Opinionista Ivo Vegter 4 July 2018

Why a wireless open access network won’t work

Both local and international experience cautions that a monopoly wireless open access network will fail to achieve its objectives of improving access to telecommunications and reducing prices.

South Africa’s government always stands ready to intervene when it perceives a so-called market failure. The price of data, especially on mobile networks, is high by international standards, while access to communications services is not yet universal.

Whether or not this is a “market failure” is, of course, impossible to say. Is it a market failure that one has to pay more for something than one would perhaps wish to pay, or does that price simply reflect the realities of costs and competition, supply and demand?

Without perfect information, which nobody – and least of all the government – has, it is often hard to tell whether a price is high or low. If it were easy to discover the “correct” price of things, investment managers would be able to predict stock and commodity prices; instead they have to take educated guesses.

If there is a failure, however, it can easily be attributed to the government’s own restrictive and controlling telecommunications policy over the years. Two decades ago, it gave Telkom a monopoly on landline services and a mandate to expand service to the poor. Telkom failed miserably in that objective.

The private foreign company that government enlisted as a “strategic equity partner” bled Telkom for all it was worth, under-investing in its network and overpricing its products. Internet service providers, while very price-competitive against each other, could buy wholesale internet bandwidth only from the Telkom monopoly, and, to stay viable, were forced to pass these high data costs on to customers. To make matters worse, they had to compete with their own supplier for retail customers.

When the monopoly finally ended, there were fewer landlines in operation than before, reaching less than 10% of the population. Despite the government’s best intentions, the Telkom monopoly is now widely regarded as having been the single biggest obstacle to faster, more widespread internet access in South Africa.

In the mobile space, government licensed two private operators in the belief that cellular telephones were merely toys for rich people and would never sell more than perhaps a million units. Ten years later, a third operator was licensed.

The low limit on the number of licences put a firm lid on price competition. Even so, private mobile operators managed to get cellular telephones into the hands of 90% of the population, invented pre-paid to cater for customers who were not credit-worthy, and even developed services like “call me” for customers who had no money at all. These private operators have done more for connectivity in South Africa than the government has ever done.

Licences have become more freely available, but the market remains highly concentrated, restricted by high regulatory barriers to entry. As a consequence, prices – particularly for data services – have not fallen as far as one might have hoped from the artificial highs caused by the monopoly government once created.

The government’s perverse answer to this problem is to propose a new monopoly, again owned and operated by a private consortium hand-picked by the government.

Taking advantage of the radio-frequency spectrum that will be opened up by the switch from analogue to digital television, the Information and Communications Technology (ICT) White Paper released by the Department of Telecommunications and Postal Services proposes to create a monopoly wireless open access network (WOAN), to which all operators will surrender their spectrum by the end of their current licence periods, and from which operators would then lease spectrum back at wholesale rates.

One argument is that it will prevent duplication of infrastructure. The hope is, of course, that this will enable more efficient use of capital to reach under-serviced areas and a neutral entity that can sell bandwidth at regulated – and presumably cheap – prices to operators both old and new.

That runs into an old economic fallacy, however. What is less expensive? One railway line between Johannesburg and Cape Town, or two? The government’s answer would be one, since two lines require twice the capital outlay. The private sector’s answer would be two, since those two lines would compete, so passengers and freight customers would enjoy lower prices and higher quality service.

The WOAN proposal is the exact opposite of what industry observers have long sought: privatising most of the radio spectrum and making it freely tradable. In principle, it is comparable to mineral rights, which the state has expropriated and now owns and leases back to mining companies on its own terms. It is also comparable to Julius Malema’s proposals about land, which he wants government to own and lease back to citizens.

Besides the obvious economic arguments against monopolies, such as that they destroy both market competition and the power of the price mechanism, there exist sound case studies that suggest a WOAN probably won’t work. Gary Moore, a South African lawyer and researcher for the Free Market Foundation has produced case studies from four countries that have tried it: Kenya, Mexico, Russia and Rwanda.

Kenya’s national broadband policy in 2011 proposed a WOAN to fast-track the roll-out of 4G services. According to Moore, it would be built, financed and operated by public-private partnership with a consortium including the main telecommunications operators. By 2013, the largest operator, Safaricom, had pulled out in despair at the “glacial pace” of developments. In 2014, it was noted that neighbouring countries had already rolled out 4G, while Kenya was still stuck with 3G.

