Paul Golding, Guest Columnist
The Government of Jamaica on Thursday, January 15, 2015 unsurprisingly approved the US$3-billion acquisition of Columbus International by Cable & Wireless Communications PLC (CWC). On Thursday, November 6, 2014, CWC had announced that it had purchased 100 per cent of the equity of Columbus Communications, the parent company of Flow Jamaica. This purchase and regulatory approval signalled another significant shift in one of the most dynamic industries in the world with implications for all aspects of the Jamaican market, including competitiveness, structure, regulation and the consumer.
The recent history of the Jamaican telecommunications sector can be characterised by three significant milestones. The first is the liberalisation of the sector, which started in late 1999 to early 2000, with the granting of two new carrier licences for the provision of domestic mobile voice, data and information services, awarded on the basis of auctions. This brought Digicel into the market and broke the monopoly of Cable and Wireless Jamaica (C&WJ) - now LIME. Full liberalisation was completed on March 1, 2003, making Jamaica the first English-speaking Caribbean island to liberalise telecommunications.
A second milestone was Claro's 2007 entry into the Jamaican marketplace, which many observers speculated was in response to Digicel's entry into El Salvador and Honduras.
The third significant milestone was the 2011 swap deal between Digicel and Claro that reverberated throughout the Caribbean and Latin America and had analysts proclaiming the advent of a new monopoly.
During this period, the telecommunications and cable TV sector generally evolved independently, but with one common characteristic: They each tended towards a monopoly or at least monopolistic competition. This CWC acquisition of Columbus International has signalled the convergence of the two sectors of the market in the Caribbean. This is the fourth significant development in the history of the sector.
From a strategic-management perspective, this is an excellent deal for CWC and, by extension, LIME and also for Columbus International. LIME has struggled in the deregulated environment and, despite its name change, has found it difficult to distance itself from its monopolistic past - a time when many Jamaicans saw it as arrogant and unresponsive to customer needs. It has floundered in the lucrative mobile segment and has had to resort to profit-crippling price wars to gain modest market share. This acquisition will provide a shot in the arm for LIME as it will acquire connectivity to 42 countries in the region via its submarine cable, IT services, corporate data solutions and data centre services throughout the region. In addition, LIME will be able to offer a full range of TV, mobile, phone and broadband (quad-play) services to customers.
Columbus International, on the other hand, needed an injection of cash for the company to grow and survive. In the year ended December 31, 2013, it generated revenue of US$505m, however, its net debt assumed by CWC in the current deal was US$1.2b. This would suggest that Columbus International, a privately held company, needed to go public in order to raise funds or be acquired.
If information in the media and other sources is to be believed, Digicel was in negotiations with Columbus International, but the latter did not blink and Digicel lost the deal to CWC. Hence, any objection by Digicel is merely sour grapes.
Beyond the Caribbean, this type of consolidation in the telecommunications market is not unusual. According to Capgemini, a consulting technology firm, as at July 2014, as many as 79 deals with a total value of US$230 billion were already announced. The company strongly believes that the total number of deals and the total deal value will have doubled by the end of 2014. Capgemini indicates that mobile operators in Europe are looking to augment their service offerings by acquiring fixed-line or cable operators that would enable them to offer quad-play services.
There is an increasing uptake of quad-play services in Europe, which would enable the operators to lower the churn, thereby reducing customer-acquisition costs in a saturated mobile market. As a result, the European telecoms market is witnessing greater consolidation between mobile and fixed/cable operators.
Among the main drivers of this worldwide wave of consolidation in the telecommunications sector is the increased competition from Internet-based services, particularly over-the-top (OTT) applications. These OTT services have mushroomed with the speed and availability of broadband networks, the capability and affordability of wireless devices such as smartphones and tablets, and the continued dominance of social media.
The rise in OTT services has triggered a decline in revenue for telecoms' core business of voice and messaging services. During last summer, both Digicel and LIME temporarily blocked access to several OTT services. The Caribbean telecommunications ministers also discussed this issue in an effort to arrive at a feasible response, but no apparent consensus was reached. CWC (LIME) acquisition of Columbus International and Digicel acquisition of Telstar, SportsMax, and Caribbean Fibre Holdings, a submarine fibre network, are strategic responses to new market conditions.
AWAITING OTHER APPROVALS
The CWC deal is still subject to regulatory approval in a number of countries, including Barbados, Trinidad and Grenada. When the deal was announced in November, sources indicated that the regulators were informed via the public media. This level of hubris suggests that CWC did not expect any of the regional regulators to deny approval, and none is expected.
In Jamaica's situation, the minister of science, technology, energy and mining (MSTEM) had no regulatory basis to block the deal. The Fair Trading Commission is constrained by the Fair Trading Act (FCA) of 1993, which is silent on mergers, acquisition, and monopolies. The other regulatory body, the Office of Utilities Regulation (OUR), has no jurisdiction on this matter from a competition perspective. Even if the FTC and the OUR could block this deal, it would be counterproductive based on the realities of the marketplace - changing technologies, convergence, OTT and the emergence of applications ecosystem.
Another policy issue that should be discussed in this context is number portability. In June 2014, MSTEM delayed the introduction of number portability for 12 months. LIME was ready for mobile portability but not fixed-line number portability. Both FLOW and Digicel argued for full number portability, with FLOW as the chief protagonist. If this was not realised, it was considered that the regulators would be conducting asymmetric and, therefore, unfair regulation. With LIME's parent company now the owner of Flow's parent company, the imperative for fixed-line portability evaporates. Based on the new market realities, my view is that the need for number portability has become irrelevant.
Regulators will have to determine the number of telecommunications operators their market can profitably support as scale will be an important, if not the fundamental factor in determining profitability. Small markets like Barbados will only be able to support one operator, while Jamaica, at best, will only optimally support two.
The challenge for the regulator in the region will be to ensure competitive prices, protect the consumer from unfair bundling, ensure minimum quality of service in a market with a single operator or a dominant operator. In 14 years, the Jamaican market has seemingly taken a boomerang: monopoly - liberalisation - monopoly. The more things change.