Thursday, April 12, 2012

Antitrust Concerns of Subscriber Win-back Strategies in Mobile Number Portability

With the 2011 appointment of the consortium of US-based Telcordia Technologies, Saab Grintek and Interconnect Clearinghouse Nigeria (ICN) by the Nigerian Communications Commission (NCC) as the Mobile Number Portability Service Provider, it is expected that mobile number portability (MNP) will go live on the networks of all mobile network operators (MNO) sometime in the middle of 2012. This is coming against the background of the MNP Business Rules & Port Order Processes recently published by NCC on the 10th April 2012.

Subscriber win-back strategies refer to an incumbent service provider’s scheme aimed at winning back a subscriber who intends to switch or has already switched to a competing service provider. These actions are usually carried out through targeted marketing and selective price discount. In this article, I examine the antitrust concern of these strategies in the context of the recently published Nigeria’s MNP framework.

Introduction
The Nigerian Communications Act 2003 (NCA) commenced on 8th July, 2003 repealing the Nigerian Communications Commission Act of 1992. Under § 1 (c) and (e) respectively, NCA has the stated objectives to “promote the provision of modern, universal, efficient, reliable, affordable and easily accessible communications services and the widest range thereof throughout Nigeria” and “ensure fair competition in all sectors of the Nigerian communications industry....” NCA contemplates the removal of legal and regulatory barriers to entry so as to enable free market entry, encourage technological innovation & rapid deployment of telecommunications services while ensuring that a firm’s prowess in satisfying consumer demand will determine its success or failure in the marketplace.

MNP and win-back strategies
MNP is the ability of a mobile telephone service provider to change his/her service provider while still retaining his/her mobile telephone number. The ability of subscribers to retain their telephone numbers when changing service providers will give subscribers flexibility in the quality, price, and variety of telecommunications services they can choose to purchase. Number portability promotes competition between telecommunications service providers by, among other things, allowing the consumers to respond to price and service changes without changing their telephone numbers, in other words a customer is less likely to switch carriers if he cannot retain his/her telephone number, see Cellular Telecomms. & Internet Ass’n v. FCC, 330 F.3d 502, 513 (D.C. Cir. 2003) (“CTIA”). The resulting competition will benefit all users of telecommunications services. Indeed, competition will foster lower local telephone prices and, consequently, stimulate demand for telecommunications services and increase economic growth.

Win-back strategies refer to an incumbent service provider’s strategies aimed at retaining or regaining a subscriber who intends to switch or has already switched to another competing service provider. Generally, win-back strategies will take the form of targeted marketing and selective price discounts offered to these subscribers. A standard feature of win-back strategies is that it is targeted at only a portion of competing service providers’ customers who were once customers of the incumbent service provider. Nicita (2009) argues that win-back strategies are a form of selective price discrimination towards a competitor’s customers.

A price discrimination is said to exist when two similar products having the same marginal production cost are sold at different prices (Armstrong, 2006). In the context of the MNP process, this price discrimination would usually take the form of selective price cuts where the incumbent service provider decides to charge a (lower) tariff to a group of subscribers to induce them not to switch to a competing MNO. In extreme cases, the group could actually be a single subscriber.

Antitrust concerns of win-back strategies
The primary antitrust concern presented by selective price cuts is usually foreclosure. Most antitrust authorities are uniform in the view that price discrimination can be exploited by a dominant firm with significant market power to “exclude” competitors or reduce competitors incentive to compete effectively (Armstrong, supra). While foreclosure may not necessarily be the primary motivation for engaging in the conduct (profit maximization through price discrimination usually is), however this strategy would have the resultant effect of excluding unaffiliated competitors in the relevant market.

The antitrust treatment of price discrimination in the Nigerian Telecommunications market is captured by § 8 (f) of the Competitions Practice Regulations (CPR) 2007 which provides that supplying communications services, at prices below long run average incremental costs or such other cost standard, as is adopted by the Commission is a conduct or practice deemed to result in a substantial lessening of competition. Section 8 (i) i CPR which provides; deliberately reducing the margin of profit available to a competing Licensee that requires wholesale communications services from the Licensee in question, by increasing the prices for the wholesale communications services required by that competing Licensee, or decreasing the prices of communications services in retail markets where they compete, or both would also come into play where the resultant effect of price discrimination would injure competition in the long run by marginalizing new entrants and or by raising entry barriers.

The post-Chicagoan school of economic thought argues that such selective price discrimination offered to this category of subscriber would be anti-competitive by suppressing long-term efficient entry into the relevant market (Nicita, supra). In their view, market power translates to short-term competitive advantage by the incumbent, thus whenever a new entrant or an existing competitor cannot replicate the discount policies adopted by incumbent’s foreclosure tactics which raises the rivals cost up to the point of eliminating entry or reducing the incentive to compete effectively. Such anti-competitive conduct should immediately be sanctioned by antitrust authorities (‘Nicita, supra).

In Case C-62/86, AKZO Chemie BV v. Commission, [1991] E.C.R. I-3359, [1993] 5 C.M.L.R. 215, the European Commission’s decision was largely driven by the predatory nature of AKZO’s pricing strategy, it nevertheless concluded at paragraph 72 that:
Moreover, prices below average total costs, that is to say, fixed costs plus variable costs, but above average variable costs, must be regarded as abusive if they are determined as part of a plan for eliminating a competitor. Such prices can drive from the market undertakings which are perhaps as efficient as the dominant undertaking but which, because of their smaller financial resources, are incapable of withstanding the competition waged against them

Paragraph 27 of the MNP Business Rules & Port Order Processes prohibits win-back for a period of ninety days from the date the porting was completed, however the donor (former) service provider may contact a ported subscriber for (a) recovery of outstanding debts or (b) to discuss products/services other than the ported mobile telecommunications service. However, this win-back rule is still subject to abuse as a donor service provider may offer to discount the outstanding debt due or offer another service (say internet access) at a discount to the recently switched subscriber on the condition that s/he switch back to its network. In the case of (b), this is a very likely possibility, especially if the donor service provider possesses a significant market power in that market. In my view, such market share may be leveraged upon to foreclose competition in the market for mobile telecommunications service and will present another anti-competitive practice- tying/bundling; which is also capable of substantial lessening of competition.

Conclusion
As rapid technological changes continue to shape the Nigerian Telecommunications market, the behaviour of subscribers will continue to be impacted presenting new challenges to NCC. The main focus of this challenge will be to ensure that favourable market conditions exist which thrives on technological innovations, whilst still ensuring the promotion of consumer welfare. Win-back strategies are capable of substantially lessening the competition because, “it affects the extent to which dominant firms may defend themselves against competition rather than act to consolidate or even increase their dominance in the market” (Jones and Sufrin, 2001). Even though, NCC’s restriction to subscriber win-back by service providers is limited to only ninety days, it must take cue from antitrust authorities in North American and European countries, where win-back strategies have come under serious scrutiny. NCC should toe the post-Chicagoan path by recognizing that win-back strategies under certain conditions may have the effect of substantially lessening the competition.

MNP does actually stimulate competition. If implemented properly, MNP will engender competition and lead to a lowering of switching cost, resulting in added value to the existing services already been enjoyed by the Nigerian mobile telecommunications subscribers.