Telecom Industry in South Africa: Scale, Monopolies, & New Developments, Papers of Electrical and Electronics Engineering

Download Telecom Industry in South Africa: Scale, Monopolies, & New Developments and more Papers Electrical and Electronics Engineering in PDF only on Docsity! The Pathohimprovement intelecommunications Industhy Prepared by: Pejman Balouchian Date: October 05, 2006 Item Topic Page 1 Introduction 3 2 Background on Telecommunication Industry 3 3 New Developments 4 4 Economies of Scale and Fixed Costs 5 5 Demand Scale Economies 6 6 Substitutes for Traditional Telecommunications 7 7 Alternative Private Networks 7 8 What happens after the period of exclusivity? 8 9 Conclusions 9 10 References 11 Economies of Scale and Fixed Costs The act of telecommunications (except cellular and radio) requires that the users be physically connected to each other through a system of cables and exchanges. This network requires substantial investment in switching equipment (exchanges) transmission facilities (wire or optical lines) and terminal (subscriber equipment). The need for up-front investment creates sharply decreasing average costs: marginal costs per call are practically zero, and the fixed costs of the network are allocated to an increasing number of calls. This means that telecommunications is served to be traditionally a natural monopoly. In an unregulated market the competitive advantage in cost for an incumbent telecommunications services provider is considered to be an effective barrier to entry. Telecommunications assets are highly site-special and would be of little value to businesses which are not directly competing in telecommunications market in which the equipment is installed. These high exit costs, which increase the risk of investment in a competing telecommunications venture increase and heighten the barriers to entry. Many of the costs of industry are non-recoverable sunk costs in result to the geographical location of the physical asset matters and the inter-temporal nature of capital assets. For entrants, these sunk costs should be covered by post entry revenue. Demand Scale Economics The nature of the telecommunications network dictates that economies of scale will arise as additional consumers subscribe to telephone services. In addition to expansion of the network by one subscriber increases marginally the utility of all incumbent subscribers, since their opportunities for telecommunication have been increased. On a decentralized basis and in an environment with non-zero transaction costs, the positive externality which is generated by an additional subscriber goes un-priced. The supply-side manifestation of this market failure is the risk that service providers are dealing with. or servicing only the lucrative markets. Areas that do not offer much profit potential may not receive telecommunication service, although society as a whole would benefit from higher penetration. Substitutes for Traditional Telecommunications Recent technological improvements have created a number of close substitutes (and complements) from outside the industry, which weaken the natural monopoly tendencies. The advent of cellular telephony and other wireless data communications technologies (pagers, personal digital assistants) have reduced dependence on network-based telecommunication. Moreover, the imminent merger of digital telecommunications systems and cable television systems provides scope for additional competition in both industries. The continued improvements in computer hardware and user- interface software are increasing the ease with which consumers can chose the most attractive mean of receiving and transmitting information. The ever-increasing availability of theses substitutes further reduces the remaining monopoly power of telecommunications service providers. Alternative Private Networks During the period of exclusivity, licensed service providers and private network users are required to use Telkom infrastructure, including links and other associated equipment. Two other private networks currency exist, owned by Transnet and Eskom, two of the leading networks throughout South Africa. Transtel, a business unit of Transnet, is a primary supplier of telecommunication services to Transnet. It owns and operates a information asymmetries involved, where the firm has much more information than the regulator, this shows strong regulatory capabilities are necessary. Unregulated, the network operator will have an incentive to abuse the relevant position, both by charging high prices for network access, and to favor service provision by its own subsidiaries or associated companies. Without economic regulation in the telcom sector, Telkom, as the dominant provider of the fixed network service in South Africa, may therefore seek to set prices to independent service providers in a way designed to weaken and ultimately eliminate competition from other possible network operators after its period of exclusivity. After this period one would expect to see a general reduction in prices of network services for independent service providers primarily as a result of the possible entrance of other network operators. Prices must be fair enough, with tariffs charges by network operators with significant power being cost-oriented. Private networks and service over the network should be encouraged, while facilitating sophisticated necessary tools for business and other users. References: ` AMBROSE, H & CHAPON, 1990. Privatising telecommunications systems: bus inessopportunities in developing countries. IFC Discussion Paper, 10. BAUMOL, W & SIDAK, G, 1994. Toward Competition in Local Telephony. Cambridge, MA: MIT Press. BMI TECHKNOWLEDGE, 1998. Communication Technologies. Handboo k 1998. GALAL, A & NAURIYAL, B, 1995 . Regulating telecommunications in developin g countries . World Bank Policy Research Working Paper, 1520. Washington DC: The World Bank. HORWITZ, R, 1993 . South African telecommunications: history and prospects. In Noam, E (Ed.), Telecommunications in Africa. PETRAZZINI, B, 1996. Global telecom talks: a trillion dollar deal. Institute for Internationa l Economics.WALLSTEN, S, 1998 . Competition, Privatisation, and Regulation in Telecommunications Markets in Developing Countries. World Bank. VAN SICLEN, S, 1999. mimeo. Paper for Worksho p on Regulation and Competition, Pretoria, August 1999. WELLENIUS, et al, 1992 . Telecommunications: World Bank Experience and Strategy. World Bank Discussion Paper No 192, December. Washington DC: The World Bank