The Anti-Competitive Dimension Of On-Net/Off-Net Price Differentials

On the 14th of July, 2015, Etisalat as the Applicant instituted Etisalat v. NCC & MTN Suit No. FHC/L/CS/1075/15 (the case) against both NCC (the Commission) and MTN seeking among other reliefs; an order of perpetual injunction restraining the Commission from granting any permission and/or approval to MTN to have any differential between MTN’s on-net and off-net retail voice tariff in violation of the 2013 Determination of Dominance in Selected Communications Markets in Nigeria (the 2013 Determination).

Although an order dismissing this case was granted by the trial court on 2nd December, 2015, in this article I analyze the anti-competitive impact of MTN’s on-net/off-net price differentials, and argue that Etisalat would also have succeeded in this case had the main thrust of its case rested on the argument that MTN’s on-net/off –net price differentials substantially lessened competition in an aspect of Nigeria’s communications market.

The factual background

In 2013, the Commission undertook the 2013 Determination whereby it found MTN dominant in the mobile voice market and imposed the following ex ante obligations on it; accounting separation; collapse of on-net and off-net retail tariff; submission of required details to the Commission; and a determination by the Commission of the pricing principle to address the rates charged for on-net and off-net calls for all operators in the mobile voice market. On April 14, 2015, the Commission wrote to the Applicant informing them that the Commission had approved a 30% differential for on-net and off-net for MTN. The effect of this approval was the reversal of the Commission’s direction in the 2013 Determination requiring MTN to collapse its on-net and off-net retail tariff.

Subsequent to this, Etisalat commenced the case seeking among other reliefs; an order of perpetual injunction restraining the Commission from granting any permission and/or approval to MTN to have any differential between MTN’s on-net and off-net retail voice tariff in violation of the 2013 Determination. However, during the pendency of the case, the Commission wrote a letter to MTN directing that it “maintain the status quo of the dominance obligation that is to maintain parity between on-net and off-net tariff charges with immediate effect”, which subsequently resulted in the case being dismissed by the trial court on account of MTN’s argument that Etisalat’s claim has become “academic”.

What is on-net/off-net price differential?

On-net/off-net differential pricing refers to the practice of a mobile network operator (MNO) charging subscribers higher prices for making off-net calls (i.e., voice calls originating on its network and terminating on a competitor’s network) than on-net calls (i.e., voice calls originating and terminating on its own network). The conduct of MTN in price discriminating between calls within its network (on-net calls) and calls to other mobile networks (off-net calls) constitutes on-net/off-net price differential.

The substantial lessening of competition test in Nigeria’s communications market

The substantive standard for assessing an anti-competitive conduct in Nigeria’s communications sector is the “substantial lessening of competition” test. As a general rule, Section 91 (1) of the Nigerian Communications Act (the Act) prohibits a Licensee from engaging in “…any conduct which has the purpose or effect of substantially lessening competition in any aspect of the Nigerian communications market”. For a particular conduct to constitute a substantial lessening of competition, Regulation 6 of the Competition Practice Regulations (the Competition Regulations), further requires that the following be considered; definition of the relevant market or markets; impact of the conduct on existing competitors in the identified markets ; impact of the conduct on further market entry; impact of the conduct on consumers, including the availability and pricing of products and services; and degree of interference with competition that results in identifiable injury to competitors or consumers.

It is important to note that although Etisalat made several submissions to the Commission, and to the Court during the trial, on the negative impact of MTN’s on-net/off-net price differential but none of these submissions were in accordance with the substantial lessening of competition (or anti-competitive) test prescribed by Regulation 6 of the Competition Regulations which requires that the foregoing factors be considered in assessing whether a conduct constitutes a substantial lessening of competition.

The prohibited anti-competitive conducts

Under the Competition Regulations, MTN’s on-net/off-net price differential would be caught by Regulation 8 (b) and (f).

Regulation 8 (b): This provision provides that “Discriminating in the provision of interconnection or other communications services or facilities to competing Licensees, except under circumstances that are objectively justified based on supply conditions, such as discrimination based on differences in the costs of supply” is a conduct deemed to result in a substantial lessening of competition. On-net/off price differential have been argued to be a form of price discrimination since the cost of providing on-net calls is likely to be different from the cost off-net calls, especially when termination rates are regulated at cost. In this particular case, MTN is price discriminating between calls within its network (on-net calls) and calls to other mobile networks (off-net calls).

Regulation 8 (f): This provision provides that “Supplying communications services, at prices below long run a average incremental costs or such other cost standard, as is adopted by the Commission” is a conduct deemed to result in a substantial lessening of competition. On-net price discounts have also been argued to be a form of predatory pricing by larger MNOs, raising concerns that they will eventually lead to a customer churn away from competing networks, onto a single network. Where MNOs significantly differentiate between on-net and off-net calls when wholesale call termination rate is regulated at cost, the only assumptions would be that the on-net call price is priced significantly below cost or the off-net call price is significantly above cost.

