Two-part rationale for third telco player

The Duterte administration has made the establishment of a third telecommunications industry player one of its major industrial policy concerns, believing that the duopolistic situation in the telco industry is unhealthy for the Philippine economy and therefore must be brought to an end as quickly as possible. The original deadline set for the selection of the applicant came and went, and today, nearly two years later, the selection process continues, with one new deadline set after another.

The delay is hardly surprising, considering that telecommunications is one of the most capital-intensive and complicated of industries. It is no accident that the duopolists of the Philippine telco industry—Smart Telecommunications and Globe Telecom—are subsidiaries of two of the biggest corporations in this country, viz., PLDT (Philippine Long Distance Telephone Co.) and Ayala Corporation and that the only other attempt to break into the telco industry was made by one of the larger domestic conglomerates (the Gokongwei corporate group).

The Duterte administration has indicated that its push for the establishment of a third telco industry player has a two-part rationale. One part is economic; the other is technical.

The Duterte administration believes that a duopoly is not a sound structure for any industry, let alone an industry as critical and as sensitive as telecommunications, and that competition in the telco industry would be better assured if there were players in the industry besides Smart Telecommunications and Globe Telecoms. Although no charges of collusive activity have ever been leveled against the Smart-Globe duopoly, the Duterte administration believes that there would be less risk of such activity if the domestic telco industry had more players.

This raises a basic equation. Would the maintenance of competitive coalitions be better assured if the Philippine telco industry were a triopoly rather than a duopoly? The answer is No. Three industry players can collude—the legal term is “combine in restraint of trade”—just as easily and effectively as two players. Indeed, as the famous 1980s case of the US electrical equipment industry showed, even numerous players in an industry can, if they are so minded, engage in collusive and competition-lessening activity.

On the other hand, the record of the Philippine telecommunications industry shows how duopolists can operate in a highly competitive manner. Though an superior marketing strategy—better products and aggressive pricing—Globe has steadily been taking market share away from Smart.

The more valid part of the Duterte administration’s push for a third telco industry player is the technical part. The Duterte administration believes that, with only two players, the Philippine telco industry has made insufficient progress, to the point where this country has one of the lowest Internet speeds in East Asia. It wants SG capability to be installed in Philippine telecommunications. The goal is more likely to be achieved if there were more than two players in this country’s telco industry, the Duterte administration believes.

To be able to bring about more rapid development in the Philippine telco industry, the third player that the Duterte administration will select must be a foreign entity that has financial clout and a significant footprint in the world telecommunications industry. These two attributes go together. The bill recently filed in Congress seeking to re-designate telecommunications as a service industry rather than a utility, if will make it possible for the foreign partner to own more than the 40 percent to which foreign equity in a utility is limited. Most of the ten Filipino companies that have exhibited interest in being the third telco industry player are neither financially nor technically solid; hence the need for a strong foreign partner.

A sure deterrent to broad foreign interest in the third telco-player program of the present administration would be a requirement—proposed by the (DoF) Department of Finance—that the incoming player pay what amounts to a fee for entrance into the Philippine telco industry. Critics of the DoF idea, which apparently includes DICT (Department of Communications and Technology), argue that an entrance fee would be unfair, considering that the government made no such imposition on Smart Telecommunications and Globe Telecom when these companies were given approval to engage in the telco business.

Is the nation likely to see a new player in the Philippine telecommunications industry before year-end, as indicated by DICT? I’m not holding my breath. There are so many important issues to be resolved along the way to the awarding of the third-player slot,

One thing is certain. Whichever applicant is chosen will have to hit the ground running. It is very difficult to go into a business where the existing players have been there for a long time, and Smart and Globe are already well-entrenched in the Philippine telecommunications industry.

Topics: Telecommunications , Philippine Long Distance Telephone Co , Smart Telecommunications , Globe Telecom
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