By 2015/16, the Kenyan WOAN was essentially “dead in the water”. Other government regulations, such as mandatory infrastructure sharing to eliminate “wasteful duplication”, were also abandoned. In 2017, the international club of mobile network operators, the GSM Association, declared that the fate of the Kenyan WOAN project highlighted how complicated the single wholesale network model was. It never did deliver the services it was meant to, writes Moore.

In Mexico, a WOAN had been planned for construction beginning in 2014, to be fully operational by 2018. The objective was much the same as in South Africa, namely, to establish a non-discriminatory wholesale provider that would charge “competitive” rates (although competitive with what is unclear in a monopoly environment). This would, the government maintained, encourage new retail customers to enter the market and bring affordable broadband to almost the entire population.

The network failed to materialise within the original time frame. Eventually, writes Moore, a monopoly licence to construct and operate the network was awarded in late 2017 to the only private-sector bidder that qualified, a multinational consortium. Building on existing state-owned infrastructure, it was required to begin providing services in March 2018, but it has only just connected its first customers. Full network roll-out to 92% of the Mexican population is only expected by 2024.

The Mexican WOAN operates with an untested business model, with few potential customers, and with the open hostility of the country’s retail telcos. Yet, according to Moore, experts consider Mexico’s regulatory and market environment more conducive to the successful establishment of a WOAN than it is in South Africa.

The lengthy delays in both Kenya and Mexico are reminiscent of the disastrous regulatory delays in South Africa’s own telecommunications history, which impeded the establishment of a third mobile operator, a second national operator, digital terrestrial television, and a host of other developments that would have happened more rapidly under open market conditions.

The sentiment towards Mexico’s WOAN operator likewise reminds one of the hostility towards Telkom in South Africa, which was responsible for keeping prices high, failing to upgrade networks to accommodate growing demand, competing with its own customers, and delaying the roll-out of new network technologies that would benefit end-users.

Russia established a wholesale 4G network monopoly in 2010. Known as Yota, it was given not only available spectrum, but also spectrum taken from existing network operators, as is the intention in South Africa. The goal with Yota was also to avoid network infrastructure duplication while providing mobile retailers with bandwidth that would result in faster access and lower prices for customers. Coverage was expected to reach 180 cities and 70-million people by 2014.

By 2015, the project had failed, according to Moore. Yota resembled Telkom, in that it competed against its own customers, which resulted in unattractive wholesale prices. Other retailers rebelled and went their own way with building 4G networks. A revived plan to establish a shared wireless network has also fallen through, despite, as Moore points out, Russia’s unusually autocratic ability to dictate terms to companies under its jurisdiction.

Rwanda’s WOAN was launched in 2014, in partnership with Korea Telecom under a 25-year licence. It is the sole wholesaler of 4G in the country, according to Moore. However, the network is notoriously unreliable, often falling back to telcos’ existing 3G networks. It has also proven to be expensive even though retailers were making little profit reselling the 4G monopoly’s bandwidth.

The old-fashioned, slow, but ubiquitous 3G provided by competitive private telcos still dominated the market by 2017, and the international GSM Association reported that Rwanda’s monopoly 4G network was unlikely to achieve its coverage, price and competition objectives.

Moore writes that according to the GSM Association, government-mandated wholesale networks have been much slower to expand coverage, perform upgrades and to embrace new technologies such as 3G and 4G, and can be expected to prompt less innovation than network competition.

This should not be surprising. Because customers have nowhere else to turn, monopolies experience no competitive pressure to keep prices low and to keep improving services. In fact, they have every reason to maximise profit by raising prices and reducing investment in network capacity and new technology. If prices are regulated, then under-investment becomes the only option to improve profits. And when network capacity and quality are also dictated by government, the rate of technological progress will slow to the snail’s pace of regulation, leaving the country years, or even decades, behind its peers. Because telecommunications technology develops so rapidly, this would critically hamstring such a network.

Establishing a WOAN in South Africa will merely repeat the disastrous policy the government followed with wired networks when it granted Telkom its monopoly. It severely retarded infrastructure development in South Africa and did not achieve the limited objectives towards universal service that motivated the policy.

In three of the four countries under examination, a WOAN has failed outright, and in the other, sclerosis has already set in. If it cannot learn from its own mistakes, the South African government might consider learning from the mistakes of others. DM

Disclosure: Although it accords perfectly with Vegter’s views, the Free Market Foundation commissioned this article.

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