This is because firstly, tariffs offered to consumers are set by the networks and must be approved by Satra and secondly because the
networks imposed standard contracts on the service providers who in turn passed these on without mutation to the consumer. Competition
amongst service providers impacted on the consumer in relation to convenience and location and not much else. What rivalry there
was benefited the network, in the same way as the competition amongst salespeople who peddle the same brand serves the interests
of their employer more than their customer.
But the most important change that has led to the demise of the service provider is the change in the industry with the advent of
pre-paid subscribers. Prior to 1996 most cellular services were sold to consumers by way of a 12 month or 24 month contract with
one of the networks.
Vodacom in their submissions to us have described the evolution of the service provider. When the industry was in its infancy the
service providers in return for a commission on their contracts assumed the burden of concluding contracts, vetting credit worthiness
and collecting revenues on behalf of the networks. Because they assumed the credit risk on the contracts many failed. Not surprisingly,
as the market for cellular services has grown the need to avoid the risk of credit failure led to the advent of pre-paid services
Eighty five percent of Vodacom’s new business is now pre-paid. Since pre-paid services eliminate the need for any one to contract
with a consumer, to vet credit worthiness and to collect revenues, the traditional role of the service provider has diminished. Supermarkets,
service station and spaza shops now sell the networks’ products obviating the need for ISP’s or for an extensive network
of outlets for them.
The result of this is that the traditional service provider market no longer exists in its pure form and increasingly the downstream
market is characterized by the role of retailers who aren’t service providers. GSM and Teljoy are now involving themselves
in what are described as “back office” operations namely the management of retailers or a wholesale to retailer relationship.
The Commission regards this as the relevant market for the purpose of the merger. It is not necessary in our view to decide this
issue, as even on the narrowest conception of the market, competition remains unaffected.
Even if Vodacom is to wholly integrate its service providers the effect on competition will be negligible. The role of service providers is to provide the networks with a customer base. If the networks think they can do the job more efficiently
they should be allowed to do so. This is consistent with the current view on the subject as expressed by Oftel who state in their review of the mobile market dated July 1999,
“In a fully competitive market, there would be a presumption that if networks did not wish to use independent service providers as
a route to market, then it would not be efficient for them to do so and regulatory intervention to require this would not only be
inappropriate but counter- productive. This is consistent with standard competition analysis which makes no presumption against vertical
integration.
6.
Vertical Issues
Typically vertical mergers raise less competition concerns than horizontal ones and when they do so it is usually because they either
increase the barriers to entry into a market by requiring competitor to vertically integrate as well thus raising rivals costs or
because they force them to increase their costs and thus make them less competitive in the horizontal market in which they face the
integrated firm. The subtext to all this is the imminent entry into the network market by an as yet unidentified third licensee.
Satra has at the time of this decision conducted hearing into applications for a third licence but has yet to award the licence.
If anyone were to be effected by foreclosure in the distribution markets it would be the third licencee. For this reason the Tribunal
required the Commission to provide its recommendation to all the applicants for the third licence and invited them to make representations
to the Commission concerning the mergers. Only one of the applicants, Cell C, accepted the invitation. They indicated that they were
not opposed to the merger although they had long terms concerns about retail exclusivity, which we deal with below.
At first blush this silence from potential competitors in an industry noted for the vigor and sophistication in which players engage
regulators, as part of their business strategy seems surprising. The Commission’s investigators say their market information
is that the third licence applicants do not want to go the ISP route as did the existing networks and hence the mergers raise no
concerns for them. The Commission’s report quotes one of the applicant’s licence application’s which says that
they have found the traditional service provider model inadequate. The absence of concerns about vertical integration from those
with the most interest in objecting is the most telling fact that the mergers raise no concerns about entry barriers. Nor indeed
has Satra the sector regulator chosen to make any representations although invited to do so by the Commission.
A second reason the merger has not generated much controversy amongst Vodacom's competitors present and potential is that both GSM
and Teljoy were exclusive suppliers of Vodacom's products and neither could take on a competing network without Vodacom’s prior
consent. Thus the merger does little to later Vodacom' s existing ability to foreclose access to its rivals. Further there is no
evidence to suggest that this exclusive relationship has led to complaints in the past.
Vodacom motivates the mergers by efficiency gains that can be achieved through uniform IT systems and amortizing these costs over
a wider subscriber base. We have not examined these efficiency claims critically since they are not necessary to sustain our approval
of the mergers since they raise no competition concerns. Their only relevance is to indicate that there is a legitimate business
motive for these mergers which is not linked to the exclusion of rivals.
7.
Future Concerns
The one area where competition is currently vigorous in the downstream market is at the level of the retailer.
Retailers have become an increasingly significant outlet of the networks products with the advent of pre-paid services. Retailers
do not affect the price of service, which as we have stated is pre-determined by the network with the approval of the regulator,
but they do compete for ancillary supplies such as the price of a handset.
There are indications that the incumbent networks may be moving to tie up retail outlets with exclusive supply contracts thus foreclosing
those outlets to its rivals. Cell C in its submissions to us states,
The purchase of Service providers to facilitate vertical integration does not concern our client as much as the practice of limiting
the number of distribution outlets through exclusivity agreements, either directly or through service providers of either of the
operators. Both Vodacom and MTN appear to be engaging in these practices, which we believe are anti competitive, and warrant the
attention of the Competition Commission.
We view this trend with some concern because although its is trite that a multiplicity of retail outlets capable of supplying cellular
network products exist the elimination of strategic outlets could substantially raise rivals costs in particularly the new entrant
which will lack the market leverage to either attract retailers with similar offers or indeed to dissuade them from exclusive contracts
with its more extensive rivals.
However the present mergers involving Vodacom’s consolidation of two already supplicant service providers will not enhance its
ability to impose exclusivity on its retailers as it derives that leverage not from its hold over service providers but its power
in the network market which remains unaffected by this deal. As pointed out correctly by the Commission if these practices do become
prevalent the correct approach would be to consider them as potential restrictive practices.
In conclusion we have decided to approve the mergers without conditions.
N.M. Manoim
Date
Presiding member
Concurring: D.H. Lewis and P.E. Maponya
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