Sinclair demands regulatory protection in high stakes telecoms market
Published:Friday | February 10, 2012 | 12:00 AM
Lavern Clarke, Business Editor
As an investment banker his tone was fairly modulated. But inside Jamaica's take-no-prisoners telecoms market, Garfield 'Garry' Sinclair is confrontational, direct and stoked for a fight.
In the telecoms game where size is king, Sinclair is demanding regulatory protection for LIME.
He's already laid down a gauntlet.
Maybe, just maybe, he said, LIME is not willing to continue investing big in a market where the system now appears stacked against the company and other players who are not Digicel.
"Shareholders should not be asked to pump money into a sinkhole," Sinclair said Monday in an interview with the Financial Gleaner.
He got tapped for the job as managing director of LIME Jamaica in 2010, just around the time that parent Cable and Wireless International had given up on "parachuting in" talent from overseas to turn around its 140-year-old subsidiary.
Sinclair was entering a company where his friend Chris Dehring was already ensconced in a senior position. But he said he was recruited for the job, not by Dehring, but by LIME's regional head of human resources Henry Reid.
"That's a myth," he said of Dehring's involvement in his hiring.
Dehring, who is LIME Jamaica's chairman and chief marketer for the regional outfit, was brought in at the tail end of the recruiting process, he said.
At first blush, Sinclair seems an odd fit for a telecoms firm. Investment banking is generally conservative and low-key; the telecoms market is high energy, constantly evolving and often unpredictable.
Sinclair's known business associations and dealings after Dehring, Bunting & Golding were also in the financial sector - as chairman of Jamaica's first REIT, Kingston Properties Limited, and as co-owner of the two-year-old Proven Management Limited.
But the banker turned telecoms warrior appears to have found grounding in familiar aspects of the two fields. Both, he says, are highly regulated, dominated by a few strong players, are highly competitive and sell a commoditised product.
Sinclair was initially brought into LIME at a lower level on a programme to learn the business before assuming the managing directorship six months later on October 1, 2010.
No time to shadow
He was initially made the head of customer segments and put in charge of a retail sales force. Busy with that unit, and travel, he had no time to shadow Geoff Houston who he was brought in to replace.
"I was thrown in, by and large, at the deep end," Sinclair told the Financial Gleaner.
"The transition was challenging and exhilarating," he said. "The learning curve has been steep. This is anything but a simple business."
Indeed, while the name of the latest technology may not always roll glibly off his tongue, Sinclair appears to have taken on the persona of the aggressive telecoms boss, alternating between attack mode and a passionate defence of the company he now leads.
In a sign of just how much liberalisation has changed the telecoms game one decade in, Sinclair is today demanding regulatory protection for LIME as it seeks breathing room to fortify its share of the mobile market.
"We have in place a regulatory environment that is oppressive," he said, adding that after a dozen years of liberalisation it was time to reform the law.
"We are clearly the smaller player," he said.
A decade ago, just before Digicel was founded, it was Jamaicans pleading to be rescued from monopoly Cable & Wireless Jamaica, now reborn as LIME.
On Monday, Sinclair reached back in time to frame LIME as a company that had delivered value to Jamaica as philanthropist, sponsor of scholarships, as investor, and as the company that gave Jamaica the backbone on which it has built a modern telecoms system.
Asked whether he was not romanticising a past monopoly, Sinclair dismissed the suggestion and doubled down on his take of the company, saying that while Cable & Wireless had made commercial mistakes, its contribution to jobs - about 4,000 at liberalisation; down to about 1,200 today - charity, and the skills pool and technological input were undeniable.
"Those are facts," he said. "The idea that those sole provider days are dark days, is just ludicrous."
Today, the company has 380,000 mobile customers compared to Digicel's two million, Sinclair said, but that when its fixed line business is factored, LIME's voice customer base likely climbs to about 700,000.
Mobile delivers 17-19 per cent of gross margins; broadband about 15-18 per cent and the fixed line business remains dominant at around 51 per cent.
He said it is a fallacy to say that LIME lost mobile business after Digicel made its market entry in 2002.
Pre-liberalisation, LIME had 117,000 to 120,000 mobile clients, he said, which is about a third of its current numbers of 290,000 active customers and a base of 380,000.
What Digicel did—and deserves high commendation for, he said—was create a new market segment for prepaid services that has now become the main driver of mobile business.
But Sinclair also says LIME is finding it difficult to hang onto its market share, which he links to the pricing policy of the dominating Digicel and "prohibitively expensive" cross-network talk.
