Kenya: CCK identifies Safaricom and Orange Kenya as having “significant market power”

Telecoms

The telecoms industry regulator has signaled its intention to declare two operators dominant in key segments of the telephony market, setting them up for stringent oversight and exposing them to heavy penalties for breach of set rules.

Safaricom and Telkom Kenya have been singled out as bearing the power of dominance in the mobile and fixed voice services respectively – implying that they have market power that in the view of the Communications Commission of Kenya, could be used to the detriment of the consumer.

“The declaration means that the two have the force and power to influence costs and at times to the detriment of consumers,” said Muriuki Mureithi, the chief executive at Summit Strategies, a local IT consulting firm.
 
Matano Ndaro, the director competition, tariffs and market analysis at CCK, said that the move is aimed at facilitating effective competition in the interest of consumers.

“What this means is that, as a regulator we will not impose penalties or obligations to entire services offered by the operators but to specific segments in which they have been declared dominant,” he said. “We will for example be looking at how an operator has priced its off-net (tariffs to other networks) compared to tariffs within its network and if we find that the charges are preventing its subscribers from calling other networks we shall enforce the obligation or penalties.”

If officially declared dominant, the two operators will have, among other measures, to file separate accounting statements for their subsidiaries or other businesses to curb cross-subsidy.

Safaricom and Telkom will also be required to make public their network characteristics, accounts, technical specification and will have to seek clearance from the CCK before introducing any service or product into the market.

The move could have serious implications for the pricing of SMS, and other data services that have been benefiting from the huge voice revenue inflows. It could also force a further drop in voice call tariffs as the regulator moves to level the playing field by preventing the dominant operators from using their position to keep their subscribers from calling other networks.

CCK released the competition guidelines and declaration of regulated services 2011, on Friday for review by the public until August 22.

Declaration of dominance is based on the regulator’s review of the telecoms operators’ pricing strategies, market share, switching costs, economies of scale, barriers to entry, advertising and branding and their effect on fair competition in the marketplace.

CCK says the 69.9 per cent market share that Safaricom holds in the voice segment of telecoms market based on its subscriber base and 81 per cent by revenue is above the threshold for presumption of dominance.

The regulator argues that in established competition case law, sustained market shares of over 50 per cent give rise to a rebuttable presumption of dominance while market shares of over 40 per cent are suggestive of the possibility of dominance.

“Based on the above evidence, Safaricom’s market share by far exceeds the thresholds where firms are typically presumed to be dominant,” says the regulator. “On the balance therefore, Safaricom has an enduring Significant Market Power in mobile voice and SMS services that enables it to behave, to an appreciable extent, independently of its competitors, customers and ultimately consumers.”

Safaricom said any plans to impose penalties on market dominance needs to given proper consideration as they may lead to introduction of drastic measures that harm the sector.

“Retail price controls is one of the measures a regulator can impose in certain instances but this is considered a drastic measure of last resort,” said Nzioka Waita, Safaricom's Director of Corporate Affairs.

Safaricom also appeared to question the CCK’s mandate to regulate competition citing the recent enactment of the Competition Act and establishment of the Competition Authority.

“These guidelines and other pronouncements in this area by the CCK will have to be evaluated against developments in competition management, specifically the enactment of the Competition Act which is the primary legislation on competition issues in Kenya,” Waita said.

Telkom Kenya also faulted the regulator for terming its dominant in fixed telephony, arguing that CCK is to blame for not licensing other operators in this segment of the telecom market. “Dominance means you are dominating other players which cannot be the case if you are the sole player in the retail fixed voice market segment,” said Mickael Ghossein, the CEO of Telkom Kenya.

This is the second time that the CCK is issuing guidelines on fair competition to promote competition in the telecoms market.

Last year, the regulator released the Kenya Information Communication (Tariffs and Fair competition and Equality of Treatment Regulations) 2010 that Safaricom contested as unfairly targeting its business.

The forced Information minister Samuel Poghisio to seek a second opinion from UK consultants Frontier Economics, who found key aspects of the gazetted rules to have been out of tune with international best practices and recommended that they be revised or struck out altogether.

Frontier Economics said that to declare a player dominant, the CCK must demonstrate that effective competition cannot develop among existing players and that there exists strong and permanent barriers to entry in the identified market segment. It also placed on the doorsteps of the CCK the burden of proving that the existing competition law is not sufficient to deal with potential abuse and that proper management of wholesale prices cannot stop the abuse. Safaricom had expressed concern that the rules as earlier constituted did not provide for a mandatory process that the regulator must follow before declaring a player dominant in a specific market segment leaving room for arbitrary action.

The CCK also lost the power to set tariffs in cases where they are not satisfied with a dominant player’s application to adjust tariffs. Frontier Economics recommended that, the industry regulator only retains the power to advise the operator to adjust the proposed tariff without being specific.

Legal experts said it was nearly impossible for the CCK to meet the requirements within the time set making the possibility of such action remote. While releasing the new guidelines last Friday, CCK said that the Kenya Information and Communication Regulations, 2010 gives it the powers to periodically asses the status of competition in the market, define the market and develop guidelines for determining the regulated services. Other than Safaricom and Telkom Kenya, the regulator has also classified the fee mobile operators’ levy each other, the interconnection or wholesale mobile termination rates for voice and short messages (SMS) as regulated services.

This gives the CCK the power to impose new interconnection rates whenever it convinced that the prevailing one favours any of the four operators.

The interconnection charges were to fall in July to Sh2.21 from Sh4.42 but were left unchanged following a presidential directive that gave the operators one year to study the effect of the prevailing rates.

The drop in interconnection charges last year saw Airtel slash its tariff by 50 per cent, forcing other operators to follow suit. The ensuing price wars have since seen Safaricom’s share of the voice market drop from the previous 75.9 per cent to the current 69.9 per cent.