It is pertinent to note that the Commission in its Consultation Paper on Dominance in Selected Communications Markets (October 27 2009, p. 30) explained that these conducts and other conducts listed under Regulation 8 constitutes an abuse of a dominant position by a Licensee, consequently MTN by engaging in on-net/off-net price differential is abusing its market power or dominant position. In addition, under the Competition Regulations, in determining whether a particular conduct engaged in by a dominant Licensee constitutes an abuse that substantially lessens competition, one is required to apply the standards and procedures described in Part II (substantial lessening of competition) of the Competition Regulations. Thus, the Commission (or any other person) is obligated to among other things, apply the substantial lessening of competition test prescribed in Regulation 6 when determining whether a dominant Licensee has exercised its market power in an abusive manner.

Applying the substantial lessening of competition test to the prohibited conducts

Applying the substantial lessening of competition test to MTN’s on-net/off-net price differential will require;

definition of the relevant market or markets: The defined market would either be retail market for mobile voice calls, or the market for terminating a voice call on the mobile network of MTN.

impact of the conduct on existing competitors in the identified markets: Economic opinion in the literature, indicates that on-net/off-net price differential have foreclosure effects on smaller MNOs, as the dominant operator has an economic incentive to set lower prices for on-net calls than for off-net calls in order to induce a customer churn away from competing networks. Foreclosure is used to describe a situation where effective access of actual or potential competitors to consumers, supplies or markets is hampered or eliminated as a result of the abusive conduct of a dominant firm.

In Decision n°12-D-24, following a complaint filed by Bouygues Télécom, the Autorité de la concurrence (France’s national competition regulator) fined Orange France and SFR a total of €183.1 million for implementing excessive rate differentiation practices between on-net calls and off- net calls. In that case, the Autorité established that Orange France and SFR abused the dominant position each of them held in their respective call termination markets (i.e. in the interconnection service they offered other operators by “terminating” calls on their networks).

The Autorité described the foreclosure effects of on-net/off-net differential pricing as follows:

“These offerings first of all artificially accentuated the “club” effect, that is, the propensity for close relatives to regroup under the same operator, by encouraging consumers to switch operators and join that of their relatives. These offerings played a great role as this factor was, above price, the main incentive for subscriptions (70% of a subscriber’s consumption is used towards its three favourite interlocutors)

Once the clubs were formed, these offerings “locked” consumers in durably with their operator by significantly raising the exit costs incurred by the subscribers of on net unlimited offerings as well as by their relatives who wish to subscribe to a new offering with a competing operator.

The rate differentiation between “on net” and “off net” calls puts off any operator switch because the subscriber or its relatives would consequently no longer be able to make or receive “unlimited” calls.

According to the Autorité, this differentiation between “on-net” and “off-net” calls therefore consequently damaged the fluidity of the retail market by hampering customers’ migration towards another competing operator.

impact of the conduct on further market entry: The anti-competitive foreclosure effect of MTN’s on-net/off-net price differential is likely to heighten barriers to entry into the relevant communications market, and will reduce the incentive of competing networks to compete effectively.

impact of the conduct on consumers, including the availability and pricing of products and services: Customer choice is limited due to their inability to switch to a competing network.

degree of interference with competition that results in identifiable injury to competitors or consumers: There will be an appreciable degree of interference with competition in the relevant market because of MTN’s dominance in this market.

Conclusion

My intention in this article, is to show that MTN’s on-net/of-net price differential does indeed substantially lessens competition in the relevant communications market, and to make a case for the application of the competition provisions of the Act and/or the Competition Provisions. In this regard, both the Act and the Competition Regulations provide detailed procedures for challenging an anti-competitive conduct. For instance under Section 94 (1) of the Act, a person may institute an action at a court seeking an injunctive relief against any conduct which has the purpose or effect of substantially lessening competition in any aspect of the Nigerian communications market. The Competition Regulations in its Schedule provides an administrative procedure whereby an “interested person” can commence a proceeding for the Commission to investigate a competition related complaint or to take related action against a Licensee.

Since, the enactment of the Act in 2003 and the Competition Regulations in 2007, the Commission, Licensees or even another person has unfortunately, yet to successfully challenge a conduct under the competition provisions of the Act and/or Competition Regulations, however, it is suggested, that the appropriate recourse in the prospective challenge of an anti-competitive conduct (or a conduct which is suspected to be anti-competitive) be the relevant competition provisions including those discussed in the foregoing.

Chukwuyere is a Senior Associate at Streamsowers & Köhn and the author of the forthcoming book (2016) Regulating Anti-competitive Practices in Nigeria’s Communications Sector.

CHUKWUYERE EBERE IZUOGU