Fri | Jan 18, 2019

The benefits of recent interventions in Jamaica's telecoms sector

Published:Friday | October 10, 2014 | 12:00 AM
The Digicel headquarters serves as a backdrop for a work crew in August 2012. Digicel's acquisition of Claro Jamaica was seen as a tightening of the market. File

Sustainable economic growth has eluded Jamaica for the better part of the last 50 years.

While I make no claim to be clairvoyant, it seems reasonable to argue that Jamaica's prospect for growth over the next 50 years is inextricably linked to the performance of the telecommunications sector.

Currently, there is hardly any area in our commercial and personal space which is untouched by information technology.

Markets generate considerable benefits for consumers as they become organised competitively. These benefits include lower prices, greater product diversity, and greater rates of technological development, relative to markets which are not competitively organised.

Competition, therefore, offers the best opportunity for a market to 'grow' in the sense of becoming accessible to more consumers and offering greater product diversity.

Accordingly, the promotion and preservation of competition in the telecommunications sector is absolutely critical for Jamaica's growth prospects as growth in the sector is likely to translate to the greatest sustainable expansion of the wider economy.

The telecommunications sector has been rocked with two 'shocks' in recent years.

The first shock involved the merging of competing mobile operators. Specifically, in August 2011, Digicel Jamaica Limited acquired Oceanic Digital (Claro Jamaica).

All other things constant, the exit of a significant rival will adversely affect the performance of the market and result in reduced consumer welfare.

In December 2011, the Fair Trading Commission (FTC) sought to intervene by challenging the legitimacy of the transaction in the courts.

This intervention was timely and decisive as it sought to preserve the benefits competition between Digicel and Claro had been generating for mobile subscribers.

The FTC estimated that during the three-year period preceding this transaction, competition generated consumer benefits in excess of $4.182 billion annually in the form of increased promotions and value offers and reduced calling rates.

The second shock involved changes in the regulations governing mobile termination rate (MTR), which refers to the price one operator pays to complete - that is, terminate - calls on a mobile network belonging to another operator.

Termination service is a crucial input for the provision of voice services, especially for operators of smaller networks.

The Office of Utilities Regulation (OUR) reduced the MTR to $5 per minute in July 2012 and then to $1.10 per minute in July 2013.

All other things constant, lower MTRs will positively affect the market by increasing the opportunities and incentives for operators to lower prices. This is exactly how it played out in Jamaica (See 'The real laws of competition' in The Gleaner, June 25, 2013).

The public correctly anticipated that lower call rates would improve consumer welfare. What is uncertain to date, however, is the extent of such benefits.

One way of measuring the benefit is to compare consumer welfare when the MTR was lowered with the consumer welfare had the MTR not been lowered.

The FTC assessed the effect of the lower MTR using the quantity of talk time - that is, mobile call volume - as a measure of consumer welfare. The FTC concluded that up to March 2014, subscribers would have talked for approximately 10.021 billion minutes if the MTR was not reduced. The actual talk time recorded during the period when the MTR was reduced, however, amounted to as much as 11.302 billion minutes.

This means that the OUR's intervention benefited consumers by 1.281 billion minutes over a 21-month period.

To the extent that mobile call rates for standard calling plans ranges between $1.99 and $17.70 per minute, the market value of these benefits ranges between $2.549 billion and $22.674 billion.

Subscribers to mobile voice services are enjoying considerable benefits from the changes in the regulation governing mobile termination rates.

The OUR's decision to introduce a cost-based reciprocal mobile termination rate stimulated com-petition between telecoms operators in the form of significantly lower calling rates.

This resulted in subscribers accessing benefits valued between $2.5 billion and $22.7 billion and came as sweet relief to subscribers who were adversely affected by Claro's exit in 2011.

Dr Kevin Harriott is competition bureau chief at the Fair Trading