Dec 21, 2016

NCC, the Data Price Floor and Competition Law - Stephen Oke

Stephen 'seun Oke
I am sure most, if not all, of us received notifications (be it from our telecoms operators, the press or the grapevine) about a directive of the Nigerian Communications Commission ("NCC") requiring the Telcos to increase their data tariffs to the level of a newly imposed price floor (the “Directive”) . Fortunately, the Nigerian Senate mounted enough pressure on NCC to backtrack. Most of us (myself inclusive) would agree that the Directive was unwelcome, given the prevailing economic clime. However, harsh economic climes apart, the following analysis seeks to:

1.     Give an insight into the legal framework forming the basis for NCC to issue such a Directive; and
2.     Articulate why the Directive was, in my opinion, flawed from a competition law perspective.

For the purpose of the Directive, NCC identified two distinct markets for (i) GSM/voice call services; and (ii) internet data services. The Directive aimed at imposing a price floor (minimum price) of N0.90k/MB for data services. According to the NCC, industry average market price for big operators such as MTN, Etisalat, Airtel and Glo wasN0.53k/MB (with Glo charging as low as N0.21k/MB), while the average market price for smaller operators/new entrants was N0.71k/MB. [Smile Communications - 0.84k/MB, Spectranet - 0.58k/MB and NATCOMS (NTEL) - 0.72k/MB].

The decision to impose a price floor, according to the NCC, was aimed at promoting alevel playing field for all operators in the industry, and to encouragesmall operators and new entrantsFor this reason, small operators were exempted from the new price regime. NCC considered “small operators” to be operators with less than 7.5% market share, and “new entrants” as operators who have operated in the data market for less than 3 years.

For the benefit of those who are less conversant with competition law, I’ll start with a brief primer on some basic assumptions of competition law that serve as my premises for evaluating the propriety of the NCC Directive.

Assumptions of Competition Law
  • Consumer welfare is the primary/long-term goal of market regulation and competition law.
  • Indicators/fruits of “consumer welfare” include, without limitation: (i) low prices; (ii) improved quality of goods/services; (iii) innovation; (iv) choice i.e. ability and ease of switching from one supplier to the other.
  • Fair competition” is a market condition that breeds consumer welfare.
  • There is fair competition in a free market i.e. many sellers and buyers, homogenous product/service, price determination by forces of demand and supply, free flow of information, etc.
  • Although a free market is not attainable in “real life”, market regulation should aim to bring the market as close as practicable to a free market.
  • As a general rule, the market regulator should not regulate or interfere with price in the market. Ideally (and consistent with a free market), price should be determined by market forces.
  • If a market regulator must regulate price at all, this
(i)  must be based on sound economic (cost) analysis in the market;
(ii) can only be justified if it aims to preserve fair competition.
  • Sellers are in business for (and compete) for profit – this is a legitimate goal, and one that incentivizes supply/investment and innovation. Accordingly, there cannot be “fair competition” if one seller sells below cost, i.e. a price at which other sellers cannot make 1 kobo of profit (or sufficient profit to replenish supply) even if they were to operate efficiently.
Illustration of “selling below cost” – Take for instance, there are two different markets for Widgets and Blodgets;
  • X, Y and Z are sellers in the market for Widgets. However, X also sells in the market for Blodgets.
  • If the minimum cost of raw materials for a Widget is N5, the sellers in the market for Widget cannot make any profit unless they sell above N5.
  • If X decides to sell at N4, he is not competing fairly because Y and Z cannot match that price.
  • Typically:
·        X would only be able to sell at N4 if he is offsetting the loss he is making up for theN1 loss he is incurring in Widgets, from the profits he is making in the market for Blodgets or some other market where he is selling above cost / at a profit – this is known as “cross-subsidization”, an anti-competitive practice;

·        In the short-run, consumers will be happy to buy Widgets from X [because, really,who no like awoof?]

·        However, in the long run, Y and Z will be forced out of the Widgets market, leaving only X who becomes a monopolist.

·        X can then increase his price for Widgets to N15 because he has no competitor to “steal” his customers. [Beyond this, X may then try to consolidate his monopolistic lead in the Widgets market by unfair advantages on competitors in the market for Blodgets].
·        By this time, it is too late for the market regulator to salvage the Widgets market.
  • Note that illustration above is simplistic; in “real life”, the cost analysis to be carried out by a market regulator involves more complex cost variables. Also, “cost” includes a fair return on investment.
Back to real life…
Is NCC a Competition Regulator?
Yes. Like other sector regulators (e.g. NERC, SEC, DPR etc.), sections 90 of the Nigerian Communications Act 2003 (“NCA”) gives NCC the exclusive competence to administer and enforce compliance with competition laws, and to sanction anticompetitive practices, in the telecoms market. The Competition Practices Regulations 2007 (“Competition Regulations”) were made by the NCC pursuant to its powers under the NCA.

Does NCC have the Powers to Regulate Price?
Yes. Section 108 gives the NCC powers to regulate and approve tariff rates. Section 108(4)(d) requires the NCC to structure tariff rates and set levels to attract investments into the communications industry.

