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Safaricom dominance report proposes an impractical solution

Tuesday February 28 2017

By JOHN WALUBENGO
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I finally got a sneak preview of the leaked report on telecommunications dominance that has been repeatedly analysed in the media and even made it to editorial pages despite not being officially launched.

Given that the ICT cabinet secretary has also jumped into the fray of analysing this report that is yet to be made public, I suppose I can take advantage and make my analytical contribution.

Most commentators seem to agree with the thinking that we should not contain or punish a successful dominant company by introducing procedures that would curtail or slow down its runaway success.

This, of course, is in contrast to the leaked consultant’s recommendations, that amongst other things, suggest that the dominant player, Safaricom, should be forced to share its base station infrastructure as well as functionally divorce its M-Pesa (mobile money) unit from the parent company.

Whereas I may take some pride in observing that it took the consultant a whole year to arrive at conclusions that took me a week to publish, there are some small, but significant, differences in how I would solve the problem, compared to the report.

Whereas the consultant rightly identifies that Safaricom is dominant in certain market segments, they erroneously apply telecommunication remedies to cure a problem that is largely internet or application-based.

ENFORCED BY THE REGULATOR

Historically, in the telecommunications world, the best way to break up monopolies or dominant players was to enforce what is known as an inter-connection pricing regime.

In such a regime, bigger players would be required to provide interconnection to their smaller competitors through rates that the regulator presides over and enforces. That is the same interconnection regime that is used by operators to charge and route voice calls between each other.

Without such a regulatory intervention, bigger player can choose to punish smaller ones by demanding that they pay exorbitant amounts to access and route calls through their networks.

This is all fine, but can it apply to non-telecoms services like M-Pesa?  Can the regulator prescribe and enforce interconnection regimes over what are actually application-based rather than telecommunication based services? The short answer is "No".

This is because in the internet or the application based world, unlike voice communications, details of whom to connect to, at how much and for how long are often out of the regulatory domain.

The simple reason is that cost structures for internet or application based services are multi-sided markets.

INTERNET REALITY

It’s like in the airline industry.  The cost of travel is not necessarily symmetric to the distance travelled. A trip from Nairobi to the United States via Dubai may actually be cheaper than the more direct trip via Europe, even though the distance via Dubai is longer.

Dynamics of air travel go beyond distance and include salient issues like passenger traffic on various routes, congestion, quality and efficiency of intermediary airports, amongst others.

Trying to allocate pricing between partnering airlines based on equitably apportioning costs based on the distance each airline partner covers is not appropriate for the airline industry.

Replacing distance covered with communication links, airports with internet routers and passengers with internet traffic, you realise that the price charged for an internet or applications service is often not directly related to the cost of providing a service.

Trying to symmetrically partition these costs between two service providers through the old interconnection regimes misses or ignores the realities of the internet world.

This is the solution the consultant is advancing by suggesting that the regulator dictate interconnection rates for application and internet-based services like M-Pesa.

This reality is often exemplified by Google, Facebook and other Internet players as they continue to invade the telecoms world, making the separation between telecoms and internet even murkier.

For example, Google is building fibre networks in some parts of Africa while Facebook offers free content services in various African markets. In most cases their services are free both to the consumer and the telecommunication providers, while a third player, the advertiser, settles the bills.

This is typical of most multi-sided markets where multiple players and stakeholders are involved.

NOT APPROPRIATE

Essentially, in the internet and application worlds, the price charged and the cost of service provision are agnostic to each other, arising from their multisided nature. 

Trying to tie together the cost of provision and the price charged to the consumer through interconnection charges, as the consultant recommends, is not appropriate for these types of services.

It reflects their failure to appreciate the increasing internet-based nature of telecommunication services.  The consultant is therefore guilty of using standard telecommunication remedies to cure a completely different, internet-based, sub-sector.

So what should the remedy be for dealing with Safaricom's dominance be?

We can borrow from the best practices in the internet world. Let us demand and have open standards that allow other operators to interconnect with application services like M-Pesa.

However, let us avoid trying to micro-manage or dictate the details of commercial agreements that a dominant player may have with inter-connecting operators or players.

Mr Walubengo is a lecturer at the Multimedia University of Kenya, Faculty of Computing and IT. Email: [email protected], Twitter: @jwalu