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[2015] ZACT 10
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Mobile Telephone Networks (Pty) Ltd v Afrihost (Pty) Ltd (019075) [2015] ZACT 10; [2016] 1 CPLR 184 (CT) (12 January 2015)
COMPETITION
TRIBUNAL OF SOUTH AFRICA
Case No: 019075
In the matter
between:
MOBILE
TELEPHONE NETWORKS (PTY)
LTD
...............................................
Primary
acquiring firm
And
AFRIHOST
(PTY)
LTD
....................................................................................................
Primary
target firm
Panel: Norman Manoim
(Presiding Member)
: Andiswa Ndoni
(Tribunal Member)
: Prof Imraan
Valodia (Tribunal Member)
Heard on: 05
November 2014
Order Issued on: 05
November 2014
Reasons Issued on:
12 January 2015
Reasons for
Decision
Approval
[1]
On 5 November 2014 the Competition Tribunal (“Tribunal”)
unconditionally approved the acquisition by Mobile Telephone
Networks
(Pty) Ltd
(“MTN”)
of
Afrihost (Pty) Ltd
(“Afrihost”).
[2]
The reasons for unconditionally approving the transaction follow
hereunder.
Background
[3]
We will first briefly explain the merging partie
s'
respective
positions in the mobile telecommunications value chain and their
pre-merger relationship.
[4]
In South Africa there exist just a handful of mobile network
operators
(“MNOs”)
of
which MTN is the second largest. MTN is a vertically integrated
entity involved in operating mobile networks (at the upstream
level)
and the provision of a broad range of mobile communication services
to end-users (at the downstream level).
[5]
By contrast, Afrihost is an internet service provider
(“ISP”)
whose
activities include data hosting services and ancillary services,
retail asymmetrical digital subscriber line
(“ADSL”)
internet
access services, and mobile internet access services.
[6]
In relation to the provision of network services, both MTN and
Afrihost provide access to end users. However, MTN provides internet
connectivity through its own internet protocol
(“IP”)
network,
whereas Afrihost does not own an IP network and merely resells the
internet connectivity it purchases from MTN.
[7] The provision of
network services is done so on top of an established
telecommunications infrastructure. In general there are
two types of
telecommunication infrastructures on offer. Firstly, there are access
connections which connect end customers or business
sites to the core
networks. Secondly, there are transmission services or links which
are used to build the core networks of network
providers, consisting
mainly of leased lines and microwave links.
[8] In order to
provide internet access services, the ISP’s providing such
access require a number of different types of access
links to the
website content. Such connectivity includes international and
national connectivity, as well as local access links.
In connecting
to international websites, an ISP that operates an IP network has to
obtain the content from the relevant website
to come back to its IP
network. To do this, the ISP may have an international link to the
relevant website directly or alternatively
have a link to another
network that connects directly or indirectly to the relevant website.
In practice however, ISP’s normally
buy capacity to link to
overseas peering points, such as LINK, where a number of networks
interchange content, as well as to one
or more networks that directly
or indirectly connect to the relevant website.
[9]
In terms of connecting to local South African websites, an ISP also
has to obtain the local content back to its network. In
the case of
fixed connectivity and in order to eventually deliver the content to
the customer, ISP’s utilize Telkom’s
infrastructure. This
infrastructure consists of two main portions of links. The first are
circuits offered by Telkom which connect
an ISP’s Point of
Presence
(“PoP”)
to
a Telkom exchange. This access provided by Telkom is generally known
as Internet Protocol Connect
(“IPC”)
bandwidth.
Teikom effectively owns all the IPC bandwidth in the country and this
connectivity is charged by Telkom as a Rate/Mbps.
The second consists
of copper lines that link the Telkom exchange to a customer’s
premises, the so called last mile’.
1
[10] Similarly,
internet connectivity can be provided over wireless technology. The
main distinction between mobile versus fixed
internet relates to the
access portion of the connectivity. Whereas mobile internet is
provided over radio access network infrastructure,
fixed internet, as
the name suggests, relies on fixed connectivity cables for its
access.
