Tuesday, May 8, 2012

Tying: Are Mobile Network Operators really committing a competition offence?

Tying (or bundling) of telecommunications services is a feature desired by many telecommunications users. In Nigeria for instance, a telecommunications user may decide to purchase a black berry device bundled with a SIM card for mobile telecommunications service and data plan even though these services are distinct products. A typical tying arrangement occurs where a service provider sells one product or service over which it has market power (the “tying product”) on the condition that the purchaser purchase a second product or service (the “tied product”). A tying arrangement is expressly prohibited under the Nigerian Communications Act 2003 (NCA).

In this article, I examine whether particular practices of mobile network operators (MNOs) constitutes tying arrangement under the NCA.


Tying arrangement allows a service provider with market power in the tying product to obtain a competitive advantage in the market for the tied product. Tying will usually work where the demand for the two products (or services) are complimentary, such that end-users use them together (as in the example above) and not where the demands of the two products are independent such that the end user is unlikely to consume them together. Traditional tying arrangements require; (a) two separate product/service markets (See Eastman Kodak Co. v. Image Technical Services, 504 U.S. 451 (1992)); (b) the defendant’s sufficient market power over the tying product; (c) unlawful forcing; and (d) a not insubstantial amount of commerce in the tied product affected by the tie.

In vertically integrated markets such as the Nigerian Telecommunications market, tying can reduce competitors’ sales by capturing customers who would otherwise have purchased product A rather than products A and B together, thereby reducing the portion of the market for the tied product the service provider must compete for. If there are fixed costs in the production of the tied product, then the service provider may be able to reduce its competitors’ sales to the point where remaining in the market (or entering the market) is no longer viable. If the service provider succeeds in this form of elimination then it is said to have successfully “leveraged” its dominant position in the market for the tying product into the market for the tied product.

Tying in Nigeria’s Telecommunications market
Several MNOs operating in Nigeria are involved in one form of tying arrangement or another. For example, several MNOs tie the sale of tablet computers to core telecommunications services, one in particular ties its telecommunications service to an android running handset (named after a weird dressing American pop star) locked to its mobile network. In the case of another which ties the Huawei S7 tablet to its telecommunications services, its website says that the offer is open to only users purchasing SIM card or already having SIM card for use on its network. This implies that users will be locked-in the telecommunications service of this particular MNO for as long as they use its SIM card to make calls with the device.

Applicable legal standard for tying in Nigeria’s telecommunications market
Tying is expressly prohibited under § 91 (4) of the NCA. As a general rule this section provides that:
A licensee shall not, at any time or in any circumstance, make it a condition for the provision or supply of a product or service in a communications market that the person acquiring such product or service in the communications market is also required or not to acquire any other product or service either from itself or from another person.
A licensee as defined under § 157 of the NCA means a person who either holds an individual licence or undertakes activities which are subject to a class licence granted under this Act. No doubt MNOs hold individual licenses.

Section 12 (2) of the Competitions Practice Regulations 2007 (CPR) further provides that all tying arrangements are prohibited without the requirement of assessing their practical effects. Pursuant to this provision, all tying arrangements are outrightly illegal and should be condemned without elaborate investigation into its anti-competitive effect. This is a departure from traditional analysis of competition offences which requires the determination of the relevant market and the assessment of the competitive (or efficiency) effect of the offending practice consistent with sections 6 and 15 of the CPR where; (a) the definition of the relevant market or markets in accordance with the methodology under Part IV (of the CPR); (b) impact of the conduct on existing competitors in the identified markets; (c) impact of the conduct on market entry; (d) impact of the conduct on consumers; and (e) degree of interference with competition that injures competitors or consumers are taken into consideration.

As Part IV of the CPR mentions only § 92 (1), (2) and (3) of the NCA (in the same way § 12 (2) of the CPR mentions only § 91 (3) and (4) of the NCA), it is assumed that Part IV contemplates its application to only these provisions (as would § 12 (2) of the CPR). This interpretation is consistent with the Expressio unius est exclusio alterius (the express mention of one thing excludes all others) rule of statutory interpretation.

It is worth mentioning that the standard applied under § 12 (2) is similar to the per se standard applied in competition cases in the United States (US). Under the per se standard, certain arrangements are prohibited outright, such that no evidence of actual anti-competitive effects is required for the finding of illegality. The US Supreme Court in determining whether the appellant’s tying practice constituted unreasonable restraint of trade in Northern Pacific R. Co. v. United States-356 US (1958) held that “there are certain agreements or practices which, because of their pernicious effect on competition and lack of any redeeming virtue, are conclusively presumed to be unreasonable, and therefore illegal, without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.” The per se rule applies to an arrangement or practice that “facially appears to be one that would always or almost always tend to restrict competition and decrease output, and in what portion of the market, or instead one designed to increase economic efficiency and render markets more, rather than less, competitive.” (See Broadcast Music, Inc. v. CBS, Inc, 441 U.S 1, 19-20 (1979)).

Tying arrangements are analysed under the per se standard in U.S. The per se standard is appropriate only if courts, having had sufficient experience with a practice, can determine with confidence that the practice is anticompetitive in almost all circumstances when applying the rule of reason. (See Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 127 S. Ct. 2705, 2713 (2007)).

It is also worth mentioning that it is unknown whether the Nigerian Communications Commission (NCC) has authorized MNOs to engage in these tying practices in accordance § 93 (1) of the NCA which provides:
(1) A licensee may apply to the Commission prior to engaging into any conduct which may be construed to have the purpose or effect of substantially lessening competition in any aspect of the Nigerian communications industry, for authorisation for the conduct.
Even if NCC authorised the tying practices of MNOs, such authorisation must be in the national interest (See § 93 (2) of the NCA). In my view, for a tying arrangement to meet the threshold of national interest, it must also be pro-competitive.

Conclusion
However I also note that traditional cases of tying from the U.S seems to indicate that a tying arrangement will usually be condemned under the per se standard if the plaintiff can show both market power in the tying product and a “not insubstantial” amount of commerce affected in the tied product market (See Times-Picayune Pub. Co. v. United States, 345 U.S. 594, 73 S.Ct. 872 (1953)), but this does not seem to be the case in Nigeria’s telecommunications market where the relevant statutes does not require the consideration of elaborate arguments favouring pro-competitiveness and expressly condemns this practice without taking these arguments into account.

Tying is as anti-competitive as it is pro-competitive. Tying can harm consumers in circumstances where a service provider with monopoly power in one market acquires another monopoly power in a secondary market or continues to perpetuate its monopoly in the market for the tying product; and is pro-competitive especially in cases where technological tying results in innovations, even if the innovative products makes the complementary products of competitors incompatible.

As case law in this area of practice is still developing in Nigeria, it would be interesting to see how this debate finally concludes.