Digicel-Claro buyout a concern

Concerns have been quite properly raised about the effects on competition - and on consumers - of the announced buyout of Claro Jamaica by Digicel.

When the Government of the day moved to break the Cable & Wireless monopoly and to open up the telephone market to other players, with minister with responsibility for telecommunications, Phillip Paulwell, determinedly leading the charge, not least among the targets were lower costs to consumers and better service driven by competition. Digicel entered the market in 2001 and quickly assumed dominant position, thanks to widespread consumer dissatisfaction with the previous sole provider. MiPhone followed, and was acquired by the giant Claro, muscling its way into the Jamaican market in 2008.

The planned acquisition of Claro Jamaica by Digicel is a reversal of this diversification trend. The Organisation of Caribbean Utility Regulators (OOCUR), to which Jamaica's Office of Utilities Regulation (OUR) belongs and in which J. Paul Morgan, a former chief executive of the OUR, is a leading spokesperson, has expressed concern about the prospect of reduced competition and consumer choice in the region. This concern comes against the background of the proposed acquisition of Claro by Digicel in Jamaica.

The OOCUR has called upon Caribbean governments to exercise especial caution in markets where no competition and antitrust regulations exist. "(Governments) must be particularly mindful of the benefits to consumers and the national economies as a whole that might be lost as a result of the lessening of competition in the telecommunications sector," said the regulators.

"The view that there is a real prospect of market failure and the re-emergence of monopolies in the provision of telecommunications services has to be closely monitored, as the implications for the smaller markets, in particular, could be disastrous where the gains that have been made through the introduction of competition could be quickly eroded," said the OOCUR in a statement.

But consumers already have been bearing the cost burden of anticompetitive practices in the mobile telephony market with little action on the part of our Government for providing relief. Providers in the market have been manipulating the Mobile Termination Rate (MTR) to unfairly entrap customers. The MTR is the rate a mobile provider charges for the customer of another network to call its mobile customers.

A LIME document says, "LIME and Digicel currently charge an average reciprocal termination rate of $8.40." The document claims that "LIME was proactive and offered both Digicel and Claro a $4 termination rate. Claro accepted so that they, too, could offer lower rates to consumers, while Digicel refused."

But as the LIME statement concludes, "A lowering of the mobile-to-mobile termination rate is an important first step to the reduction of mobile retail rates that are charged to customers, as it is a fixed cost which is included in the final retail price to the customers."

Consumers have resorted to owning two, and even more, handsets to avoid the exorbitant and punitive cross-network MTRs which have little to do with the real costs of providing the service.

The high rates particularly favour Digicel, which has no market incentive to unilaterally lower its own MTR, the highest in the market, or to negotiate with other providers for an across-the-board lower flat rate as LIME says it is proposing. Digicel is claiming more than two million customers, accounting for more than three-quarters of the market, placing this provider in a clear position of market dominance with the potential of manipulating the market for unfair advantage.

Because of the large MTR differentials and the sheer number of Digicel customers, a mobile phone user is far more likely to switch to Digicel, assisted by price coercion, than to switch from Digicel to another provider, no matter how good the quality of the service provided by the other carrier might be or how much better the call charges might be within that network.

A 2007 Fair Trading Commission (FTC)-OUR report noted that the cost of off-net calls, coupled with the lack of number portability, tended to make subscribers unwilling to switch networks. Claro, an appendage of the international telecoms giant America Movil, with the financial muscle to push market penetration, is abandoning the Jamaican market. If market diversification, fair competition, and lowered prices to consumers with improved service remain goals of the Government, what is to induce other players to enter the Jamaican market following the absorption of Claro by the dominant player?

The table compares current call charges per minute and MTRs for the three mobile-phone service providers. (See Table below)

                                                                             Rate/min

                                                                   Retail            Termination

LIME fixed to Digicel                                8.50                       6.57

LIME fixed to LIME                                    7.00                       5.75

LIME fixed to CLARO                                7.00                      5.75

LIME to CLARO                                         12.00                    4.00

LIME to Digicel                                          12.00                    9.00

CLARO to LIME                                           7.00                     4.00

Digicel to LIME                                            17.70                   9.00

Last year, LIME applied to the FTC for a review of what it described as "Digicel's anticompetitive practices" which were "likely to have the effect of substantially lessening competition". The FTC reported from its investigations that Digicel's conduct was likely to lessen competition substantially and harm consumers in the fixed and mobile-voice services market in Jamaica.

The commission recommended that the regulatory environment be altered to "remove Digicel's undue influence over the price of its rivals' voice services".

The FTC staff also noted that given the existence of network effects (whereby the value of a voice network to a subscriber depends, in part, on the number of subscribers he can communicate with), anticompetitive conduct in telecommunications will increase market concentration and, "without the appropriate intervention, there is a danger that the market will "tip" in Digicel's favour.

If "tipping" occurs, Digicel would be in a position to operate without effective constraints from existing rivals and, therefore, would have the opportunity to exercise market power. The FTC forecast that Digicel would develop such a position, and that its conduct was "likely to lead to a monopoly market structure".

I am all for the free market. And the opening up of the telephone market has brought significant benefits to consumers in access, costs, cutting-edge technology, and quality of service. But markets need regulation to ensure fairness, transparency, and the dampening of any anticompetitive practices. The Government must stop tiptoeing around the matter of fair competition in the mobile telephone market and, as umpire, resolve any anticompetition issues.

There seems to be a clear case for enforcing a lowering and equalisation of MTRs pegged to real costs and negotiated by industry players. This may appear counter to the freedom of businesses to set prices but would be liberating to the market and consumers, which is a higher good.

Martin Henry is a communication specialist. Email feedback to columns@gleanerjm.com and medhen@gmail.com.