Around the world substantial increases in the accessibility and affordability of mobile technologies have been achieved through efficient and effective market competition. Increasingly evidence indicates that access to information communication technologies, and in particular mobile services, has a significant impact on economic growth. As a result increasing mobile penetration, affordability and therefore use is becoming important to growth and poverty reduction strategies for development. A November 2012 report for the GSMA noted that doubling the consumption of mobile data per 3G connection increases the GDP growth rate by 0.5 percentage points annually. The study also notes that a 10% increase in mobile penetration increases productivity by 4.2 percentage points in developing countries.

In recent years we have seen the restructuring of telecommunications sectors in the Pacific region through the establishment of independent regulators and / or the introduction of competition. As at March 2012 mobile competition has been introduced in Fiji, Palau, Papua New Guinea (PNG), Samoa, the Solomon Islands, Tonga and Vanuatu. Since the introduction of competition mobile market penetration in these countries has increased dramatically (Exhibit 1). In 2012 the Federated States of Micronesia and Tuvalu also announced plans to liberalise their telecommunications sectors.

Exhibit 1: Mobile penetration in Pacific island nations from 2000 to 2011 – the dotted lines indicate penetration pre-competition [Sources: ITU ICT Eye statistics, TRR]

In the case of Fiji mobile penetration increased rapidly prior to liberalisation due to the incumbent’s activities in preparation for competition. Vodafone Fiji then maintained its dominant position after the introduction of competition. In Vanuatu we see that following the introduction of competition in 2008 mobile penetration increased rapidly. Similarly there have been notable increases in mobile penetration in other Pacific island countries following liberalisation, particularly Vanuatu and Samoa. Mobile penetration in Tonga is lower than some of the other liberalised markets, however this can be partly attributed to the fact that Tonga also has one of the highest fixed-line penetration rates (Exhibit 2) in the sample (29% in 2011).

Exhibit 2: Fixed-line penetration in Pacific island nations, 2011 (note: 2010 data has been used for Samoa as 2011 information was not available) [Source: ITU ICT Eye statistics]

Competition is regarded as a key driver of investment in telecommunications and for the consumer competitive pressures also drive down prices. Network Strategies Limited has undertaken analyses of Pacific mobile service prices over a number of years. Our results show that Fiji, Palau, Samoa and Tonga are the most affordable of the countries that have introduced competition (in terms of spend of average monthly income on mobile services). However note that although Palau has one of the highest charges for all three categories (low volume use, prepaid use and SMS-based use) it has a relatively high GDP per capita – as a result of higher average incomes residents are able to better afford the high service prices compared to consumers in other countries. PNG, the Solomon Islands and Vanuatu are the least affordable countries in the sample in terms of spend of average monthly income on mobile services (Exhibit 3). Why should this be the case, given that market liberalisation has occurred along with competitive market entry? In the case of the Solomon Islands, competition is still in its infancy however the Telecommunications Commission noted that the affordability of mobile voice calls improved in 2011.

Exhibit 3: Monthly spend on mobile usage as a proportion of average monthly income for low volume, prepaid and SMS-based usage baskets 2012 [Source: Network Strategies, World Bank]

While the ICT Regulation Toolkit warns against unfair competitive advantages by an incumbent operator to the detriment of a new entrant, it appears that in some Pacific island nations we are seeing evidence of precisely the opposite. According to the ICT Regulation Toolkit:

Liberalization and increased competition in telecommunications markets require active regulatory involvement to provide new entrants with a level playing field when attempting to compete against well-established incumbent operators. Incumbent operators usually have substantial advantages, such as a legal ubiquitous network that is largely depreciated, a substantial customer base, and market power.

However, the unique characteristics of the Pacific means that building a ubiquitous network is often a challenge for an incumbent operator without deep pockets. A combination of factors such as small populations spread over large distances, rugged terrain, a number of small islands and a large number of rural / remote dwellers has historically meant that incumbent operators have struggled to provide universal service. Prematurely ending an operator’s exclusivity in the market also may mean that inadequate time is allowed for the operator to prepare for impending competition. In these circumstances the introduction of a competitor with access to funding and the absence of regulatory intervention can lead to a playing field tilted against the incumbent, allowing the new entrant to dominate the market within a very short space of time.

