Business

The consumer knows best

Friday, April 29, 2011    

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Dear Editor,

It is argued that Digicel is engaged in anti-competitive behaviour by virtue of the manner in which it structures its on-net vs off-net retail rates. This argument is simplistic and patently false. Moreover, it fails to take into account the realities which affect pricing in telecommunications globally.

Indeed, it is commonplace that carriers (globally) price on-net calls cheaper than calls going off-net. This is a justifiable and globally recognised business practice in which the carrier seeks to reward its customers for driving on-net traffic. It is not a penalty as suggested by some commentators.

This is the case not just in Jamaica but across the region. In fact, all one needs to do is have a look at LIME's retail rates across the Caribbean and you will see that they, like Digicel, also price off-net calls differently to on-net calls. In fact, in Barbados, LIME's off-net rates are in some instances in excess of 500 per cent more expensive than its own on-net rates.

In Jamaica, whilst there is a differential between on-net and off-net pricing (and this applies to all Jamaican carriers), it is not nearly as much as what LIME have charged in other markets. Accordingly, it is disingenuous to argue about supposed anti-competitive pricing whilst such differentials are both common and legitimate pricing policies practised across the globe.

Further, in terms of the comparative costs for making a domestic cross network call vs a call to Japan, as the commentators have repeatedly cited, they would do good to inform themselves on the nature of telecommunications and the relative capacity costs utilised when sending traffic off network — whether to another domestic carrier or to Japan.

Indeed the costs for sending traffic that additional distance to a foreign country are marginal when compared to a domestic cross network call, given the massive availability of capacity for carrying international traffic. Hence carriers are generally able to price international calls with this consumer benefit in mind.

The simple fact of the matter is that consumers in Jamaica currently benefit from some of the lowest calling rates across the globe. This applies both in relation to the prevailing on-net rates and off-net retail rates. This is even more the case when one considers the effective rate paid by consumers when factoring the number of free minutes given by carriers in Jamaica.

Indeed, Jamaican consumers pay on average, all things considered, roughly US 5 cents per minute to make voice calls and that is in comparison to consumers in Europe, the UK and the US who pay anywhere between an average of US 14 - 31 cents per minute. There is therefore no question that consumers in Jamaica have already benefited immensely from liberalisation and it is simply sensationalised paranoia to suggest that consumers are likely to be any worse off as a result of the proposed deal between Digicel and Claro. Competition in the form of LIME will still exist.

Termination Rates: It is often cited that Digicel maintains artificially 'high' termination rates and that this causes the cost of telecommunications in Jamaica to be excessive. Such statements do not stand up to rigid scrutiny. Although termination rates are an integral cost to a carrier's business it is often left unsaid that it is also a source of revenue for a carrier — which if reduced could result in higher retail rates for consumers as carriers seek to recover these revenues from elsewhere.

In economic theory there is a well recognised and documented concept called the 'waterbed effect' which has gone to great lengths in highlighting that excessive reductions in termination rates are likely to lead to increased retail rates for consumers. This is instructive reading for those commentators who maintain this false argument about termination rates and the need for reductions.

In 2008 when Claro and LIME struck a deal to lower termination rates between their respective networks there was much media hype. However, what is interesting is to note that any reduction in these termination rates were not passed on by LIME to its consumers, since the price of a cross network call from LIME to Claro still remains the same $12 per minute as had been charged prior to these pronouncements. This therefore begs the question -- where was the benefit to the consumer from the rate reduction at that time?

Regulation: It is important to realise that there are established regulatory processes which are adopted for the assessment of termination rates and that this is a technical area requiring significant inputs and resources which are managed by the regulator.

It is disingenuous to suggest that the existing regulatory framework does not contemplate or provide the regulator with the ability to review and assess termination rates. Indeed, if you look at the regulator's recently published work plan you will see that this is an issue on its agenda and that it is adhering to the requisite consultative process prescribed in the governing legislation.

Notwithstanding, commentators continue to claim that the existing regulatory framework is inadequate for current purposes and are quick to lay the blame at Digicel's feet. This is unfair and unjustified as such comments lack merit, given that the existing framework is being applied and processes being adopted to regulate Digicel in the same manner as LIME as it relates to mobile service.

After all, haven't all the mobile networks been determined as dominant for termination of calls on their own networks, thereby opening the door for each to be regulated in a like fashion?

The other issue which a number of commentators seem to conveniently forget is that in spite of the efforts to liberalise the telecoms market LIME continues to maintain and enjoy its virtual monopoly on the provision of fixed line voice services. When the Telecoms Act was brought into force over 10 years ago, its purpose was to facilitate competition, not only in the mobile market but also in fixed line and Internet service markets.

LIME continues to enjoy market dominance in both fixed line and Internet services and can hardly complain that the regulatory oversight imposed on it are unjustified or lack purpose. Justifiably, LIME was and continues to be regulated in respect of its fixed line network. This is distinct from regulatory processes affecting the mobile market which, by all accounts, is symmetric in its application to all the existing operators in the market.

Finally, these same commentators continuously speak of the thousands of Jamaicans that are shareholders of LIME and the fact that they are in need of protection from the fierce competitive forces that have been exacted upon it by Digicel over the years. Forgive me, but isn't LIME majority owned and controlled by CWC PLC in London?

Whilst I am mindful that there are also a great number of local shareholders, this issue is nothing but a red herring. Quite simply, it is not the role of the regulator, the FTC or Government to safeguard persons invested in listed companies. Those investors are to hold the management and executives accountable for the performance of the company in which their investments are made.

It is instructive to note the comment in praise of Digicel outperforming its competitor in areas such as customer care and marketing, and not at the same time recognising the important role played by these differentiators between the success of one company and another. If you look at the numbers you will see that whilst LIME's revenues over the last 5 years have remained relatively stable with only a two per cent variance over the period, its profitability over the same period has plummeted from $1,922,561,000 in 2006 to negative $3,388,191 in 2010 (a swing of $5,310,752,000) as operating costs and finance costs have spiralled out of control.

Those with their agenda are clearly seeking to lay the blame all over the place but would be well served paying attention to the old dictum "the consumer knows best" and in a free market economy is the ultimate arbitrator.

Michael Henderson

Kingston 8

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