Ramaphosa's move to control mobile data prices is a grave mistake

President Cyril Ramaphosa has ordered his communications minister, Stella Ndabeni-Abrahams, to bring down mobile data prices by 50% by instituting direct controls on retail prices. This is a grave mistake.

Since 2016, the #DataMustFall campaign, widely supported by some NGOs, industry associations such as the Internet Service Providers' Association, and the general population on social media, has maintained that South Africa's mobile operators charge excessively high prices for mobile data.

Of course, for consumers, any price at all is "too high". Everybody wants higher speeds, greater bandwidth and would like to pay less, or indeed, nothing at all.

Using freed-up digital radio spectrum to provide free public Wi-Fi, instead of auctioning it to the highest bidder for commercial use, was among the demands of one such organisation, the Right2Know Campaign. It insisted on greater government control of the telecommunications sectors, and demanded that communications regulator Icasa, which regulates the sector, do more to "rein in telecoms companies".

It seems to have got its wish, and long may it live to regret it.

Lost in the clamour is the recognition that the mobile operators almost single-handedly, and contrary to the expectations of government regulators, brought widespread telephony and Internet access to the masses.

Toys for the rich

Government policy was to grant Telkom a monopoly to bring universal service to the masses using fixed lines. It dismissed mobile telephones as a toy for the rich, and gladly handed licences to the private sector.

Government's strategy failed spectacularly, and the private sector succeeded beyond all expectations. The mobile operators pioneered prepaid airtime and data, making mobile phones accessible to even the most credit-impaired people.

Fixed-line coverage never exceeded the low millions. Yet by 2019, 
according to Icasa, mobile 3G coverage reached 99.7% of the population, while 4G coverage was available to 92.8% of South Africa's people.

Smartphones, which in 2016 were available to only 43.5% of the population, by 2019 reached 91.2%. There were some 82 million active prepaid subscriptions in 2019, and a further 14.5 million contract subscriptions, together covering the South African population almost twice over.

It is rare to find any employed person who doesn't own a mobile phone today.

Mobile data subscriptions rose from 50 million in 2016 to 78 million in 2019. A compound annual growth rate of 16% in a depressed economy does not exactly scream "too expensive".

Yet that is exactly what the Competition Commission found in its 
Data Services Market Inquiry of 2019. It claims that South Africa ranks poorly in International Telecommuncation Union comparisons across a worldwide selection of countries, but the chart it published suggests local data prices are not much higher than the median, and are lower than those in many other countries, including developed countries such as the US, Germany and Belgium. They are also cheaper than data in Canada, New Zealand and Switzerland.

It makes simplistic comparisons to other African countries, but it appears to have gone to no effort to assess the myriad factors that could account for differences in costs, network quality and prices, saying merely that South African operators have "failed to demonstrate" that these factors account for price differentials.

Among these factors are population density, country size, telecoms regulations, licensing fees, subsidies, spectrum availability and quality of service. Many African countries, for example, are smaller, have a higher population density and only have 4G coverage in some urban areas.

South Africa has a population density of 48 people per square kilometre, which is lower than in most countries with lower prices. In Ghana, it's 127, in Nigeria it's 218, in Uganda it's 166 and in Rwanda it's 470. Even in Lesotho, which consists mostly of sparsely populated mountains, it's 75, which is higher than in South Africa.

India, which has the cheapest data in the world, has a population density of 417 people per square kilometre, so each cell tower can serve almost 10 times as many customers as in South Africa.

Superior coverage

Both Vodacom and MTN spend considerably more on capital per subscriber in South Africa than in other African countries, and this is reflected in their far superior network coverage and speeds here.

It should also be noted that both Vodacom and MTN have substantially reduced their data prices in the last decade. A 1GB package in 2010 would cost you R289 on both networks. In 2020, that package cost R149 on MTN and R115 on Vodacom. Other packages saw similar price decreases over the same period.

The Competition Commission found none of these arguments compelling. It also claims that there is an anti-poor bias in pricing packages. However, this makes little sense from the point of view of the exploitative robber baron.

If one wanted to gouge customers, better to gouge the rich, who have lots of money from which they can be parted. This suggests that there are other factors at play than simple greed, such as service costs and revenue stream certainty.

Threatened with prosecution, the mobile operators all agreed to slash data prices in 2020, primarily on their low-end packages. Vodacom was the first to buckle, announcing cuts of up to 40% on selected packages from 1 April 2020, taking a R2.7-billion, or 10%, hit to its revenue.

Although the Competition Commission made no findings against Cell C, it, too, signed a voluntary data price agreement hot on the heels of the Vodacom announcement. MTN initially promised to cut prices in May 2020, and eventually did so in June of that year.

Despite these concessions, Ramaphosa in December 2020 ordered Ndabeni-Abrahams to 
ensure mobile data prices are slashed again, this time by 50%. To achieve this, the department has been directed to institute direct regulatory controls on retail prices.

The consequences of such a step will be grave. Price is a signal between buyers and sellers that balances supply with demand. The effect of price controls is always to create surpluses or shortages. If prices are forced artificially high, there will be excess capacity. If prices are forced artificially low, capacity and network quality will constrained.

The only way in which mobile operators can respond to being forced to slash prices is by cutting their investment in network infrastructure, with the result that South Africa's mobile network quality, far from being the envy of the continent, will become spotty, unreliable and slow.

Already, Cell C has 
given up on maintaining its own network infrastructure, instead trying to turn around the company’s dismal performance by piggybacking on the MTN network.

Policy options

Instead of blaming mobile operators for high prices and summarily dictate prices to them, the government has several policy options that would significantly improve data pricing without violating free-market principles.

The most significant of these is to proceed with the long-overdue auction of spectrum released by the migration to digital terrestrial television. The switch from analogue television was supposed to have been completed nearly a decade ago. It is still not done.

Significant amounts of spectrum have been available for years, but the delay in making it available to mobile operators has dragged on for years. Just when it seemed the sale might take place by the end of March 2021, 
Telkom filed court papers to have the process stopped, citing the nonviability of some of the frequency bands and the lack of competition in the market.

This is rich coming from Telkom, which owns more spectrum than any other telecoms operator, dominated the telecoms market for years, and still enjoys monopoly power over significant portions of South Africa's fixed network infrastructure.

Other policy interventions have been proposed. The Internet Service Providers' Association has suggested establishing a wholesale market for mobile data, much like the regulator did with fixed-line data to combat the exorbitant pricing when Telkom monopolised that market. This would require infrastructure companies to sell mobile data to ISPs at the same discount that they would do internally to their own ISP divisions. By stimulating competition among ISPs, it is hoped to bring retail prices down, as it did for fixed-line data in the days of ADSL.

Such a policy cannot be justified, however. Unlike in the Telkom monopoly days, there are now six mobile network operators, making the space fairly competitive already. Further licences could be issued, but only the release of significantly more spectrum can truly stimulate price competition.

Forcing large operators to sell access to their infrastructure at wholesale prices would disadvantage those that invested heavily in infrastructure, to benefit those that placed little capital at risk, and would in any case have limited impact on consumer prices.

A rash move by government to control retail prices would do critical damage to South Africa's mobile data networks. One cannot fix failed over-regulation with more regulation. It is critical that government release and auction off radio spectrum as soon as possible, but then leave the market free to innovate in how they use it.

What the mobile market has always needed was more freedom, not more government control.

This article was first published on TechCentral on 27 January 2021

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