High data prices? Don’t blame Vodacom and MTN

24 June 2020
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Why, with so many burdensome regulations and compliance requirements that drive up costs in the mobile data sector, does the narrative remain that some "duopoly" between Vodacom and MTN is the source of South Africa’s relatively high data prices?

Companies want to maximise their profits. Having inordinate prices that exclude a major market segment cannot achieve that: they want to be able to lower their prices. The ball is in government’s court to allow data providers to do just that.

But is there, in fact, a duopoly? In other words, are there only two main suppliers in the mobile data industry? A cursory glance at the industry will reveal five notable players: Vodacom, MTN, Cell C, Telkom and Rain.

The so-called duopoly's market share has declined in recent years. MTN’s market share in South Africa fell from 36.45% in 2013 to 29.44% in 2019. Vodacom’s share increased from 41.42% to 42.39% over the same period, but dropped by over one percentage point between 2018 and 2019. This is not because those MTN or Vodacom subscribers disappeared into the ether. Instead, they chose a different data provider - an indication of the competitive nature of the market, even under trying circumstances. Graphs show that this decline in market share by the two big data providers coincides with an increase for Telkom.

Based on these numbers, there is clearly no duopoly as the market is not divided exclusively between two big players. The market share continually shifts, with subscribers going where they find the best deals. The market is highly contestable, even though government tries to make it as rigid as possible. Thus, while South Africa might appear to have an oligopoly in the sector, we must appreciate that it is entrenched as an unintended (or perhaps intended, but detrimental) consequence of government regulation.

Malaise
Government has brought about such an economic malaise in general and harmed the data industry in particular. It is no wonder that aspiring entrepreneurs who might consider breaking into the sector instead veer away.

The data industry is entirely dependent on electricity. Eskom's failure to do the only job it was expected to do has, among other factors, led to the destruction of infrastructure that needs to be continually repaired, and to unjustifiable electricity price hikes. That cellphone towers become inoperative during load shedding is by now well known, as tower batteries do not have enough time to recharge between our moments of darkness. Not only must data providers bear these costs directly, but also indirectly as all their input costs from their own suppliers rise.

These costs must also be factored into the prices they charge for the data services they provide. Government policy and incompetence thus plays a big part in shifting such costs onto consumers.

Ideological and ordinary corruption have also taken their toll. The ideological corruption of socialism that underlies every economic policy in government squeezes any dynamism out of the market, and the ordinary corruption of trillions in wasted tax rands is not conducive to an economy that aspires to create a prosperous middle class.

I was recently on a panel hosted by the Cornerstone Institute where all my fellow panellists, arguing Internet access to be a human right, either believed it must be made more affordable or made to be free, using the force of law. While we were in agreement that Internet access is incredibly important in an increasingly digitised world, I warned that pushing government to interfere even more in this sector of the economy would yield unintended, detrimental consequences.

Government must clean up its own act before we consider asking it to "fix" the mobile data industry. It is government's corruption, regulation and incompetence that has brought us to where we are today. The Competition Commission's "recommendations" (the better word would be "extortion") are equally misguided, for the same reason.

It makes no sense to entrust government with rolling out the unattainable goal of free data for all. Government's own mismanagement of those industries it has been most directly entrusted with - electricity, water, health care, infrastructure, etc - must give us pause before we cede another whole industry to the state.

Finally, it is worth bearing in mind that data providers not only compete with one another, but also with fixed Internet connection providers. As the number of fixed Internet connections rises, the total dependence on mobile data inevitably declines. This is important to note because it illustrates how competition does not only operate horizontally, but in fact operates in three dimensions.

The scary fact is that government's interference in any single part of the economy also operates this way, creating devastation and stunted growth throughout the whole economy. We have a "big picture" surgery to perform before we start trying to apply Band-Aid to a gushing wound.

This article was first published on TechCentral on 17 June 2020

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