Parties to the
Transaction
Primary acquiring
firm
[11] The primary
acquiring firm is MTN, which is a provider of both fixed and mobile
voice and data services; mobile messaging services;
mobile handsets;
certain value added services; and subscription services at both
wholesale and retail level.
[12]
MTN is wholly owned by Mobile Telephone Networks Holdings (Pty) Ltd
(“MTN Holdings”) which is, in turn, a wholly
owned
subsidiary of the MTN Group Ltd. The MTN Group Ltd is listed on the
Johannesburg Securities Exchange Limited (“JSE”)
and is
not controlled, directly or indirectly, by any entity
2
Primary target
firm
[13]
The primary target firm is Afrihost which is an ISP that
predominantly operates at the retail level only. Afrihost is not
controlled by any single firm; its shareholders are its current
management or their respective family trust.
3
A
recently established firm whose management are still largely its
founders it has shown considerable entrepreneurial zeal
having
expanded their market share rapidly in their particular retail niche.
Proposed
Transaction and Rationale
[14]
In terms of the proposed transaction, MTN is purchasing from the
present management, in the aggregate (50%) plus one (1) share
of the
entire issued share capital of Afrihost. However, post-merger, the
management shareholders will have certain minority protections
which
mean that Afrihost is not solely controlled by MTN in all respects
but the subject of joint control.
4
[15] The transaction
allows MTN entry to a segment of the retail market where it lacks a
presence whilst allowing the sellers to
realise some of their
investment and to grow the business with the assistance of a major
shareholder.
Relevant Market
[16] As mentioned
above, there are two forms of internet access relevant to this
transaction which can be sold to customers. MTN
is active in the
wholesale provision of both fixed and mobile data connectivity,
whereas Afrihost does not own an IP network and
currently only
resells MTN’s fixed and mobile data.
[17] An
investigation into the merging parties’ business activities
revealed that both MTN and Afrihost offer services relating
to mobile
data, fixed (ADSL) data services and hosting services as well as
ancillary services. Thus, there are horizontal overlaps
arising from
the merger in relation to the provision of (1) hosting services and
(2) ADSL and (3) mobile data services at a retail
level. There is a
further vertical relationship identified in that Afrihost also
resells MTN’s ADSL and mobile data services.
[18] The Commission,
in its analysis, assessed the merger in the national markets for the
following:
i. Data hosting
services and ancillary services;
ii. Wholesale ADSL
data services;
iii. Wholesale
mobile data services;
iv. Retail ADSL data
services, with potential sub-markets separately comprising large
corporates and residential and SMME customers;
and
v. Retail mobile
data services, with potential sub-markets separately comprising large
corporates and residential and SMME customers.
Competition
Analysis
Horizontal
assessment
[19]
According to the Commission’s analysis, the merged entity is
unlikely to exercise market power in the markets for the
provision of
hosting services and ADSL and mobile data services at a retail level.
In relation to hosting services, the merged
entity will have a
combined market share of less than 6% and will continue to be
constrained by several other large information
communication
technology
(“ICT”)
companies
such as Internet Solutions, BCX, Telkom, Gijima, Neotel, Vodacom
Business, Vox, MWEB, and Hetzner etc.
[20] In relation to
retail ADSL, the Commission found that the merged entity is unlikely
to exercise market power, due to it having
a combined market share of
less than 6%. The Commission further found that the merged entity
will be largely constrained by Telkom,
the market leader in respect
of ADSL data; virtually all other service providers are predominantly
dependent upon Telkom for the
leased lines and the ‘last mile’
connectivity which are required in the provision of ADSL data.
Furthermore, there
are also several other players such as MWEB,
Internet Solutions, Vox Telecom, and Cybersmart amongst numerous
others who provide
ADSL data in the retail markets.
