A Review of the Draft Analysis Mason Report on the Telecommunications Competition Market in Kenya: 

Background

The Communications Authority of Kenya on 20th February 2018 convened a public workshop to disseminate the findings of the telecommunications competition market study in Kenya. This market study was initiated in March 2016 to investigate the presence of dominance in various markets within Kenya’s telecommunications industry so as to facilitate an evidence-based regulatory response. The draft report by Analysys Mason (the Consultant) contains the findings of the study and recommends various ex-ante regulatory remedies (based on forecasts rather than actual results or events that have already occurred) to facilitate effective competition in Kenya, with a final report to be completed within one to three months.

Identified markets

The Consultant identified five retail markets and eight linked wholesale markets in Kenya as summarised in the figure below.

Figure 1: Retail Markets and lined wholesale markets in Kenya’s telecommunications industry [Source: Analysys Mason, 2016]

Three-criteria test

In order to determine whether any of the identified markets is susceptible to ex-ante remedies, the Consultant applied the three-criteria test as follows: (i) whether there are high and non-transitory barriers to entry; (ii) whether the market structure tends towards effective competition within the relevant time horizon (in this case, within three years); and (iii) whether competition law alone would address the market failure adequately. Where the three criteria were satisfied in a particular market, the Consultant has recommended ex-ante regulations to be enacted in that market.

Findings and recommended remedies in the wholesale markets

In the wholesale markets, the Consultant concluded that ex-ante regulations were necessary in the Unstructured Supplementary Service Data (USSD) and SIM Application Toolkit (STK) mobile access on mobile networks; call and SMS termination on mobile networks; and towers markets.

USSD allows a mobile user to send and receive services from any service provider on a remote server while STK is programmed into the subscriber identity module (SIM) card and therefore is not dependent on maintaining a real-time connection with a remote server. The study found that the operators in Kenya use STK access and are usually reluctant to grant STK access to third parties. In the USSD and STK mobile access on mobile networks, the study recommends that all Tier 1 mobile operators should be required to provide USSD access on request to all licensed content service providers.

Since ex-ante regulation has already been applied to the call and SMS termination on mobile networks market by the Communications Authority’s regulation of termination rates, the study recommends that each mobile operator should be required to provide termination services on its network to any other network operator on a non-discriminatory basis.

The ex-ante regulation proposed by the Consultant in the tower market is the regulated sharing of tower sites by Safaricom across seven rural counties (identified as Isiolo, Garissa, Mandera, Marsabit, Samburu, Turkana and Wajir). In the tower-sharing arrangement, Safaricom would be required to provide other Tier 1 mobile operators (such as Airtel and Telkom) with access to tower sites in the proposed seven rural counties on a non-discriminatory basis and based on a regulated reference access order detailing the commercial and technical terms for such sharing. This remedy appears to be a formulation of the essential facilities doctrine, where the owner of an essential facility is obligated to provide access to competitors at a reasonable price.

Findings and recommended remedies in the retail markets

The study considers that there is dominance in the retail mobile money markets and the retail mobile communications. In the retail mobile money market, it recommends that the same fee structure and fee level on transfers should be applied to registered and unregistered users.

In the retail mobile communications market, the study recommends (a) 2G, 3G and 4G national roaming in seven designated counties at regulated rates to other Tier 1 mobile operators for an initial period of five years; (b) standard tariffs, permanent loyalty schemes and promotions capable of being profitably replicated by reasonably efficient competitors; (c) restriction on charging differential rates for on-net and off-net calls; and (d) restriction of loyalty bonuses or promotions whose qualification criteria require different levels of expenditure or usage by different subscribers in the same category.

The study also proposes certain remedies to address other barriers in the retail markets. These include achieving more balanced spectrum holdings and reduction of regulatory fees for smaller operators in the retail mobile communications market. In the retail mobile money market wallet-to-wallet operability and agent-to-agent interoperability is recommended which would enable agents to use the same float for all platforms that they support.

Criticism of the study findings

A fundamental criticism to the study is that its methodology is flawed as the Consultant failed to undertake a historical analysis of the operators in Kenya so as to appreciate the current telecommunications market structure. In addition, the study did not analyse the licence renewal conditions introduced by the Communications Authority which require operators to put up sites, which would in turn put the complying operator at the risk of being found dominant if the other operators failed to comply with such conditions.

Further, the study has been criticized for failing to take into consideration other factors in each of the markets. First, the study was based on the European Commission framework for market review (which is often recognised as an example of global best practice) but failed to appreciate the differences in the culture and consumer habits in Kenya. In Kenya for example, it was observed that a subscriber would typically have more than one SIM, and as such, the definition of market would have to be reconsidered. Second, the study failed to consider the impact of over-the-top (OTT) media services such as WhatsApp or Netflix on the relevant markets. Third, the study failed to consider the strengths and weaknesses of the operators which may contribute to their success or failure, independent of the other operators.

Conclusion

Going forward, this market study will, from a regulatory perspective, influence both telecommunications and competition regulation in Kenya going forward, with a precedent likely to be set for future investigations and remedies. The study places a heavy burden on the Communications Authority as it has to balance between encouraging ‘joyriding’ on the success of operators and encouraging investments in the telecommunications sector.