Phoney concerns: No need for alarm on Digicel-Claro merger

Densil A. Williams, Guest Columnist

I am not perturbed by the recent announcement that Digicel, the number one mobile service provider (as measured by customer numbers) in Jamaica, has announced that it will be merging its Jamaican operations with those of the newest player in the market, Claro. Many commentators have raised concerns that this development in the telecommunications landscape will be bad for Jamaica and, by extension, Jamaican consumers. I do not share this view. This fear seems to be derived from memories of the past when the telecommunications sector was operated under a monopoly market structure.

Today, thanks to Phillip Paulwell for his foresight, we do not have a monopoly market structure but a competitive, open market in the telecommunications sector. This means that the main barrier to entry has now been removed, and anyone who can afford a licence and the attendant infrastructure to offer services in that industry sector, can now operate in there. It is exactly because of this development why we should look at the impending merger in a positive light. I will put on record that this merger will be a good thing for the mobile market, and Jamaican consumers will be better off over the long run. To make this very bold claim, one has to develop a more-than-superficial understanding of the nature and structure of industries in order to foresight future scenarios. Unfortunately, most of the persons who are commenting on this deal do not show this level of understanding.

Don't Fear Monopoly Status

Harvard economist and business strategist, Michael Porter, in one of his highly cited works on strategy and firm behaviour, highlighted five factors that shape the nature and structure of an industry, which are, in essence, the drivers of profitability for a firm. These factors have become to be referred to as the classical 5-Forces model of industry competition. They include: barrier to entry; power of suppliers and buyers; level of rivalry; and threat of substitutes. It is beyond the scope of this article to expound on each of these.

However, a close reading of Porter shows that the most critical force which shapes the type of industry are barriers to entry. This really speaks to the strength of the walls that are put around the industry in order to protect its existing players. If the wall is too strong, it makes it difficult for new firms to enter and, therefore, limits the level of competition that can take place. It will also limit the ability of incumbent firms to exit as well. Therefore, in essence, once you are in, you are in; and if you are out, you are out.

It is conditions like these that will create a monopoly situation in an industry because, as the industry becomes saturated, the ability to grow organically is minimised; and, as such, mergers and acquisitions become the best growth strategy. This will eventually minimise the number of players in the industry and, therefore, can lead to a monopoly situation where one firm dominates the industry and abuses consumer welfare. The situation in the Jamaican mobile market is far from this.

The telecommunications industry is quite open and the barrier to entry is no more insurmountable. Investors with capital can get into the industry once there is value to be extracted. The impression that this merger will allow Digicel to monopolise the mobile market is not one we should take seriously. In fact, one could argue that based on anecdotal evidence, Digicel is already a monopoly in the market. If we take the numbers that are being floated around to help us better understand the nature of the industry, the result will reveal nothing new. If it is assumed that Digicel has 80 per cent of the market, it means that 20 per cent is shared between Claro and LIME. If we assume that Claro and LIME have 10 per cent each (which is quite a stretch for Claro), then, with Digicel's acquisition of Claro, it merely gives them a 90 per cent share, while LIME will have 10 per cent. This marginal jump will not change the dynamics of the market in any significant way for Digicel. They will still hold on to that quasi-monopoly status. Now with a 90:10 split, and two players in the market, this is where LIME has a big opportunity to prove its worth.

Strategic Thinking Needed

If the merger goes through (I don't see why it should not), it will give LIME a lifeline to recover in what was shaping up to be a hypercompetitive marketplace. LIME will now have more degrees of freedom, so it is for that company to start extracting the value from its resources in order to offer highly competitive offerings to the customers in the marketplace and increase the churn from Digicel. The company will have to make clear its value proposition and identify what it wants to be known as in the marketplace. LIME should not be competing in the mobile market as a full-service provider. The company needs to spin off its mobile arm and operate as an independent company so that it can become more nimble to respond to the changes in the mobile market. Nimbleness is one of Digicel's major strengths. With LIME stepping up its game in order to win back some of the market share from Digicel now that Claro is out, I am sure consumers will benefit tremendously from innovative offerings.

If LIME is not willing and able to make the game competitive, consumers do not have to worry. There are capitalists out there with deep pockets who will be ready to enter the market and give Digicel a run for their money. The market is now wide open, and this is what Digicel has to bear in mind. Therefore, Digicel cannot behave like an incumbent monopoly even though it has dominance in the market at Time X. The new market dynamics are different from 11 years ago when Cable & Wireless was a monopoly and behaved as such because the barriers around it seemed impermeable. If Digicel makes this mistake, it will face the same fate as Cable & Wireless when the market was liberalised in 2000.

So, it is this new market structure that should provide hope for Jamaican consumers that the impending merger will not spell a death knell to the innovation and dynamism in the mobile sector which they have become accustomed to over the last seven years. The commentators who are driving fear into people about this deal need to go back to their reading on competitive strategy in order to understand how industries operate under a capitalist mode of production. If Digicel thinks it can rest on its laurels and behave like a behemoth monopoly, it will be making a sad mistake in a world where financial capital moves at the speed of light, trying to find investment to give it the highest return. The liberalised nature of the telecommunications market in Jamaica makes it an attractive site for capital to consider if the incumbents do not show that they are indeed sophisticated enough to deliver high value to customers and build shareholder value. Interesting times are ahead, indeed.

Dr Densil A. Williams is a senior lecturer of international business and head of Department of Management Studies at the University of the West Indies, Mona.