Cash-strapped incumbent no match for new entrant in PNG

Assistance with funding from institutions such as the International Finance Corporation (IFC) has allowed Digicel to rapidly deploy mobile infrastructure in the more populous parts of PNG, achieving a market share of over 70% in the mobile market by 2011, that is, within four years of entering the market. An IFC loan for USD40 million was approved in 2007, a further USD80 million in 2009 and USD26.8 million in 2011. Note that while mobile penetration increased from about 5% to 34% between 2007 and 2011 following the introduction of competition in 2007 (Exhibit 1), there still remains significant room for growth in PNG. Barriers to uptake include both availability in terms of coverage as well as high service prices. With a low population density (15 persons per square kilometre in 2010), low number of urban dwellers (13% in 2011) and a large land area consisting of rugged and mountainous terrain and a number of populated outer islands, infrastructure rollout in PNG is a significant challenge.

While having an operator with a high market share in itself is not necessarily indicative of abuse of market power, PNG also has one of the least affordable mobile markets in the Pacific. Although after market entry in July 2007 Digicel consistently offered lower prices for mobile services than the incumbent bemobile, in mid 2009 Digicel’s prices increased (even after adjustment for inflation) and since then have been decreasing gradually but were still higher than at market entry as at August 2010. For example Exhibit 4 shows that while the monthly mobile spend in PNG for a low volume Digicel user was USD26.75 in December 2007, by June 2009 this was USD34.40, dropping slightly to USD30.43 in August 2010. In the absence of a mobile retail service determination (MRSD), and with little competition from a cash-strapped bemobile a quasi-monopoly had developed.

Exhibit 4: Inflation-adjusted monthly mobile spend in PNG for a low-volume user between 2007 and 2010 [Source: Network Strategies, based on OECD methodology]

The MRSD is regulation enforced by the relevant government minister upon recommendation of the National Information and Communications Technology Authority (NICTA) of PNG under the National Information and Communications Technology Act 2009. NICTA launched an inquiry into the need for a MRSD in November 2011. A final inquiry report was published in September 2012 recommending that pre-paid mobile originated retail national voice call services supplied by Digicel be subject to a MRSD. The recommendation was based on the following findings as part of the inquiry process:

• Digicel holds a substantial degree of market power in the retail services market
• the retail services market is not effectively competitive
• in the absence of ex ante regulation Digicel is likely to hold market power in the retail services market for at least the next two years
• Digicel has an incentive as well as the ability to act anti-competitively
• the scale of Digicel’s on-net/off-net price discrimination was exceptionally high by international standards
• a significant proportion of mobile-originated national voice traffic in PNG remains on net.

Telecommunications market dominance is not defined in the PNG telecommunications legislation. However a number of factors pointed towards Digicel’s dominance during the inquiry process including the following 2011 performance measures:

• 74.5% share of total mobile service subscribers
• 87.9% share of the total mobile market revenues
• 90.6% share of the total mobile-originated national voice minutes
• as at December 2011 Digicel provided mobile service coverage to 23.8% of PNG (compared to 4.4% by bemobile and 5.9% by Telikom / Citifon).

As a result of NICTA’s recommendations, in September 2012 the Minister for Communications and Information Technology has enforced an MRSD which allows discrimination of up to 40% with a couple of exceptions subject to NICTA’s approval:

This means that Digicel can charge a price for pre-paid voice calls that are made to subscribers with services on other networks up to 40% more than it charges for calls that are made to subscribers on a Digicel network. In additional Digicel may exceed that percentage figure in two cases – (1) if it has a cost justification that has been accepted by NICTA, or (2) if it is running a promotion which has been cleared beforehand for price-setting purposes by NICTA. Some of Digicel’s current prices exceed that differential.

While the MRSD will be reviewed again after September 2014, bemobile is currently expanding its network to be able to better compete in both PNG and the Solomon Islands. The bemobile expansion project for PNG and the Solomon Islands was approved by the Asian Development Bank (ADB) in March 2011 with a disbursement of USD9 million in equity investment and USD40 million in the form of a private sector loan. The aim of the project is to increase access to reliable and affordable telecommunications services in line with international standards by:

• strengthening bemobile’s telecommunications backbone infrastructure and therefore reducing its reliance on the legacy infrastructure of Telikom PNG
• upgrading and expanding bemobile’s existing network in PNG to increase coverage
• continuing the roll-out of bemobile’s national network in the Solomon Islands.

