challenge of Consumer Choice in Gated Communities
Consumer choice can be completely eliminated in gated communities through the establishment of a monopoly provider in these communities. These localised pockets of monopoly come into existence either through the home owners’ association providing an exclusive mandate to an infrastructure provider or by the behaviour of the telecommunications infrastructure provider. The creation of such monopolies results in the gated community consumers being denied choice. Furthermore, the MTN acquisition of Smart Village highlighted this competition issue.
What is the Competition Commission Ruling?
The following text is extracted from the Competition Commission news letter dated July 2016.
On 29 January 2016, the Competition Commission approved with conditions a merger whereby Mobile Telephone Networks (Pty) Ltd (“MTN”) acquired Smart Village (Pty) Ltd (“Smart Village”). MTN is a global communications partner and cellular network operator. Smart Village is mainly active in providing fixed line fibre broadband access to the residential market.
The merger presented a horizontal overlap in relation to the provision of fixed-line broadband fibre optic access network as both parties deploy fibre in gated residential estates. Both parties also operate as Internet Service Providers and offer internet connectivity services to residential estates where fibre is deployed. The Commission found that each gated residential estate constitutes a distinct separate geographic market as gated residential estates generally do not permit the duplication of fibre infrastructure in the respective gated estates. In that regard, there was no geographic overlap arising in the assessed markets. Smart Village holds 100% of the market in each of the gated residential estates wherein it has laid the fibre, thus the merged entity would have monopoly power over each of the gated residential estates.
The Commission found that the vertical relationships arising from the merger would result in a substantial lessening and prevention of competition. The merged entity would acquire a position that would allow it the ability to exercise market power. This could be exercised through foreclosure strategies over its fibre infrastructure in the gated residential estates. In addition, the Commission found that the merged entity would have the incentives to do so as MTN is also able and intends to expand its downstream services offerings in the gated residential estates. Such foreclosure conduct would ultimately harm consumers in those estates where such conduct would be perpetuated and prices are unlikely to decline when there are no viable competitive choices. MTN would also be in a prime position to leverage market power on its fibre into downstream services such as internet connectivity, TV on demand services and security services through bundling strategies.
The Commission found that the input foreclosure strategy could be remedied through the imposition of conditions relating to open access model to the fibre infrastructure on fair, reasonable and nondiscriminatory terms and having transparent and market related pricing. With an open access model, customers in gated residential estates would be afforded choice in terms of product and price offerings. The Commission was further of the view that as long as MTN’s ability to leverage its market power over fibre is curtailed by the adoption of an open access model on a non-discriminatory basis, other potential exclusionary strategies such as bundling are also unlikely to be achieved.
A Brief Global Review
The issue of access of telecommunications infrastructure within buildings or private estates has been dealt with in other jurisdictions. The key themes that run through the regulations are the protection of consumer choice and the encouragement of broadband growth.
Here are a few country examples:
- Decree-Law 123/2009 was published, setting out the legal regime applicable to the construction of infrastructures to lodge and install electronic communication networks and to the construction of telecommunications infrastructures in housing developments, urban settlements, concentrations of buildings and buildings. The essence of this law is that it obligates infrastructure sharing within the abovementioned settlements and buildings.
- In 2013 ictQATAR (the national regulatory authority) issued a set of instructions to service providers, developers and building owners that specially stated that exclusive telecoms infrastructure usage was prohibited. ictQATAR stated that end-users must have the possibility to choose between the offers of all and any service provider to the public licensed in Qatar and the arrangements which have a negative impact on competition, i.e. exclusionary or exploitative effects, between service providers and/or developers and/or building owners are forbidden.
- The telecom riser ducts (or simply risers) in buildings are administered by Infocomm Development Authority (IDA) under the provision of the Telecommunications Act, 1999. IDA’s policy is to reserve the risers for use by fixed-service facilities based operators (FBOs). Any other person or enterprise intending to use the risers shall seek permission from IDA.
In other jurisdictions, different methods of access to in-building or estate infrastructure exists. Where these regulations exist, they serve to promote fair competition.
