Nothing "Natural" About Monopolies or Duopolies in Telecom

To break even in the long run, the operator’s revenues less avoidable costs must cover its sunk costs. The number of players in the industry will adjust in the long run to ensure this margin is realized.

The general observation is correct. In a capital-intensive industry such as the telecom business, only a relatively small number of firms can invest and still hope to wring a profit out of the venture. As a rule, that number is somewhere between two and three firms.

But market size matters. Larger markets can support more contestants, generally speaking. Markets where suppliers have more differentiation can support more contestants. Conversely, markets where price competition dominates might not support so many contestants. Also, in markets where competitors compete in the same geographies, there tend to be fewer sustainable opportunities.

If telecom access services no longer are thought of as being a “natural monopoly,” neither is the business capable of supporting many providers on a sustainable basis. Precisely “how many” providers are viable in any single market is the issue. In some markets, regulators believe a minimum of four providers is sustainable.

In other markets, many believe only three mobile providers can survive, plus perhaps some number of fixed network operators. In some markets, the present number of mobile suppliers is as few as two. In some markets, perhaps even two cannot be sustained long term, others would argue.

A research paper produced by four professors suggests that, in the Philippines, it will be hard to create more competition beyond the two providers (Globe and PLDT) that now divide the market, unless a government-funded wholesale network is created.

But they suggest competition is needed. The Philippines prices represent consumer costs at 5.9 percent of gross national income per capita,  compared to the regional average of 1.7 percent.

At least traditionally, “regulation is the main lever by which governments can influence competition in the telecom industry, increasing or decreasing the barriers to entry,” the authors say. Some might argue it will not be that simple, going forward. Market entry can be open, and yet competitors might rationally conclude their is no opportunity.

The availability of a spectrum may be the current largest single barrier to entry, the authors say. And yet, what is necessary is not sufficient. “Economically, telecom requires massive capital requirements implying high barriers to entry,” they say.

That noted, the institutional framework matters quite a lot. “Network infrastructure alone for the newcomer could cost as much as US$2.5 billion,” the professors say. Not even that explains the extent of the problem.

“With a constitutional limit of 40 percent on foreign ownership, this effectively limits the presence of companies that can inject fresh new capital,” the researchers note.

A transparent spectrum allocation process, probably using an auction process,  is better than an administrative approach, say a team of academics looking at the Philippines telecom industry.

Perhaps the biggest conclusion they reach is that market entry by a third competitor is “not viable” under the present circumstances.

Spectrum allocation process is important because the method chosen by the regulator determines the resulting structure of the industry.

The present two-player structure is “fiercely competitive,” the authors say. But they also note that  the “Philippine telecom market is highly concentrated.”

The two major telcos, Globe and PLDT, control almost 100 percent of the market and with a Herfindahl-Hirschman Index (HHI)12 of 5162. To put that figure in perspective, the U.S. Department of Justice considers a market with an HHI of less than 1,500 to be a competitive marketplace, and an HHI of 2,500 or greater to be highly concentrated marketplace. At 5162, the Philippines market is extremely concentrated.

Under such conditions, only a publicly-owned third player can afford a  “last-mile” network, they argue. The perhaps-unstated qualifier is that this arguably is true without bigger changes in regulatory policy, underlying technology or business model that can change the potential business model for any third provider.

Were a third (or additional) providers able to get into business without paying for spectrum; using new access platforms; with strong mandatory wholesale rules and possibly different business models, a third competitor might well be viable.

What can not be done under the present framework does not mean a different framework results in the same constraints on any new competitor entering the market.


source:  Epictetus E. Patalinghug Professor Emeritus University of the Philippines ;Wilfred S. Manuela Jr. Associate Professor Asian Institute of Management ; Regina Manzano-Lizares Assistant Professor University of the Philippines; Jason C. Patalinghug Assistant Professor Southern Connecticut State University
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