Telecom Vanuatu struggles to compete following early termination of exclusivity deal

Another example of a quasi-monopoly is Digicel in Vanuatu. Telecom Vanuatu’s (TVL’s) exclusive licence to provide mobile services in Vanuatu – originally due to expire in 2012 – was prematurely terminated and non-exclusive licences were subsequently granted to both TVL and Digicel in 2008. Under the terms of the two mobile licences issued in 2008 any licensed operator will be designated dominant by the Telecommunications and Radiocommunications Regulator (TRR) if:

… in any telecommunications market in Vanuatu … its gross revenues in that market (including services provided using an international gateway) constitutes forty per cent (40%) or more of the total gross revenues of all licensed operators in that market (as determined by the Regulator).

TRR may also designate a licensed operator to be a dominant service provider if it considers that the operator, individually or acting with others, enjoys a position of economic strength or controls an essential facility providing it with the power to behave to an appreciable extent independently of competitors / customers in the market (even if the operator holds less than 40% of the market share of gross revenues).

Once designated as dominant the mobile operator is prevented from various actions and activities considered to be an abuse of a dominant position, and various options are available to TRR if abuse occurs. As a result of being declared dominant, providers may be required to file with TRR all tariffs / rates / charges for the services provided and to receive approval for proposed tariff increases.

A dominance Designation Order was issued to Digicel in June 2009 finding Digicel dominant in the market for retail mobile services and the wholesale market for call termination on Digicel’s network. It was found that Digicel:

… enjoys a position of economic strength or controls an essential facility affording it the power to behave to an appreciable extent independently of competitors or customers …

Note that the order is based on what Digicel is capable of doing and does not require an abuse of market power for it to be issued. “Appreciable” means a level that may be noticeable or considered important. TRR concluded that the high market concentration as well as high barriers to entry provide Digicel with an appreciable degree of market power and therefore the ability to raise prices above competitive levels for a sustained period of time without incurring significant loss of sales or revenues.

The Order remains in force until revoked by TRR (a review was conducted in 2012 and it was decided that the Designation Order would continue to apply). The market for retail mobile services as according to the Order includes:

• on-net and off-net calling in Vanuatu
• calls from the mobile network to international destinations
• calling to deposit or retrieve voicemail
• SMS messages.

The services in the relevant market include both residential and business customers as well as post-paid and pre-paid mobile services across Vanuatu.

According to TRR Digicel had a market share in excess of 60% of mobile subscribers in 2011. Additionally:

• Digicel’s network covers approximately 90% of Vanuatu’s population (and Digicel’s number of cell sites apparently exceeds that of TVL)
• Digicel had a 57% share of retail mobile services revenue in 2011
• Digicel is in a strong financial position with an EBITDA (earnings before interest, taxes, depreciation and amortisation) margin of 20% for the year ending March 2011.

In terms of the market for wholesale call termination Digicel has the control of an essential facility (its network) which may allow it to abuse its dominant position:

The technical impossibility of bypassing Digicel to terminate calls in its network gives Digicel a considerable power to exclude competition and as such confer [sic] Digicel the ability to behave to an appreciable extent independently of competitors or customers in this market.

Note that while TVL was designated a dominant service provider in March 2008 no requirements were placed on TVL to seek TRR’s approval before increasing its tariffs / rates / charges in the relevant telecommunications markets (including cellular mobile services).

Regulatory intervention: the ambulance at the bottom of the cliff for incumbents

While competition has been viewed as the mechanism to encourage investment, lower prices and increase uptake / use of mobile services, in both PNG and Vanuatu a quasi-monopoly has formed following market liberalisation allowing the dominant operator to maintain service charges above competition levels. The unique challenges of infrastructure rollout in the Pacific coupled with incumbent operators that were ill-prepared for competition meant that the new entrant has been able to rapidly acquire a large market share to the detriment of end-users. For example, as we have illustrated real prices have actually increased since the early days of competition in PNG whereas in Vanuatu mobile service prices remain relatively unaffordable in relation to income levels. Active regulatory involvement is required to ensure a level playing field for the former monopoly operator against the new entrant.