Ms. Aldaba is a fellow of the Philipppine Institute for Development Studies (PIDS). She is also involved in an Action for Economic Reforms study on competition in the telecommunications industry, supported by the Local Implementation of National Competitiveness for Economic Growth. This piece was published in the April 11, 2011 edition of the BusinessWorld, pages S1/4 to S1/5.
With mobile telephony now already considered a mature industry (cellular penetration exceeding 80 percent), broadband Internet services are expected to be the sector’s new growth driver. According to Business Monitor International (2010), Smart and Globe continued to report strong growth in their broadband business segment. Total broadband subscribers for the two operators crossed the two and one million mark respectively, and wireless broadband take-up is the main subscriber growth driver for Smart and Globe.
It is amidst this setting of falling revenues in cellular services (an industry segment nearing maturity) but with high prospects for broadband Internet services (another segment which is still in its infancy and expected to compensate for the decline in cellular revenues) that PLDT has recently acquired Digitel. The deal would result in a duopoly with PLDT’s Smart, Talk N’Text (Piltel), Red Mobile (Cure) and Sun (Digitel) on the one hand, and Globe Telecom and TM on the other. PLDT now controls 70 percent of the total cellular subscribers while Globe controls the remaining 30 percent. Digitel has 400,000 broadband subscribers to be added to PLDT’s two million subscribers.
Table 1: Number of Subscribers and Percentage Shares: 2009 and 2010
|Telco||Number of cellular subscribers||% Share prior to acquisition||% Share after acquisition|
|-Talk ‘N Text||19||17|
How will this reconcentration in the industry affect overall welfare? It is important to distinguish between welfare-enhancing mergers and acquisitions (M&As) and welfare-diminishing M&As. In the former, M&As between firms can be an effective way of developing competitive advantage, optimizing the benefits of complementary strengths and taking advantage of economies of scale and scope. M&As can also work as an important discipline upon poorly performing management. . All these could lower the operating costs of PLDT. M&A activity can thus improve efficiency to the benefit of consumers and the country in general. Existing Sun subscribers can benefit from PLDT’s wider network coverage. Smart can also expand its network capacity if it is able to use Sun’s 3G frequency which could lead to less network congestion and improved wireless connectivity. Note that radio spectrum is an essential input for wireless telecommunications such as mobile telephony or wireless internet access. Access to this essential resource is restricted to those owning a license. (Licenses for using radio spectrum are applied to a negative externality: too many firms broadcasting on the same frequency range may cause mutual interference, degrading signal quality.) Three of the four 3G licenses (3G technology provides high-speed data transmission and support multimedia applications such as full-motion vide, video conferencing and Internet access, alongside conventional voice services.) awarded by NTC are now owned by PLDT (Smart, Sun and CURE, a new player which was eventually bought by Smart in 2008).
On the other hand, M&As can result in a decline in the number of players in an industry, at least in the short run. In some cases, particularly where there are significant barriers to entry, M&As can lead to increased industry concentration and increased market powe, which may run counter to national welfare. It is not easy to enter the industry due to existing barriers such a separate franchise requirement for each telecommunications sector as well as Constitutional restrictions limiting foreign participation to 40 percent. Obtaining a congressional franchise is difficult and costly, apart from the need to have political influence. Moreover, access to radio spectrum is another constraint to new entrants especially if this is concentrated in the hands of only one player. Until these entry barriers are addressed, competition will be limited and the industry would continue to reap oligopoly rents.
To ensure that mergers and acquisitions do not create or enhance market power which can damage emerging competition, it is necessary to remove barriers to entry and have laws and policies that would ensure market contestability and regulate anti-competitive business conduct or practices. For instance, in the US and Japan, mergers and acquisitions are controlled when they tend to stifle competition substantially or to create a monopoly using important criteria. Such criteria include the threshold beyond which a merger or acquisition is subject to scrutiny (in Japan, the market share of 25 percent) and efficiency which will be created through the merger or acquisition.The industry regulator NTC said it would review the acquisition.
If effective competition has to emerge, the government must pursue regulatory reforms towards the creation of competitive market and industry structures. Given the high entry barriers in the industry along with the absence of effective competition law, the recent acquisition of Sun might pose some risks for competition. Our past experience shows how PLDT behaved in the face of increased competition from new entrants. Without effective competition laws acting as safeguards for fair competition, it may be difficult to control mergers and acquisitions, particularly those that lead to substantial increases in industry concentration. Along with the difficulties posed by the high barriers to entry, the PLDT-Sun deal may endanger both competition in the industry and any welfare improvement arising from the deal.