COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case Number: 10/LM/Nov99
and
Case Number: 13/LM/Nov99
In the large mergers between
Vodacom Pty Ltd and
GSM
and
Vodacom Pty Ltd and
Teljoy Holdings Ltd
Reasons for Competition Tribunal’s Decision
1. Approval
In September 1999 the Vodacom Group Pty Ltd, the cellular network
operator, decided to acquire additional shares in two of its exclusive
service providers in which it already had existing stakes. In brief we had to
consider whether these mergers, whether assessed separately or together
raised any competition concerns for the cellular communications industry.
We have concluded that they do not and we have approved the mergers
unconditionally.
The competition issues in both mergers are similar and for this reason we
are dealing with them in the same decision.
2. Nature of the Transactions
GSM
In this transaction the several minority shareholders have offered their
shareholdings for sale to Vodacom. The result of the transaction is that
Vodacom will increase its shareholding in GSM from 50% to 100%.
Teljoy
In this transaction Vodacom has made an offer to purchase 100% of the
shares in Teljoy Holdings Ltd. Currently it holds 25% of Teljoy Holdings.
3. Nature of the Businesses
Both GSM and Teljoy 1 through its subsidiary Teljoy Cellular Services Pty
Ltd are service providers. To this end both firms have these services in
common;
1) Selling contract airtime
2) Selling prepaid airtime
3) Renting cellular handsets
4) Selling cellular handsets and accessories
Vodacom is one of the two companies licenced to operate a national cellular
telecommunications network. Vodacom in turn owns various subsidiaries one
of which Vodac is its wholly owned service provider.
1 Teljoy through some subsidiaries is also engaged in the television rental market .This market contains no
competition concerns for us and is therefore not analysed.
2
4. Nature of the mergers
The mergers are both horizontal and vertical in nature. They are horizontal
in essence because they involve the consolidation under common control
of two erstwhile competitors and secondly because Vodacom is already
vertically integrated and owns Vodac the largest service provider for its
network.
They are also vertical in the sense that the acquirer Vodacom is further
consolidating downstream.
5. Horizontal issues
An analysis of the issues requires a short history of the industry because
changes in the fortunes of service providers have altered their competitive
significance.
3
When the first cellular licences were issued to Vodacom and MTN the
industry model that regulators hoped would result was one where vertical
differentiation would take place between network provider and service
provider. The concept of service provider was borrowed from the United
Kingdom’s experience where in the late eighties the regulator had required
the networks to make use of independent service providers. Thus an
industry of intermediaries was established between the consumer and
network. Our regulators followed the UK model by wanting to encourage
vertical differentiation in the industry between network and consumer. The
rationale was that although the industry could only accommodate two
networks who required a licence to enter the market, the next layer of the
industry did not require regulation and it was hoped would become the
subject of vigorous competition between service providers. Unlike the
United Kingdom the use of service providers was not made compulsory
and the licence conditions of Vodacom and MTN stipulate that they can
provide these services themselves or appoint agents to do so on their
behalf. 2
Although many firms entered the market as service providers most have
either merged or failed. The reduction in the number of service providers
has not led to higher prices for consumers.
This is because firstly, tariffs offered to consumers are set by the networks
and must be approved by Satra and secondly because the networks
imposed standard contracts on the service providers who in turn passed
these on without mutation to the consumer. Competition amongst service
providers impacted on the consumer in relation to convenience and
location and not much else. What rivalry there was benefited the network,
in the same way as the competition amongst salespeople who peddle the
in the same way as the competition amongst salespeople who peddle the
same brand serves the interests of their employer more than their
customer.
But the most important change that has led to the demise of the service
provider is the change in the industry with the advent of prepaid
subscribers. Prior to 1996 most cellular services were sold to consumers
by way of a 12 month or 24 month contract with one of the networks.
Vodacom in their submissions to us have described the evolution of the
service provider. When the industry was in its infancy the service
providers in return for a commission on their contracts assumed the
burden of concluding contracts, vetting credit worthiness and collecting
revenues on behalf of the networks. Because they assumed the credit risk
2 See Paragraph 14.1 of Government Notice no 1078 of 1993, Government Gazette no 15232 29/10/93.
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on the contracts many failed. Not surprisingly, as the market for cellular
services has grown the need to avoid the risk of credit failure led to the
advent of prepaid services
Eighty five percent of Vodacom’s new business is now prepaid. Since
prepaid services eliminate the need for any one to contract with a
consumer, to vet credit worthiness and to collect revenues, the traditional
role of the service provider has diminished. Supermarkets, service station
and spaza shops now sell the networks’ products obviating the need for
ISP’s or for an extensive network of outlets for them.
The result of this is that the traditional service provider market no longer
exists in its pure form and increasingly the downstream market is
characterized by the role of retailers who aren’t service providers. GSM
and Teljoy are now involving themselves in what are described as “back
office” operations namely the management of retailers or a wholesale to
retailer relationship. The Commission regards this as the relevant market
for the purpose of the merger. It is not necessary in our view to decide this
issue, as even on the narrowest conception of the market, competition
remains unaffected.
