Liberalisation, not regulation, will promote competition in comms

Liberalisation, not regulation, will promote competition in comms
The Sentech transmitter in Auckland Park, Johannesburg

This Friday and next Monday, communications regulator Icasa will host public hearings on its market inquiry into signal distribution service in South Africa.

Signal distribution companies and their clients, including Sentech, the SABC, MultiChoice, eMedia and Primedia, have all submitted comments in support of their own interests.

The purpose of the inquiry is to assess the state of competition in signal distribution services and determine whether the signal distribution services value chain may warrant regulation.

The discussion paper could have contained one line: “Sentech has a monopoly on signal distribution. What to do?”

The purpose of competition is not to accommodate rivals. The purpose of competition is to crush them

Instead, there are 48 turgid pages trying to define and regulate every tiny cog in the entire industry.

If this sounds like central planning, you’d be correct. The law accords the regulator broad powers to place restrictions on market participants, supposedly in the interests of healthy competition. If any party is too successful, for example, the regulator is expected to cut them down to size. If any party is less successful, the regulator is expected to cut their rivals down to size.

The ideal market structure, in the eyes of the government, is one in which several participants control minority shares of the market, no participants control more than half, and small participants are always viable and successful.

Even though dominant players in the market largely achieved their success because of myopic market intervention in the past which restricted competition, it is nonsensical to think that a regulator can, to use the words of the regulator itself, “identify and define relevant markets in the provision of signal distribution services, determine the effectiveness of competition in the relevant markets, determine licensees with significant market power, and identify suitable pro-competitive remedies where competition is found to be ineffective”.

Fluid and ever-changing

This is not how free markets work. Markets are fluid. Technology is ever-changing. Business models are overtaken by hungry competitors. New entrants threaten incumbents. Competition changes markets.

The purpose of competition is not to establish a happy equilibrium between competitors, in which each has a “fair share” of the market. The purpose of competition is to be better at providing goods or services than your rivals, and so earn as large a share of the market as possible. The purpose of competition is not to accommodate rivals. The purpose of competition is to crush them.

This is not necessarily a bad thing. A dominant participant in a market may occupy that position because it really does offer the best combination of price and quality for its customers. It may also be better placed to invest in the research and development needed to improve on its products, which it would do in response to competitive threats from smaller rivals.

The notion that a regulator can define a market in a static manner, and then manipulate it so that there is “effective competition” within that artificially defined market, is absurd.

No single entity, whether they’re a market participant or a regulator, can ever have all the information necessary to determine which products and services are needed or wanted by consumers, and by which means those products and services might best be produced. This is the economic calculation problem, in a nutshell.

Government may think that a multi-year “market inquiry” can provide that information, but even if it offers a painfully comprehensive snapshot of how the market operates at a given point in time, that snapshot will be outdated before the ink has dried on any policies based upon it.

Reading the submissions from various stakeholders – consumers of these services being notably absent – gives a good overview of the inadequacy of the regulator’s approach.

Sentech wants the entire discussion document and market inquiry to be withdrawn, since it says there are a host of other policy, regulatory and other processes that already cover most of the ground.

Just the list of such processes underscores the byzantine complexity of trying to regulate just one economic sector: “1) Draft white paper on audio and audio-visual content services policy framework; 2) Digital sound broadcasting regulations; 3) Broadcasting digital migration policy; 4) Digital migration regulations; 5) Promotion of diversity and competition on digital terrestrial television regulations; 6) Terrestrial broadcasting frequency plan 2013; 7) Restacking process; 8) State-owned entity rationalisation process; and 9) Facilities-leasing regulations.”

The real reason Sentech doesn’t like the inquiry is, of course, that it is the monopoly provider of signal distribution services, and it can charge whatever it likes.

The SABC, unsurprisingly, is unhappy with Sentech’s pricing. In addition, it says that regulations hamper competition by being far too specific and not neutral to the underlying technology.

eMedia complains that this market inquiry should have happened more than a decade ago, and that the failure of the regulator to act has caused broadcasters financial harm by permitting Sentech to abuse its monopoly.

The author, Ivo Vegter, argues that there should be far less regulation to promote competition

Primedia points out that although the discussion document claims there are “low barriers to entry” into the managed transmission services market by which radio broadcasts are distributed, the fact that Sentech continues to enjoy a monopoly even though other licensees are in principle entitled to offer competing services, proves that this is not true.

MultiChoice points out that the discussion document conflates transmission technologies and retail audio-visual services, and further conflates market activities when it imposes obligations upon signal distributors to carry public broadcaster channels when this is in fact a function of broadcasting services.

It also repeats an old complaint against streaming services, which use the Internet to distribute audio-visual content.

The discussion document dismisses such services entirely, when it says: “Today in South Africa, the majority of end users receive radio and television via terrestrial networks or by satellite. The authority (Icasa) notes that there are some end users that access broadcasting content over alternative delivery platforms such as using broadband connections (such as streaming services…) and using existing mobile networks. However, the authority’s view is that these alternative technology platforms are not considered as signal distribution.”

MultiChoice argues, rightly so, that streaming services constitute direct competition to broadcasters, and that the Internet, by analogy, constitutes direct competition to signal distributors. Any audio-visual content provider can opt to deliver services via the Internet, instead of via signal distributors, at any time.

Furthermore, those end users who do use these services, even if in the minority, also constitute the most profitable end of the market, are rapidly growing in number, and largely overlap with the market that can afford MultiChoice’s own services.

The company has previously (during an entirely separate inquiry into subscription broadcasting services) lobbied for regulations to be imposed on streaming services like Netflix, in order to level the competitive playing field.

‘If you look at the [streaming] players, they are unregulated; they don’t have to have a licence, they don’t have to produce local content, they don’t have to employ anybody in this country, and they don’t have to pay any taxes,” the company’s CEO, Calvo Mawela, told ITWeb in 2019.

It is clear from the discussion document and the industry responses that the legal requirement for the government to define markets and market segments in order to impose regulations that promote competition results in absurdities. No single entity, least of all the regulator, can understand market dynamics well enough, and act timeously enough, to actually improve that market. The heavy layers of regulation also reduce the flexibility of regulated entities to adapt to changes in technology and market demand.

Attempts to monitor and control the entire market actively stifle competition, reduce quality, raise prices and hamstring technological progress. Regulating to promote competition is a contradiction in terms. The regulator should deregulate to promote competition.

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