Must Tariffs Have any Correlation to “Costs”?
Yes. Specifically, section 108(4)(b) of the NCA provides that tariff rates “shall be cost-oriented and, in general, cross-subsidies shall be eliminated.” Further, section 108(4)(b)(c) of the NCA provides that tariff rates shall not contain discounts that unreasonably prejudice the competitive opportunities of other providers. Regulation 8(f) of the Competition Regulations also precludes Telcos from “supplying communication services, at prices below long run average incremental costs or such other cost standard, as is adopted by the Commission”

What is NCC’s approach to defining Market and Market Share?
In identifying markets (e.g. market for voice calls as distinct from market for data services), NCC generally considers the services that make up a specific market, the geographical scope of the market, and demand-side and supply-side substitutability.

In determining market share, NCC considers the revenues, numbers of subscribers or volume of sales.

What anti-competitive practices is the NCC specifically targeting?
Price abuses such as: under-pricing (and possibly predatory pricing, and exclusionary/downstream market abuses such as cross-subsidisation.

How Can a Forced Price Increase Possibly Benefit the Consumer?
A candidate justification for the Directive would appear to be based on the following “assumptions”:
  • Big operators are pricing data below the cost of supplying data service (in the data market) at acceptable quality levels;
  • Big operators are sustaining their below-cost pricing in the secondary market for data by using profits from the primary market voice calls) to offset the losses they may be incurring in the secondary market for data (this is known as “cross subsidization”), with the “grand scheme” of forcing smaller operators out of the data market.
  • Smaller operators are not present in the primary market for voice calls, and they are generally new entrants in the Telco industry. For this reason, they will be at a disadvantage as they have no alternative market from which to cross-subsidize in order to match the price offered by Big operators for data.
  • Big operators would therefore not be competing “fairly”
  • Although customers would in the short run enjoy low prices, in the long run customer welfare will be jeopardized because:
            i.    underpricing will inevitably lead to low quality of service; and
            ii.    Big operators are likely to increase data price after they succeed in (i) squeezing out smaller competitors from the data market, and (ii) creating a price barrier to impede the ingress of “new entrants” to the market.

Why was the Directive Flawed?
The Directive was flawed for two major reasons: (i) speculative market regulation; (ii) the seeming assumption that there cannot be fair competition in the data market without smaller operators.

Speculative market regulation
Best practices in market regulation dictate that price regulation should be a last resort and must be justified, typically by concrete information on the cost-basis for pricing in the relevant market or evidence of anti-competitive pricing. By the Directive, NCC had attempted to introduce the price floor “pending the finalisation of the study on the determination of cost-based pricing for retail broadband and data services in Nigeria.” Therefore, NCC admits that it has not determined what the cost basis is, for pricing in the data market. In other words, the low prices charged by big players like MTN and Glo may very well be above costs (like NCC, we do not know), in which event big operators would be competing fairly.

In the absence of such information, there can hardly be any justification for interfering with price competition, more so where this amount to the imposition of higher prices on consumers. Until such cost-bases are determined, any attempt at price regulation will be pre-mature and misguided, as it amounts to putting the cart before the horse.
There can be Fair Competition without Smaller Players provided there are Capable Contenders

It would appear from NCC’s move that, should the prevailing market price be technically above cost (including a fair return on investment), NCC would still think it necessary to impose a price floor if it does not consider the above-cost margin for return “attractive” enough to (i) keep smaller operators in the market; or (ii) attract new entrants. Such a regulatory disposition would be based on the flawed assumption that there cannot be fair competition or a healthy level of consumer welfare if the only operators left to compete in the market are big operators.

While it is ideal for there to be many operators, this state of affairs should not be “forced” on the market as to do so will risk (i) encouraging inefficiency on the part of smaller operators; (ii) making the consumers “subsidise” the operating cost of smaller operators, which will be inimical to the ultimate goal - consumer welfare.

Nigerian consumers enjoy low prices for data – this is presumably (although not conclusively) an indicator of consumer welfare. This state of affairs can be preserved even if only big operators are left to compete in the market, as long as NCC keeps a close eye on them to prevent a further concentration of the market (e.g. by a merger) or any collusive behavior (such as price fixing agreements, agreements to fix conditions of sale and other cartel behavior). The Big Four (MTN, Etisalat, Airtel and Glo) are near-equal contenders in terms of market share. Therefore, unless (i) two or more of them later collude to fix high prices or (ii) one or more of them leaves the market, there is no reason why consumers will not continue to enjoy low prices resulting from price competition by the big contenders.

The NCC took the right step in suspending the Directive. Its responsiveness should be commended. Although, NCC, no doubt, has powers to regulate tariffs under the NCA, nothing less than empirically-determined costs for broadband and data services should justify any further attempt at price regulation in the data market. In all, the Directive exemplified the need for a coherent and consistent competition law/market regulation Policy.

Further, and beyond the telecoms industry, there is need for objective mechanisms for information gathering. It is only on the basis of credible information that a market regulator can rightly discharge its regulatory obligations, especially with regard to a sensitive aspect such as tariff regulation and determination of market share.

Stephen 'seun Oke is an Associate at Banwo & Ighodalo. 

Ed's Note - This article was originally published here