Gated Communities in South Africa
A key characteristic of South Africa is the number and growth in gated communities.
These gates communities represent concentrated pockets of high-income households who are the prime target segment for the uptake of FTTH services. The challenge, however, is that the home owners’ associations typically sign exclusive contracts that give a single telecoms service provider or infrastructure provider exclusivity in the provision of services to that estate. Alternatively, the exclusivity relationship may arise when the telecommunications infrastructure provider deploys infrastructure and binds the gated community to an exclusive contract that excludes other competitors.
In either approach, the exclusivity behaviour serves to entrench a localised monopoly in a gated estate. Once such a monopoly exists, there exists the conditions for both horizontal and vertical closing out of other competitors. Consumers are thus deprived of freedom of choice.
In their ruling on the MTN/Smart Village acquisition, the Competition Commission ruling recognised this market behaviour and imposed open access conditions on the MTN acquisition.
Operator Strategies to Gain Access to Gated Community Infrastructure
As FTTH retail competition increases, these pockets of high-income households located in gated communities will become the focus of operators. Operators, however, will not gain access – given the monopoly that exists in these gated communities. We thus expect that there will be a rise in operators seeking mechanisms to break the monopoly in order to gain access.
The challenge is – how to gain access to infrastructure on a fair and equitable basis?
- Given that there are very few open access networks operating in gated communities suggests that the owners of such infrastructure are employing practices to restrict access. Therefore, the likely route an operator will follow would be to approach a regulatory body to mandate such access.
- It can be argued that these operators can make a case for being granted some form of access to the telecommunications infrastructure within gated communities. Furthermore, there are likely enough global case studies to illustrate how other national regulatory authorities have dealt with this challenge.
- Approaching ICASA, to grant access to infrastructure, may not be the most expedient strategy to follow.
- Rather, we would suggest that an approach to the Competition Commission would be the more economical route to follow. Based on the Competition Commission MTN/Smart Village ruling, we would expect that the operators, who challenge this monopoly situation, would receive a favourable ruling from the Commission.
Pre-emptive Strategies – Developing Wholesale Product Offerings
Operators who hold monopolies in gated communities for the provision of infrastructure should seek to develop open access or wholesale product offerings that offer access to other competing operators. This move can pre-empt the imposition of remedies that can end up being more onerous than what the operator would have developed.
The Commission has approved without conditions the intermediate merger whereby Newshelf 1363 (Pty) Ltd (Newshelf) intends to acquire Afrihost.
Newshelf is a newly incorporated firm that does not conduct any activities. Afrihost is an internet service provider whose activities include data hosting services and ancillary services, retail asymmetrical digital subscriber line internet access services and mobile internet access services.
The shareholders of Newshelf are largely the existing management of Afrihost. The proposed transaction is therefore a management buyout (MBO) which re-establishes the status quo of Afrihost’s ownership before MTN acquired control in 2014. As a MBO, the merger does not change the structure of any markets and as such the Commission stated that it is of the view that the proposed transaction is unlikely to substantially prevent or lessen competition in any market.
Unpacking the Afrihost Sale
MTN Group reported in its 2016 Interim Results (6 August 2016), that it sold its 50.02% investment for R320 million. In doing so, it recorded a goodwill impairment loss of R202 million at 30 June 2016 based on the remeasurement of the assets to fair value less cost to sell. It is interesting to note that MTN purchased its shareholding in June 2014 for R403 million, thus valuing Afrihost at around R816 million in June 2014.
Analysis of the MTN Group interim results, shows that Afrihost earned R679 million over the 12 months from July 2015 to June 2016. Furthermore, Afrihost showed very low growth over the six-month period from December 2015 to June 2016 of only 1.3%.
Outlook for the market
- Consumers: we expect that Afrihost will be free to return to its pre-MTN ownership status of being an aggressive market player in the internet service provider market.
- Wholesale Operators: we expect that Afrihost will be able to buy a wider range of wholesale services from other wholesale providers (other than from MTN).