Make the telecoms market more competitive
Paul Golding, Guest Columnist
According to Wireless Intelligence figures, in El Salvador, the combination of the America Movil (Claro) and Digicel business will create a new market leader with 3.64 million subscribers, overtaking current No.1 Millicom, which has 2.73 million. In third place in the market is Telefonica's Movistar which has 1.45 million subscribers. In Honduras, America Movil will become a strengthened No. 2 with 2.62 million subscribers, second to Millicom's 4.45 million. The deal will have the greatest impact in the Jamaican market, where Digicel's subscriber base will move from 2.1 million to approximately 2.79 million, compared to LIME which has 757,000 subscribers.
The press release on the Claro-Digicel sale indicated that the sale is subject to the approval of regulators in each of the countries. In Jamaica, the bodies that would have regulatory oversight are the Fair Trading Commission (FTC) and the Office of Utilities Regulation (OUR). This announcement preceded the AT&T US$39b purchase of T-Mobile in the USA. The US deal requires approval from both the Justice Department and the Federal Communications Commission, and it is expected to face serious regulatory hurdles. Critics in Jamaica have lamented that no similar serious regulatory hurdles are expected from the OUR and the FTC.
As it relates to telecommunications, Section 4 of the Telecommunications Act 2000 stipulates that the OUR shall regulate telecommunications in accordance with the act and for the purpose of the office will, inter alia, (1) promote the interest of customers, while granting due regard for the interest of carriers and service providers; and (2) promote competition among carriers and service providers.
According to Section 5 of the Telcommunications Act 2000, issues of substantial competitive significance that falls within the functions of the FTC under the Fair Competition Act (FCA) shall be referred to the FTC.
Several newspaper articles and editorials have cautioned that the deal, if approved, will reduce competition, employment and innovation. A March 25, 2011 editorial in The Gleaner stated, "The FTC is expected to be vigilant in ensuring that there is no abuse of Digicel's dominant position and that there will be genuine competition." A similar but more conclusive view was expressed by the Organisation of Caribbean Utility Regulators: "We are concerned that the impending move by Digicel to take over Claro's operation in Jamaica will negatively affect competition and consumer choice in Jamaica's telecoms market. The deal means that there is a real prospect of market failure and the re-emergence of monopolies."
The FTC's ability to act is constrained by the current competition laws in Jamaica. Section 19 of the FCA states that: "For the purposes of this act, an enterprise holds a dominant position in a market if, by itself or together with an interconnected company, it occupies such a position of economic strength as it will enable it to operate in the market without effective constraints from its competitors or potential competitors." Section 20 then lists six activities that would constitute abuse of dominant position. This list does not include mergers, acquisitions and monopolies. To exacerbate the FTC's position, the level of fines established under Section 47 of the FCA is not a deterrent to monopoly or cartel activities. The maximum fine which can be imposed on an entity is J$5 million, or approximately US$59,000. One night of Digicel Rising Stars should be able to pay for this.
Switching cost and network effects bind customers to vendors if products or networks are incompatible, locking customers in to early choices. Lock-in hinders customers from changing suppliers and give vendors lucrative ex-post market power. Digicel is using network effects and switching to cost and exploiting its dominant position to charge higher for cross-network calls. LIME and Claro each charges $12 for cross-network calls, while Digicel charges range between $15.80 and $17.70 for cross-network calls. Because customers are locked in, they don't switch from Digicel; instead, they purchase multiple phones, one for each network.
digicel lost the fight
In the summer of 2010, Digicel lost a long-running legal fight over the regulatory control of interconnection/termination rates between mobile network operators. The company had tried to argue that the OUR lacked the authority to regulate the termination rates, but lost an earlier case with the Jamaican Court of Appeal.
The portfolio minister responsible for telecommunications in Jamaica is the prime minister (PM) and, therefore, he will make the final decision on the deal. While this point may have no bearing on the decision, it is worth noting the Digicel US$65-million new headquarters is located in the PM's constituency.
The PM's main issue is how to continue to make the telecommunications sector competitive and, at the same time, encourage investment by current players, while making the industry attractive for new investors. In the short run, the PM must allow the OUR to regulate termination rates. Regulators in the United Kingdom, Germany, New Zealand and Israel intend to or have started to cut termination rates in their respective telecommunications industries to increase competition.
Increased competition can also be achieved by requiring tower sharing: this has been used in India and other countries to increase competition reduce cost and improve universal access. Claro's current spectrum should be reallocated to a new entrant at a competitive rate along with the infrastructure. In the medium term, there should be serious movements towards mobile number portability, along with changes to the FCA.
Dr Paul Golding is senior lecturer in the School of Computing and Information Technology, University of Technology, Jamaica. Email feedback to firstname.lastname@example.org.