Even if Vodacom is to wholly integrate its service providers the effect on
competition will be negligible 3. The role of service providers is to provide
the networks with a customer base. If the networks think they can do the
job more efficiently they should be allowed to do so. This is consistent with
the current view on the subject as expressed by Oftel 4 who state in their
review of the mobile market dated July 1999,
“In a fully competitive market, there would be a presumption that if
networks did not wish to use independent service providers as a
route to market, then it would not be efficient for them to do so and
regulatory intervention to require this would not only be
regulatory intervention to require this would not only be
inappropriate but counter productive. This is consistent with
standard competition analysis which makes no presumption
against vertical integration.
6. Vertical Issues
3 MTN has already integrated these services through its subsidiary MTel. A viable independent provider
Autopage remains in the market.
4
Oftel is the acronym for the Office of Telecommnications the United Kingdoms industry regulator.
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Typically vertical mergers raise less competition concerns than horizontal
ones and when they do so it is usually because they either increase the
barriers to entry into a market by requiring competitor to vertically integrate
as well thus raising rivals costs or because they force them to increase
their costs and thus make them less competitive in the horizontal market
in which they face the integrated firm. The subtext to all this is the
imminent entry into the network market by an as yet unidentified third
licensee. Satra has at the time of this decision conducted hearing into
applications for a third licence but has yet to award the licence. If anyone
were to be effected by foreclosure in the distribution markets it would be
the third licencee. For this reason the Tribunal required the Commission to
provide its recommendation to all the applicants for the third licence and
invited them to make representations to the Commission concerning the
mergers. Only one of the applicants, Cell C, accepted the invitation. They
indicated that they were not opposed to the merger although they had long
terms concerns about retail exclusivity, which we deal with below.
At first blush this silence from potential competitors in an industry noted for
the vigor and sophistication in which players engage regulators, as part of
their business strategy seems surprising. The Commission’s investigators
say their market information is that the third licence applicants do not want
to go the ISP route as did the existing networks and hence the mergers
raise no concerns for them. The Commission’s report quotes one of the
applicant’s licence application’s which says that they have found the
traditional service provider model inadequate. The absence of concerns
about vertical integration from those with the most interest in objecting is
about vertical integration from those with the most interest in objecting is
the most telling fact that the mergers raise no concerns about entry
barriers. Nor indeed has Satra the sector regulator chosen to make any
representations although invited to do so by the Commission.
A second reason the merger has not generated much controversy
amongst Vodacom's competitors present and potential is that both GSM
and Teljoy were exclusive suppliers of Vodacom's products and neither
could take on a competing network without Vodacom’s prior consent. Thus
the merger does little to later Vodacom' s existing ability to foreclose
access to its rivals. Further there is no evidence to suggest that this
exclusive relationship has led to complaints in the past.
Vodacom motivates the mergers by efficiency gains that can be achieved
through uniform IT systems and amortizing these costs over a wider
subscriber base. We have not examined these efficiency claims critically
since they are not necessary to sustain our approval of the mergers since
they raise no competition concerns. Their only relevance is to indicate that
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there is a legitimate business motive for these mergers which is not linked
to the exclusion of rivals.
7. Future Concerns
The one area where competition is currently vigorous in the downstream
market is at the level of the retailer.
Retailers have become an increasingly significant outlet of the networks
products with the advent of prepaid services. Retailers do not affect the
price of service, which as we have stated is predetermined by the
network with the approval of the regulator, but they do compete for
ancillary supplies such as the price of a handset.
There are indications that the incumbent networks may be moving to tie
up retail outlets with exclusive supply contracts thus foreclosing those
outlets to its rivals. Cell C in its submissions to us states,
The purchase of Service providers to facilitate vertical integration
does not concern our client as much as the practice of limiting the
number of distribution outlets through exclusivity agreements,
either directly or through service providers of either of the
operators. Both Vodacom and MTN appear to be engaging in these
practices, which we believe are anti competitive, and warrant the
attention of the Competition Commission.
We view this trend with some concern because although its is trite that a
multiplicity of retail outlets capable of supplying cellular network products
exist the elimination of strategic outlets could substantially raise rivals
costs in particularly the new entrant which will lack the market leverage to
either attract retailers with similar offers or indeed to dissuade them from
exclusive contracts with its more extensive rivals.
However the present mergers involving Vodacom’s consolidation of two
already supplicant service providers will not enhance its ability to impose
exclusivity on its retailers as it derives that leverage not from its hold over
exclusivity on its retailers as it derives that leverage not from its hold over
service providers but its power in the network market which remains
unaffected by this deal. As pointed out correctly by the Commission if
these practices do become prevalent the correct approach would be to
consider them as potential restrictive practices.
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In conclusion we have decided to approve the mergers without conditions.
N.M. Manoim Date
Presiding member
Concurring: D.H. Lewis and P.E. Maponya
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