Further Telkom pain on the way?

A legal expert has warned Telkom to be wary over the prospect of civil damages claims from value-added network services (VANS) operators – whose businesses were negatively affected by its abuse conduct – as well as VANS customers, in turn.

The Competition Tribunal on Tuesday (7 August) imposed a penalty of R449 million on Telkom SA for abusing its dominance in the telecommunications market between 1999 and 2004, a period in which Telkom was a monopoly provider of telecommunications facilities.

According to Chris Charter, director in the competition and regulatory practice at Cliffe Dekker Hofmeyr business law firm, the tribunal expressly stated that such customers paid significantly more for VANS services than would have been the case sans Telkom’s abuse.

“For this reason alone, Telkom may well look to appeal to the Competition Appeal Court and beyond,” he said.

Telkom said on Tuesday that it would assess the rulings of the tribunal before making its next move on the matter.

According to Charter, 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; and VANS providers as part of a dynamic downstream market poised for growth and innovation but dependant on the upstream monopoly service provider to survive.

He said that Telkom was also unaccustomed to competition and unable to keep pace with VANS providers on the merits; along with 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.

To many, the case looked open and shut against Telkom, according to Charter, 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),” Charter said.

“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.”

The tribunal found that Telkom had abused its dominance by refusing to grant rival VANS providers 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).

Cliffe Dekker Hofmeyr noted that 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, 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 said.

The tribunal also found that Telkom had contravened section 8(d) in that it required 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,” Cliffe Dekker Hofmeyr said.

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Further Telkom pain on the way?