Telkom fined R 449 million for abuse of dominance – legal analysis

Telkom has been fined R449 million in an abuse of dominance case that has taken eight years to come to a head. 

According to Chris Charter, Director in the Competition and Regulatory practice at Cliffe Dekker Hofmeyr business law firm, “The matter always had the makings of a classic “test case” for abuse of dominance, with all the necessary structures in place: Telkom as an upstream monopolist bred through protectionism rather than competition; VANS providers as part of a dynamic downstream market poised for growth and innovation but dependant on the upstream monopoly service provider to survive; Telkom was unaccustomed to competition and unable to keep pace with VANS providers on the merits; a clear ability and incentive on the part of the monopolist to leverage its upstream power to its advantage (or rather, the disadvantage of VANS), thus allowing it to refrain from competing on the merits and instead continue to extract monopoly rents in the upstream market.”

Charter says that to many, the case looked open and shut against Telkom, but the incumbent was able to keep the matter from being heard at the Tribunal since its referral in 2004, through various appeals to the higher civil courts that were only resolved in 2009. 

“The case has many shades of the travails facing Microsoft in Europe, where Microsoft was found to have abused its dominance in the PC operating systems market to the detriment of competition in downstream markets (including servers, web-browsing and media-players).  As with Microsoft, events in the fast-evolving technology market overtook Telkom and the penalty is imposed for past sins in a market where it is no longer the force it once was,” explains Charter. 

Charter notes that the Tribunal found that Telkom had abused its dominance by refusing to grant rival VANS providers with access to its facilities, which were essential for rendering VANS services.  For a dominant firm to refuse rivals access to essential facilities is a contravention of section 8(b).  Telkom was found to have “frozen” the networks of VANS providers that did not adhere to Telkom’s contractual terms (which themselves stifled innovation in the market).  This meant that VANS were unable to build on their existing networks and offer more efficient services to more customers.  Although Telkom did not out-and-out refuse to supply (this would have plunged the country into the dark ages as essential IT services could not be rendered) the Tribunal side-stepped this by finding that the requirement that VANS accede to unreasonable conditions to obtain supply could nevertheless amount to a “constructive refusal to supply”.  In my view, that looks more like a complaint based on section 8(c) of the Act (general exclusionary conduct) rather than 8(b) (refusal to grant access to an essential facility) but as section 8(b) requires no showing of anti-competitive harm (such harm be assumed) it is a useful section in which to box Telkom.

Charter explains that the Tribunal also found that Telkom had contravened section 8(d) in that it induced customers not to deal with competitors. Through various tactics (such as directly approaching end-users with allegations that VANS were acting illegally as well as restrictive contractual terms with VANS themselves), Telkom required end-users to contract directly with it rather than VANS intermediaries. This impeded the ability of VANS to render services and also “hugely inconvenienced customers of VANS providers”.

“It is interesting to note that the Tribunal lays some of the blame for the travails that beset the VANS providers at the door of the regulator (ICASA and before that, SATRA) and the Minister of Communications.  The regulatory framework was allowed to stagnate due to inaction and poor enforcement and the resultant uncertainty left Telkom with sufficient wiggle-room to preserve its position. 

“On a similar note, the Tribunal laments the clear conflict of interest suffered by the Minister in being both in charge of telecoms liberalisation as well as a major shareholder in Telkom.  This latter fact led Telkom to believe that it was entitled to protection, emboldening it to act as it did.  These circumstances were treated as mitigating factors and led to a 30% discount off the fine that might otherwise have been imposed (could have been R642 million),” Charter says.

He notes that the Tribunal’s observations regarding the role that State shareholding played in exacerbating anti-competitive behaviour by Telkom is chilling in the face of recent reports that Telkom may be nationalised - creating an even stronger conflict of interest in a market where Telkom is still a very important service provider to a strategic industry.

“Although the fine is lower than the proposed penalty of between R1billion and R3.2 billion suggested by the Commission, Telkom should also be concerned about the prospect of civil damages claims from VANS operators who’s businesses were negatively affected by the conduct, as well as VANS customers in turn. Here, the Tribunal expressly stated that such customers paid significantly more for VANS services than would have been the case absent Telkom’s abuse.  For this reason alone, Telkom may well look to appeal to the Competition Appeal Court and beyond,” he adds.