There is no question that the workings of the market have a powerful effect on our lives, and not least on the prices we pay for things. But particular markets shake out in different ways, and telecommunications is one sector that disproves the faith-based idea that free markets and competition always lead to lower prices and socially optimal results.
Proponents of unregulated capitalism like to point to the simple models taught in the first weeks of undergraduate microeconomics, which show that as long as firms can start up easily — in other words, that there are low or no barriers to entry — then firms whose prices are too high will soon find plucky upstarts undercutting them and be forced to drop their prices or go out of business.
This works, until it doesn’t. Very soon after that lecture, undergraduate economists start learning the list of conditions that have to be true for that model to work. And then they spend quite a long time learning to analyse the long list of markets where it works badly or not at all. The economists’ term for that is “imperfect competition”, which describes situations ranging from “competition doesn’t quite work here, might need some help” to “this is definitely something that governments can do better than markets”.
One of the poorest functioning markets is in railroads. The cost involved in laying railroad track is astronomical, not only in materials and labour but in acquiring land from hundreds or thousands of landowners. Therefore, the barriers to entry are very high. It’s not surprising that there are very few if any examples of a second railroad being built to compete with an existing one, despite governments seldom preventing it with regulation. And, to stop the railroad company from exercising monopoly power to make it extremely expensive to move goods and people around, governments tend to regulate or, much more commonly, just own railroads themselves.
Telecommunications markets aren’t as imperfect as railroad markets, but they’re very far from perfectly competitive. Telecommunications infrastructure is expensive, but that’s not even the highest barrier to entry. Telecommunications exhibit network effects, which means that a company with lots of subscribers has advantages over one with few. Before regulations forced phone companies to connect to one another, they simple didn’t: as a result everyone needed to be on the same network as all their friends and associates, which meant that a new company entering the market didn’t have a chance. Why would anyone sign up, when it meant they couldn’t call anyone?
A less extreme version of this is behind the interconnection fees or call termination rates that the Independent Communications Authority of South Africa (Icasa) is periodically in the news about: cellphone companies charge each other or their customers (or both) to place calls that cross into other networks. This is nominally to cover the cost, for example, to MTN of putting a call through to Vodacom. In practice, companies use these prices to maximise their network effects and reduce competition, as a more modest version of refusing interconnection altogether.
As a result, we need an organisation whose job it is to keep an eye on the behaviour of telecommunications companies and force them — against their best efforts and the imperatives of business — to behave in a competitive manner. Similarly, we need an organisation that can force companies to lease infrastructure to one another to make it cheaper for new companies to enter the market. Fortunately we have such an organisation, and we call it Icasa.
This is not to say that Icasa is perfect, or even very good at its job. But the problem isn’t that Icasa exists, or that it doesn’t issue enough licenses; it’s that it is underfunded, understaffed, too subject to political interference and generally insufficiently equipped to enforce competition.
That’s the conclusion of the review of economic regulation of the telecommunications sector undertaken in 2014 by the University of Johannesburg’s Centre for Competition, Regulation and Economic Development.
As for the matter of spectrum licensing, the centre found that, as “neither Cell C nor Telkom Mobile have ever been profitable, even though Cell C has been in the market since 2001 … assigning spectrum to yet more new entrants would unlikely result in the creation of sustainable, effective competition”.
Markets are tricky, and telecommunications markets are trickier than most. If your entire intellectual toolbox for approaching them is a blind faith in deregulation, then they are impossible. Fortunately, we have other tools at our disposal.
By all means, make it easier for new companies to win spectrum licences, but don’t get rid of the organisation, inadequate as it is, that oversees our telecommunications markets. Fund Icasa, strengthen it, make it more independent and then let it do its job of bringing data prices down.
Jesse Harber is a political economist. In 2014/2015, he supported the department of telecommunications and postal services in a market-structure study