[21]
The Commission has also concluded that the market for retail ADSL can
be further segmented into two customer segments namely
the small to
medium enterprises
(“SMME”)
and
residential segments, as well as large corporates. The Commission
drew this distinction based on the different service requirements
that are typical in servicing these different customers.
5
MTN predominantly focuses on servicing large corporate customers,
whereas Afrihost focuses on servicing the SMME and residential
segment. The Commission thus finds that MTN and Afrihost are not
direct competitors in the retail ADSL market.
[22] In respect of
mobile data, MTN is a large player in the market with a market share
exceeding 29%, Afrihost is by contrast a
small player at the retail
level with less than 1% market share. Thus the Commission finds that
the market share accretion is so
small and is therefore deemed to be
insignificant. Further the merged entity will continue to be
constrained by Vodacom, Cell C
and Telkom Mobile. Accordingly, the
Commission concludes that it is unlikely that this transaction raises
significant horizontal
concerns.
Vertical
assessment
[23] As mentioned
above, there is a vertical relationship between the merging parties
in that Afrihost resells MTN’s ADSL
and mobile data services.
Concerns were raised in this regard arising from third parties in
relation to the potential exclusionary
conduct emanating from this
vertical relationship. The Commission, in its assessment, identified
various ways in which exclusionary
conduct by vertically integrated
firms in telecommunications markets can be perpetuated. The
Commission accordingly assed the following
theories of harm that may
arise from the proposed transaction:
i) Unilateral
effects;
ii) Potential
exclusionary effects that could arise through margin squeeze
strategies; and
iii) Conglomerate
effects that can arise from portfolio effects of a vertically
integrated firm expanding in several downstream
(retail) markets.
Margin squeeze
[24]
The Commission, in its assessment, chose to focus on margin squeeze
as a potential theory of harm with which the exclusion
of rivals can
be exercised, given that MTN is a large and vertically integrated
firm that is expanding its downstream operations
through this
merger.
6
[25] ISP’s,
such as Cybersmart and Internet Solutions, argued that Afrihost is
currently charging below-cost prices which
have the effect of
excluding downstream rivals. In terms of the vertical relationship in
ADSL data, the Commission concludes that
MTN does not have sufficient
market power in the wholesale market to foreclose downstream
resellers. At the wholesale level, MTN
is significantly constrained
by other large and reputable ADSL wholesalers such as Telkom, MWEB,
Internet Solutions, Vox Telecom,
Cybersmart and several other ADSL
providers. Accordingly, the Commission concludes that the merged
entity will not have the ability
to foreclose rivals. In addition the
incentives to do so also appear to be minimal.
[26] In relation to
mobile data, MTN is the largest mobile wholesale provider. This is so
because MTN was the first MNO to introduce
the wholesale mobile
product. In spite of this, the Commission finds that its (MTN’s)
ability to exercise market power in
the wholesale mobile data market
appears ambiguous, particularly given the presence of Vodacom which
has the ability to constrain
MTN, given that it is the larger MNO,
with a larger network. The ability to successfully exclude downstream
rivals through a margin
squeeze strategy is premised on MTN being
able to exercise market power in the wholesale market. To the extent
that MTN is indeed
able to exercise market power in the wholesale
mobile data market, it appears that the effects of such exclusion
will only apply
to the large corporate customer segment, being the
segment MTN focuses on. Afrihost is however not active in the large
corporate
segment, thus the Commission finds that there to be no
incentives for foreclosure in this segment.
[27] Importantly,
MTN is already vertically integrated and as such is already in a
position to engage in this conduct pre-merger.
In terms of the other
segment comprising SMME and residential customers, the Commission
finds that, unlike in the larger corporate
segment which generally
operates on relatively long term contracts and typically purchase
mobile data as part of a suit of converged
services, SMME and
residential customers easily and routinely switch between mobile data
providers. In this segment customers do
not enter into long term
contracts but rather enter into month-to-month contracts which allows
for easy switching.
