The Competition Tribunal has
fined fixed-
line
operator Telkom R449 million
for abusing its monopoly
between 2004 and 2009, in
what is the first
competition decision to be
handed down against the
telecoms group.
Telkom has been found to
have bullied the downstream
sector and limited
competition in a case that
took eight years to reach a
conclusion
According to the
judgement, the tribunal
found Telkom had refused to
supply essential facilities,
which limited competition in
the sector. It did not find
enough evidence to support
an excessive pricing
argument.
The penalty is
substantially less than the
R1 billion the Competition
Commission wanted to be
imposed on Telkom for its
alleged refusal to provide
essential
services, but is 65
times higher than the fine
Telkom submitted would be
appropriate should the
tribunal find against it.
The tribunal's decision,
which has taken eight years
to be handed down after the
commission referred the
matter to it in 2004, has
been marred by several
delays, including a legal
battle over jurisdiction
that was sorted out by a
November 2009 Supreme Court
ruling. Telkom has six
months to pay half of the
penalty, while the balance
is payable within 12 months
of that.
Crimping competition
The case stems from a
complaint submitted by the
then South African
Value-Added Network Services
(SAVA) group and 20 other
Internet service providers
to the commission in 2002
around alleged price fixing
and Telkom's alleged refusal
to provide access to
essential facilities.
The providers accused the
fixed-line operator of
abusing its market dominance
by refusing to supply them
with backbone and access
facilities, unless they met
Telkom's conditions. SAVA
was subsequently
incorporated into the
Communications Users'
Association of SA, which
later disbanded.
The tribunal concluded
that Telkom leveraged its
upstream monopoly in the
facilities market to
advantage its own subsidiary
in the competitive
value-added network market.
“Telkom's conduct caused
harm to both competitors and
consumers alike, and impeded
competition and innovation
in the dynamic VANS
[value-added network
services] market,” it says
in a statement.
The commission wanted
Telkom to be fined the
maximum penalty of R3.5
billion, equivalent to 10%
of Telkom's 2003 revenue,
for alleged price fixing. It
asked, as an alternative,
for a fine of R1.1168
billion for the alleged
refusal to provide essential
facilities.
The tribunal found the
commission did not present
sufficient evidence to prove
the allegations of excessive
pricing or price
discrimination. Telkom
submitted that, if a fine is
imposed, it should be no
more than R20.5 million for
the alleged excessive
pricing complaint, and R6.8
million for the essential
facilities matter.
During closing arguments,
Telkom said a fine of R3.5
billion would have
disastrous consequences for
the South African economy
and government. “It is no
secret that Telkom's
financial performance has
been under extreme pressure
over the past few financial
years.”
Telkom reported an
operating profit of R179
million from continuing
operations in the year to
March. Profit from
continuing operations in
2010 was R3.3 billion, and
in 2011 it was R2.4 billion.
No access
In its complaint
referral, the commission
alleged Telkom would not
supply essential access
facilities to independent
VANS providers, induced
their customers not to deal
with them, charged their
customers excessive prices
for access services, and
discriminated in favour of
its own customers by giving
them a discount on
distance-related charges
which it did not advance to
customers of the independent
VANS providers.
Through this conduct, the
commission alleged, Telkom
sought to expand its
exclusivity to services over
which, in law, it did not
enjoy a monopoly. Moreover,
through the use of these
contractual terms, Telkom
sought to bypass the
regulator, which was
entrusted with enforcement
of the Telecommunications
Act – then in force – to
give itself the additional
protection of private law
remedies.
The tribunal found that
Telkom had refused to supply
access to essential services
and induced VANS' customers
not to deal with them, which
resulted in a “substantial”
lessening of competition in
the VANS market, the
tribunal found.
Instead of competing on
the merits, Telkom devised a
strategy claiming the
independent VANS were
conducting business
illegally, notes the
tribunal. Through this
strategy, which involved the
freezing of its competitors'
networks, Telkom impeded the
growth of its competitors
and retarded innovation in
the marketplace, it finds.
“While Telkom bullied its
downstream competitors into
line, it exploited, to its
advantage, the very alleged
grey area in the regulatory
framework by integrating
voice and data, and
bypassing the regulator's
requirement of separate
accounting for PSTS [public
switched telecoms services]
and VANS services,” the
tribunal stated in its
judgment.
Long walk
Although the commission
referred this matter to the
tribunal in February 2004,
Telkom challenged the
referral on various fronts,
including jurisdictional
grounds, in the High Court.
After five years of
litigation, in November 2009
the Supreme Court of Appeal
rejected Telkom's argument
that the competition
authorities did not have
jurisdiction over it and
referred the matter back to
the tribunal for a hearing.
The matter was finally
heard by the tribunal
between 17 and 28 October
last year, and presentation
of evidence was wrapped up
last December. Arguments
from both sides were heard
in February.
ITWeb requested Telkom to
comment on the ruling, but
it was not immediately able
to provide a response. In
its annual results for the
year to March, it said it
had been advised by external
legal counsel that the
tribunal has not, so far,
imposed the maximum fine on
any offender.
“Telkom has consistently
held that the conduct
complained of was fully
justified in terms of the
regulatory and legislative
environment prevailing at
the time,” it argues in its
published results.
During hearings, Telkom
argued that the market, at
the present time, bears
almost no resemblance to the
market when the complaint
was laid. It said any
penalty imposed in the
current environment would
not act as a deterrent
because the market has
opened up so much since the
period being discussed. “A
penalty can have no
deterrent effect on Telkom's
behaviour.”
Dominic Cull, owner of
Ellipsis Regulatory
Solutions, says, more
important than the fine, is
the precedent that there is
still an abundant amount of
vertical market integration
in the local market, and the
case is still as relevant as
when the complaint was
lodged in 2002.
Telkom also faces another
referral from the
commission, which was filed
with the tribunal in 2009
and has yet to be heard. The
full judgment handed down
today in the 2004 referral
is available on the
tribunal's
Web site.
