Takeover concerns not so phoney

Philip Hamilton, Contributor

I felt it important to comment on an article titled 'Phoney concerns', appearing in your paper on Sunday, March 27. The article essentially said that persons fearful of the proposed Digicel-Claro merger only felt that way because they did not really understand "the nature and structure of industries". I think the exact opposite is true; the concerns are valid.

While Dr Densil Williams made a few points in support of his premise, I beg to differ with those as well. While the removal of the licensing barrier to entry was extremely important and changed the fundamental structure of the industry, not only was that 10 years ago, but it is certainly not the only important barrier to entry. If the other four elements of competition listed by Dr Williams were to be given even cursory scrutiny in the Jamaican context, it would be demonstrated that the mobile market is no longer the "wide-open" competitive space he says it is.

Change in market dynamics

Dr Williams ignores the fact that 'deep-pocket' investors have tried to break the stranglehold Digicel has had on the market for some years. These, ironically, include Claro, which Digicel is now seeking to swallow. While LIME and Claro appear to have tried different innovative value packages over the years, Digicel has not reduced its retail rates since 2003. It has not had to - this is textbook dominance/significant market power - the ability to price without constraints. The addition of another nine or 10 percentage-point market share may not change the dynamics for Digicel (in this Dr Williams is 100 per cent correct) but it will certainly change the dynamics of the market for existing or potential competitors.

Dr Williams is right that Digicel already has a quasi-monopoly. But he is not right when he says that an increase in Digicel's customer base that would give it closer to 90 per cent of market share would not be significant. First of all, given that across the world companies are presumed dominant with 50 per cent market share, it is difficult to understand how Dr Williams can argue that if Digicel obtains a 90 per cent share, the market will somehow magically become "hypercompetitive".

It is also important to note that it is not Digicel's market share in and of itself which makes persons concerned about the merger, but the fact that those persons understand that when an 80 per cent market share is put in the context of an outdated regulatory framework which allows Digicel to control the prices LIME charges its fixed-line consumers to call Digicel customers (which they keep high), it can only be cause for concern. In addition, Digicel has also already ring-fenced customers on its network by charging excessively high rates to call any other network, making it almost impossible (even with the level of subsidies affordable only by a company with deep 'slim' pockets) to win customers from its network. These are anti-competitive practices, the likes of which will only get worse if not prevented by regulatory intervention.

Unconstrained

The point is that Digicel is now unconstrained in its pricing, despite all the litigation we have been reading about. Should Digicel become even larger without any regulatory intervention, this will not be good for consumers, nor will it be good for competition. The nature of a monopoly is what it is - if Digicel becomes a monopoly, it will behave as such - it has already demonstrated this capacity. The capital-intensive nature of the telecommunications industry will also make it very unlikely that financial capital, whether moving at the speed of light or any other speed, will find the Jamaican telecommunications industry as that place that will give it the highest return on investment.

Neither LIME nor Claro, or any other "capitalists with deep pockets" identified by Dr Williams, will be able to break into the market without regulatory intervention. Digicel's market share, together with the impact of network effects, will become a barrier to entry. Additionally, given that the regulatory framework is outdated and ineffectual, the merger, without correction of the imbalances, will ensure that there is no "value to be extracted" from the mobile market for the new investors which Dr Williams believes are circling the block.

Dr Williams, in ending his article, was correct when he said, "Interesting times are ahead." It's a pity that not much else that preceded that statement was as true in the Jamaican telecoms context.

Email feedback to columns@gleanerjm.com and philipnhamilton@gmail.com.