/ 2 March 2017

Dump Icasa and the market will force down data prices

Edwin Inganji’s smartphone app quickly connects users in Nairobi to emergency services.
Edwin Inganji’s smartphone app quickly connects users in Nairobi to emergency services.

Since the birth of Telkom, South Africans have had a particularly contentious relationship with telecoms companies. At a time when the rest of the world was going through an era of telecom liberalisation and privatisation, South Africa introduced the tepid Telecommunications Act of 1996, which did little more than formalise Telkom’s legal monopoly.

Today the internet landscape is very different. Pavements are being dug up for high-speed fibre lines, connecting more and more South Africans to the world.

Increased speeds, lower prices and improved service quality were brought by new market entrants or nonstate actors. The only exception was when Telkom begrudgingly increased network speed by introducing ADSL to its land­line monopoly. A few examples of non-state-driven telecoms improvements are:

  • The rise of Vodacom and MTN saw a large roll-out of service to some remote areas;
  • M-Web rocked the market with uncapped ADSL in 2010 and, in response, the other internet service providers soon followed suit.
  • “Fibrehoods” driven initially by open-access organisations such as Vumatel have been springing up all over major metropoles as it becomes obvious that Telkom will not take the lead in this.

The pattern here is that progress in telecoms is made by new market entrants leapfrogging over existing highly regulated or state-owned incumbents. This should make us nervous when the state seeks to intervene for the good of consumers: its track record reveals that its helpful policies achieve the opposite.

But #DataMustFall, surely?

You might concede that market actors are responsible for breakthroughs in speed and access for fixed-line and mobile data. But it seems that, even as mobile data speeds have increased, prices have remained stubbornly high. A Mail & Guardian article in September last year pointed out that South African mobile operators were up to 20 times more profitable than companies in countries with similar economies. What’s more, data prices are comparatively higher in South Africa than in those countries. In fact, there was a strong correlation between profits and data prices. Given these facts, should the government not step in and do something to ease the burden on consumers?

If we are scientific and unbiased in our analysis, the evidence points to market innovation as the only effective mechanism to decrease prices in South Africa. State-driven access, such as that in South Korea, is not a feature of the South African mobile scene, and it would be over-optimistic and politically naive to expect this to change. So, in South Africa, the best probability of achieving lower mobile data rates is by means of a market event.

Expecting the market to lower mobile data prices looks like blind faith. On the contrary, I’m suggesting that the mobile operator market is currently protected from market forces; what we need is for those barriers to be removed. The only alternative is to wait for a technology that disrupts cellphones, but that might decades away.

Among the evidence suggesting that our mobile operators do not exist in a free market is the number of operators. One way pressure is put on incumbents is by new market entrants threatening to steal market share. South Africa has five mobile operators, of which one is virtual and two own the majority of broadcasting towers. The United Kingdom has 62.

Another piece of evidence is the correlation between price and profit expected by standard economic theory when explaining market concentration. The high profitability and high price of South African mobile operators is a red flag that something unnatural is preventing new entrants from seizing market share. If being a South African mobile operator is so profitable, wouldn’t we expect more firms to enter the market?

The Independent Communications Authority of South Africa is notorious for restricting licence issuance. The very existence of a network regulator should be questioned. It is justified by vacuous tautologies about engineering concerns that are more than surmountable without top-down direction. Instead of acting as a final arbiter, the Independent Communications Authority of South Africa (Icasa) is protecting the industry from competition.

The growing public outrage expressed through #DataMustFall is not misplaced, but the political solutions offered so far are. South Africa has an overpriced mobile data market, but the only reason to petition the state is to demand aggressive deregulation and an overhaul of Icasa. The greatest barrier to an open market and choice in mobile networks is the regulatory framework.

The solution is #IcasaMustFall.

Justin Goro is a full-time software developer who has lectured in economics at the University of Cape Town. Follow him at medium.com/@justingoro