Watchdog attacks Telkom

By Nicola Mawson for Telkom
Johannesburg, 13 Mar 2007

A lawyer acting on behalf of the Competition Commission has accused Telkom of "exploitative" behaviour.

The commission last year referred Telkom's proposed takeover of Business Connexion (BCX) to the Competition Tribunal, recommending that it not be allowed.

The tribunal, which began yesterday, will hear evidence over the next month for, and against, Telkom's proposed R2.4 billion takeover of BCX.

Advocates for Dimension Data and the Internet Service Providers Association yesterday claimed Telkom aimed to bypass regulatory authority through the deal, and that allowing it to proceed would hamper the economy.

Telkom and BCX disagreed with this viewpoint. Mandla Ngcobo, Telkom's chief of corporate affairs, said the proposed impact of the merger would not lead to anti-competitive practices with regard to pricing, network access or quality of service.

De facto monopoly

Advocate Owen Rogers, on behalf of the Competition Commission, said Telkom would take advantage of its de facto monopoly to advance the merged entity if the tribunal gave it the go-ahead. He pointed to the absence of regulatory clarity that would make this situation possible until Neotel made its presence felt.

However, advocate David Unterhalter, on behalf of the merging parties, told the tribunal the market was well populated, with a large number of competitors, making for a spirited market. He cited Neotel as a competitor and said recent legislation eliminated Telkom's monopoly in some areas, such as the local loop.

Unterhalter also contended the IT services market was well populated and highly competitive, and removing BCX from the picture would not lesson competition. However, Rogers, citing Telkom documents, said the company intends to grow its share in the IT services market partially to bypass regulatory authority.

He noted that a Telkom-commissioned report, by CRA International, painted a bleak picture of this industry and downplayed the effects of the merger. Rogers quipped that if the report had gone to Telkom's board when it made a decision to buy BCX, the company would not touch IT services "with a bargepole".

The merger, Rogers said, would result in further concentration in the industry. "Never forget: the biggest managed network services player is merging with the biggest IT services player." He added Telkom has a monopoly over the infrastructure on which both services depend.

However, Telkom said the "proposed merger is not only in the interests of our customers and shareholders, but it is also in the national interest". Ngcobo argued Telkom's proposed acquisition would have benefits for all South Africans.

"It would also help to ensure more job opportunities for locally available staff and help retain critical skills in SA," said Ngcobo in a Telkom statement.

Predatory pricing?

Rogers said a range of strategies would open up for the new entity, should it be allowed to proceed. He noted there would be no way of knowing if Telkom was abusing its position due to the complex nature of the contracts it signed with clients.

He contended Telkom could take advantage of several predatory pricing or service tactics to entrench itself post the merger. "This is not a figment of the commission's imagination. It's in Telkom's own documents."

Unterhalter denied Telkom would take advantage of the situation to act in a predatory manner, pointing out this would be self-defeating.

Rogers added end-users would easily be persuaded to make use of the combined offerings of the new entity. "All it needs is a bad experience here, some whispering there and a bit of delay. Nothing that could be proved as sabotage, but enough to create a perception that things are less likely to go wrong and more likely to run smoothly if you use a combination of Telkom and Business Connexion solutions."

Unterhalter said neither Telkom nor BCX's customers were na"ive enough to be talked into choosing the merged entity.