The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas Telecommunications Company (BTC) was yesterday fined $243,442 after regulators determined its ‘exclusive’ phone card supply agreements broke the law, excluding rivals from up to 60 per cent of the market.

The Utilities Regulation and Competition Authority (URCA), in siding with the complaint filed by Cable Bahamas’ subsidiary Systems Resource Group (SRG), found that “the material harm and financial loss to competition..... would potentially be significant” if BTC’s behaviour was “not deterred”.

Cable Bahamas’ initial April 2, 2012, complaint, which has taken more than two-and-a-quarter years for URCA to resolve, alleged that BTC had breached the competition safeguards in the Communications Act and abused its dominant market position.

The complaint focused on the ‘two-stage’ long distance calling card market, and Cable Bahamas/SRG’s efforts to break into the market by having wholesale distributors supply its ‘IndiGo’ cards to retail vendors.

Cable Bahamas alleged that when it approached the wholesalers, they replied they were unable to sell the SRG cards because they had signed exclusive distribution agreements with BTC. These prevented them from selling a competitor’s phone cards.

This has now been deemed anti-competitive conduct by URCA, which has ordered BTC to immediately amend the ‘Master Distributors Agreements’ with its wholesalers and eliminate the offending exclusivity provisions.

This has to be done within 14 days from the July 29 ruling, with URCA noting that BTC’s anti-competitive behaviour has continued to this date unchecked, given that the wholesale contracts are for three years.

The $243,442 fine is effectively a ‘slap on the wrist’ and of no consequence for BTC, given that it enjoyed more than $338 million in revenues in its 2013 financial year, and $128 million in operating profit in the 12 months to end-March 2014.

More significant will be the wider ramifications of the URCA ruling, and whether it will deter future anti-competitive behaviour by BTC, Cable Bahamas or any other carrier with Significant Market Power (SMP).

It remains to be seen if the URCA decision establishes a precedent, and if BTC decides to appeal. Of note, though, is that the anti-competitive behaviour complained of started in March 2012, when Cable & Wireless Communications (CWC) was the majority shareholder - not the Government.

Apart from Cable Bahamas/SRG, the main losers from BTC’s anti-competitive behaviour were Bahamian consumers, who were denied choice and may have had to pay higher-than-necessary prices for poor service.

Still, BTC’s actions are consistent with what incumbent carriers and former monopolies do, as they bid to cling on to market share and business in liberalising markets that are subject to competition.

Cable Bahamas yesterday declined to comment on the URCA ruling, saying it was still studying the verdict and analysing the implications.

Yet a source close to the BISX-listed carrier acknowledged the harm done by BTC’s actions, arguing it had blocked its rival from entering the ‘two-stage’ long distance calling card market for more than two years.

“It was tremendously impactful on that business segment. It blocked Cable from being in that business in any significant way,” the source said.

“There is no question that the impact that has had on that particular sector has been huge. Every time Cable tried to sell a card, they couldn’t. They [BTC] tried to force everybody out of the market.”

The ‘two-stage’ long distance calling cards are pre-paid by consumers, who dial a local number and then a code, before dialling the long distance number they wish to call.

“BTC has agreements with 20 master distributors. The agreements prohibit these distributors from selling pre-paid airtime for another carrier that originates in the Bahamas,” URCA said, getting to the core of the problem. “The Master Distributor agreement has minimum volume requirements.”

Analysing the ‘two-stage’ long distance calling card market, URCA said this generated $2.38 million in revenues in 2011. Of this sum, BTC held a $2.01 million or 84 per cent share, Cable/SRG having just 16 per cent.

The market shrank to $2.065 million in 2012, with BTC’s share dropping by 20 percentage points to 64 per cent, and Cable/SRG’s growing to 36 per cent.

That year, though, was when BTC’s exclusive wholesale arrangements started, and the URCA data appears to show they resulted in the carrier’s share of a declining market rising to 75 per cent. Cable/SRG’s share dropped back to 25 per cent

A similar picture was down by the ‘two-stage’ long distance calling card market’s minute volumes for those three years. BTC’s market share, while dropping from 88 per cent in 2011 to 64 per cent in 2012, rose again to 78 per cent in 2013.

And Cable/SRG’s share, as measured by minute volume, rose from 12 per cent to 36 per cent, before dropping to 22 per cent in 2013 - after the exclusive arrangements were entered into.

“It has a market share of 64-88 per cent measured by volume of minutes, and 66-84 per cent measured by gross revenues over the period 2011-2013,” URCA said of BTC.

URCA said BTC’s market share gave it clear dominance, and as the incumbent provider with a vertically integrated structure, the regulator found it presented major barriers to market entry for rivals.

BTC attempted to argue that its wholesalers had ‘buyer power’, but URCA dismissed this, noting that the carrier had “steadily reduced the commission” it paid them since 2011.

And the fact that BTC generated between 25 per cent to one-third of its pre-paid calling card revenues itself or via its franchisee stores also limited the negotiating/buying power of its card wholesalers.

“URCA estimates that the agreements that BTC has with its Master Distributors could account for between 45 per cent and 60 per cent of total market revenues,” the regulator said.

“A further 18-24 per cent of total market revenues are supplied direct by BTC (including vis its franchisees).”

URCA said BTC’s market share meant it was likely “an unavoidable trading partner”, and there was evidence it had sought to enforce the exclusivity clauses in its agreements with wholesalers .

BTC also argued that its wholesale contracts affected only 2,000 of 7,000-8,000 ‘points of presence’ where Bahamians could access the cards, but URCA said a wholesale network - which Cable/SRG had been excluded from - was necessary for successful distribution.

“URCA concludes that the exclusive contracts that BTC has with its Master Distributors are likely to have an appreciable effect on trade in the calling card market in the Bahamas by distorting, restricting or preventing inter-brand competition in the upstream market for the supply of calling cards, and the related retail market for the supply of ‘two-stage’ long distance calling dialling services,” the regulator said.

In calculating the fine, URCA said the maximum it could impose was $33.829 million or 10 per cent of BTC’s 2013 financial year turnover.

It added, though, that this would be “disproportionate”, and said 10 per cent of BTC’s $2.117 million international calling card revenue for that year was a better starting point. This came to $211,694, and was topped up by 10 per cent or $21,166 to reflect the seriousness of the offence and the fact it had continued unabated since the 2012 complaint was filed.