Telecommunications is one of South Africa’s fastest growing sectors and is one of the most advanced networks in Africa. The market is divided into three primary sectors; fixed lines, mobile networks and broadband. The structure of the industry will be described in an attempt to illustrate core economic principles, primarily related to market structures.
Some people may argue that the fixed line market is an oligopoly, since the entrance of Neotel in 2006. However, in 2012, Neotel only held 6% of the market while the other 94% held by Telkom (Mawson 2012). Telkom’s dominant market share indicates that the market is still operating as a near monopoly; it cannot be a pure monopoly due to the fact that there is another competitor that is a close substitute and it does not function effectively as a duopoly due to Telkom’s dominance. Furthermore, one may consider it a regulated monopoly due the role ICASA plays as the regulator.
Despite the new competitor and the fact that Telkom was losing customers due to mobile industry growth, Telkom used its monopoly to the best of its advantage: since 2000, its operating profit margin increased from R1.54 billion to just over R9 billion in 2007. In order to achieve such profit margins, the costs clearly must be high which was the case as South Africa is currently one of the highest in the world and studies have indicated Telkom's pricing as disproportionate (Ponelis & Britz 2008). Telkom had 4.8-million fixed-line subscribers in 2003 and only 3.9-million by 2012. In 2003, its network carried nearly 33-million minutes of telephone calls. By 2012, it struggled to carry 19-million minutes. Furthermore, fixed lines only accounted for 40% of their market share. Despite this, the declining market did not impact their profits (again proving its monopoly power); they earned R7.3-billion from its fixed-line business in 2012 compared with R4.3-billion in 2003 (Fairweather 2013).
Telkom & Neotel practice price discrimination. As one can see in Figure 1, the firms charge higher prices during peak times which is a form of second degree discrimination. It can also be seen that it is cheaper to make a call from Neotel to Telkom during peak times then it is to make a Telkom on-net call.
Figure 1: Price comparison (Vermeulen 2012)
From the figure, one can see the tariff differences. Local on-net Neotel calls cost 17c/minute and national on-net calls are 57c. Neotel’s rates for calling the mobile operators are R1.05/minute at peak times (Telkom is R1.35) and 93c off-peak, where Telkom is R1.08 (Vermeulen, 2012). Furthermore, Neotel offers per-second billing without a minimum charge.
In more recent years Telkom’s revenue has been affected by competition, pricing pressure as well as regulation, said group Chief executive officer, Nombulelo Moholi (Telkom outlines transformation plan 2011). Telkom had no competitors until Neotel entered and thus, the nature of the market has changed. Previously, Telkom was the price maker in...