Fibre boss warns Vodacom control over DFA would break South Africa’s fibre industry

Frogfoot founder and former CEO Abraham van der Merwe has told the Competition Tribunal that he is deeply concerned about what will happen if Vodacom buys a stake in Maziv.

Maziv is a Remgro-owned Community Investment Ventures Holdings (CIVH) subsidiary, which owns Vumatel and Dark Fibre Africa (DFA).

A transaction that would see Vodacom take a 30% to 40% stake in the business is before the Competition Tribunal.

Testifying in the hearings, Van der Merwe explained that South Africa’s telecommunications industry has come to rely heavily on DFA.

He said DFA became the dominant provider of fibre infrastructure in South Africa through its promise of neutrality and open access.

It was also able to offer a much lower price by allowing multiple operators to share infrastructure instead of everyone deploying their own.

“DFA exists today because there was a massive opportunity to connect the base stations of the mobile operators. The largest one of those is Vodacom,” said Van der Merwe.

“Nobody would replicate DFA’s network and compete against it because this business case no longer exists.”

He likened DFA’s dark fibre services to building blocks, which other network operators use to build their infrastructure.

By offering its services on neutral terms, DFA became the dominant supplier of these network building blocks in South Africa.

Van der Merwe said one of their worries was that DFA has increasingly been launching services that compete against their own customers.

This raises concerns that DFA could supply “lit fibre” end-user services cheaper than it wholesales the building blocks to others.

One of the largest counterweights to this dominance is Vodacom, Van der Merwe said. If Vodacom were to acquire a stake in Maziv, a major threat that helps keep DFA in line would disappear.

Van der Merwe said Vodacom is DFA’s largest customer by far and has the means to launch a competitive threat should DFA hike prices unreasonably high.

He explained that Vodacom could duplicate DFA’s fibre-to-the-tower network or contract a player like Frogfoot to “overbuild” them if needed.

Therefore, DFA’s dominance is kept in check not due to direct competition but through the threat of disrupting its business model.

Under cross-examination, Van der Merwe conceded that Vodacom and Maziv’s proposed deal conditions stipulate that DFA must offer all customers the same prices.

Therefore, if Vodacom received a better deal from DFA or significantly hiked prices, everyone should be equally affected.

However, Van der Merwe contended that the ability to disrupt MTN’s business model by having DFA substantially hike prices could be worth more to Vodacom than the short-term impact on its profits.

He also remained concerned that Vodacom would change from being a regulating force on DFA to being invested in its financial success.

Van der Merwe said the incentive for Vodacom, Vumatel, and DFA to give each other preferential treatment is simply too great and difficult to monitor.

As an example, he pointed to Herotel, a network operator that Vumatel owns a stake in and is trying to acquire fully.

Herotel offers fixed wireless and fibre services. However, its fibre network is closed access, with Herotel acting as fibre network operator and Internet service provider.

“The merger of Herotel has not even been completed, and we already have a case where DFA is bundling a wireless link from Herotel into their managed services offerings,” he said.

Van der Merwe explained that the bundle involves providing DFA customers with a Herotel or Comsol fixed wireless access link while they wait for their fibre to be installed. Which wireless provider customers get depends on their coverage.

Crucially, DFA has not made the bundle available for wholesale. The only way to get it is to sign up directly with them.

“That’s the type of behaviour that’s really concerning for us,” Van der Merwe said.

He also highlighted that under the conditions Vodacom and Maziv have proposed for the deal, Herotel would be excluded from any restrictions.

“It is conceivable that should that merger be approved, Maziv will essentially own a closed network operator that provides the full vertically integrated stack and does not provide wholesale services.”

Maziv declined to comment on Van der Merwe’s statements, saying they preferred not to respond while the Tribunal’s hearings are ongoing.