[28] In conclusion,
the Commission finds that the occurrence of below-cost ADSL and
mobile data pricing in some instances appears
to be an outcome of
competition in the sector, due to the prevalence of large vertically
integrated firms that operate at both
the wholesale and retail
levels. The Commission accordingly concludes that the below cost
pricing concerns raised by third parties
do not arise as a result of
the merger nor are they thereby exacerbated by it.
[29]
The Tribunal raised further questions around the margin squeeze issue
at the hearing. The following further facts became apparent.
Although
MTN’s market share is presently very large, its most effective
competitor Vodacom only entered the market recently
in 2013 and hence
the market shares going forward are likely to change in favour of
Vodacom. Secondly, Cell C is well-placed to
expand in this market.
MTN also argued that it has no incentive to engage in a margin
squeeze strategy post-merger as Afrihost
represents only 3% of mobile
data revenue.
7
Finally MTN submitted that it treats all parties in an equal manner
according to its rate card. We set this out below during an
exchange
between the Tribunal and the legal representative for MTN:
“
CHAIRPERSON
:
So in other words what you’re saying is that if there
was
a
complaint to the
Commission post this merger about a margin squeeze from Internet
Solutions let’s
say
the Commission
would easily be able to investigate this because they would say to
Internet Solutions what is your data volume and
we go back to MTN and
say well what you’re getting you’re in this region of the
rate card there’s no margin squeeze
here
,
the difference
between your price and Afrihost is explained by the difference in
volume as per the rate card.
MS
BURGER-SMIDT
:
Chair that is indeed the submission by MTN and the view of MTN that
the rate card is implemented in an absolutely non-discriminatory
way
and fashion.
CHAIRPERSON
:
Does MTN apply to its own retail division the same way?
MS
BURGER-SMIDT
:
Indeed.
8
"
Bundling
[30] The Commission
also considered bundling as a strategy which may result in the
exclusion of rivals. Firstly it concluded that
bundling was unlikely
to be an effective exclusionary strategy as rivals could easily
replicate the bundle. Further, that bundled
solutions may in fact be
likely to result in pro-competitive gains, particularly for corporate
clients.
[31] In light of the
above, and on the evidence presented, we concur with the Commission’s
competition assessment, i.e. that
the proposed transaction is
unlikely to substantially prevent or lessen competition in the
hosting and the wholesale and retail
ADSL and mobile data markets.
Conclusion
[32] In conclusion
we do not consider the proposed transaction to likely result in a
substantial prevention or lessening of competition
in the relevant
markets. In addition, no public interest issues arise from the
proposed transactions.
[33] For the reasons
set out above, we approve the proposed transaction unconditionally.
12 January 2015
DATE
MR NORMAN MANOIM
Ms Andiswa Ndoni
and Prof Imraan Valodia concurring
Tribunal Researcher:
Derrick Bowles
For the target firm:
Jocelyn Katz of Edward Nathan Sonnenbergs
For the acquiring
firm: Ahmore Burger-Smidt of Werksmans Attorneys
For the Commission:
Grashum Mutizwa
1
The
Telkom cost component is the single biggest cost component of
providing ADSL data services making up roughly 80-85% of the total
cost.
2
MTN
Group Limited's shares are widely dispersed with just a single entity
holding more than 6% in MTN, namely the Government Employees
Pension
Fund C/O Public Investment Corporation that holds roughly 14%.
3
The
shareholders are the PM, GV, BA and GP share trusts, Dlpionamiz and F
Payne.
4
See
transcript of hearing page 27.
5
For
instance large corporate clients typically require complex service
level agreements when engaging with providers.
6
Margin
squeeze amounts to a reduction by a dominant operator of the margin
between wholesale and retail prices so as to make entry
into such a
market difficult or to encourage the exit of a dominant firms rivals.
7
See
transcript page 29.
8
See
transcript pages 29-30.