Last year, Sinclair said LIME ended up paying J$1.48 billion in fixed-to-mobile termination charges to Digicel, but collected just J$80 million in similar fees from its home-based but Irish-owned rival - a net advantage of J$1.39b to Digicel.
"They earn more from our fixed line business than we do. It costs us 7 US cents to terminate on their network," said Sinclair. "It costs 1 US cent for Digicel to terminate on ours."
What the figures demonstrate, he said, is that Digicel has a lock on the market that only regulatory reform of inter-connection fees can solve because the size of their customer base puts them in a place "where they are unassailable."
The two firms are fighting several legal battles in court amid their market manoeuvrings. In its most recent legal challenge, LIME is contesting the sale of Claro Jamaica to Digicel as anti-competition; while making a pitch at the same time for former Claro clients to join its network.
Such overt play for business used to be associated only with Digicel. But it fits with Sinclair's mandate from his UK bosses "to lead Jamaica and Cayman business into a new phase of aggressive growth."
LIME is for number portability, which will reduce switching costs for persons changing networks; but is pushing even more aggressively for quick passage of the revised Telecommunications Act that gives the responsible minister greater power to set inter-connection rates.
The new telecoms minister Phillip Paulwell has said that he is wary of the proposal because it inserts him into what is essentially a commercial issue to be negotiated by companies.
Sinclair, however, says the minister can just as easily assign the function of setting interim rates to an objective arbiter - the regulator of the sector - and need not insert himself in the process.
"Termination rates are patently unfair and need to be regularised," he said. "It will allow us to keep the customers we get."
Essentially, LIME is lobbying for on-net rates to be more closely aligned to termination rates, to allow companies with smaller markets to compete more effectively for customers.
The current gap in the rates allows Digicel to "ring-fence" its subscribers because it's so expensive for them to call outside the network, Sinclair said.
Mobile-to-mobile rates are currently at about J$9, he said, and the cross-network termination rate is about J$17.
Digicel on January 4-12 reduced its cross-network peak rates by J$3.50 per minute J$2 per minute for off peak rates.
The Office of Utilities Regulation is said to have placed a reduced J$5 interim mobile rate on the table for consideration.
LIME said it is lobbying for a sliding scale of J$1 to J$5 for mobile to mobile; and wants cross-network rate to be set at no more than 30 per cent above the mobile termination rate, which would effectively reduce cross-net charges to J$6.50 per call.
"If we get the rates touted by the regulator, we would be a significant way to profitability," Sinclair said.
In the past four years, LIME has poured capital of US$200 million - approximately J$17b - into its operations, but is unlikely to continue investing at the same pace if the Government does not act decisively to reform the sector, Sinclair declared.
He said, however, that this year's capex programme has not yet been affected. The company's last published cash flow statement bears this out, reflecting investments of J$1.76 billion at half-year September 2011 (HY 2010: J$1.71b).
LIME Jamaica has been losing money for the past four to five years amid declining annual revenues last reported at J$20 billion, and climbing outpayments totalling more than J$6 billion.
Broadband is currently the most efficient, and profitable, segment, said Sinclair; fixed line and mobile are struggling.
The losses have been mounting on LIME's balance sheet, and the estimated J$16 billion of accumulated deficits at September 2011 has served to erase most of the company's book value.
LIME, which three years sported equity of J$15 billion, now has a net worth of about J$3 billion.
Perhaps to demonstrate that value continues to reside in the company despite the bleed, LIME now reports its earnings before interest taxes depreciation and amortisation - or EBITDA - which is a key industry metric for determining the health of the operation of telecoms companies.
On this front, LIME is in surplus.
Its challenges essentially lie in multibillion write-offs of outdated equipment, as well as debt financing for J$22b of loans from UK parent Cable & Wireless.
The company's greatest area of weakness Sinclair said is "ironically in the area with the most value - the prepaid mobile market."
It's not that LIME has been unable to secure customers, he said, it just has not been able to keep them because of the cross-network charges for calls to Digicel's network.
"The regulatory environment limits your ability to compete; it doesn't limit your ability to get customers," he said. "You need traffic from the other network to survive."
The current system is "starving competition to the point where, as you can see with Claro, nobody can survive, particularly when you have a disparity in size."
He sarcastically dismissed the critics who say LIME had not been edgy enough in its marketing, saying America Movil-owned Claro's heavy promotions did not stop it from faltering.
"Why does the best mobile operator in the region come to Jamaica and could not survive?" he demanded. "It was not about market savvy; you can't say that about Carlos Slim, the richest or second-richest man in the world, yet he could not survive. It says something about the dominant player ring-fencing the competition."