Has the Digicel-Claro merger been good for Jamaica?
A look back at the events surrounding the sale and subsequent merger of Claro Jamaica with Digicel Jamaica, in light of the recent decision of the competition regulator in El Salvador.
Around two weeks ago, the press within the region began to draw attention to the decision of the competition regulator in El Salvador not to approve the proposed sale of Digicel El Salvador to América Móvil. The regulator, the Superintendence of Competition, was of the view that
… the merger would “adversely affect the dynamics of competition” and “welfare of consumers” in the mobile and fixed telephony market… the Claro/Digicel acquisition would create “legal, economic, strategic and technical” barriers for new entrants… (Source: The Gleaner)
The transfer of Digicel’s Salavadoran operations to América Móvil was part of a larger deal comprising Digicel Honduras and Claro Jamaica. Digicel Honduras would also be transferred to América Móvil, whilst Claro Jamaica, which is owned by América Móvil, would be transferred to the Digicel Group Limited (Digicel). The Salvadoran Superintendence of Competition’s decision not to approve the transfer has prompted us to revisit the transaction in Jamaica, and highlight some of the resulting consequences.
A look back at the sale of Claro Jamaica to Digicel
On 11 March 2011, it was announced that Digicel had purchased Claro Jamaica, the country’s third mobile operator. In our post, Is the sale of Claro to Digicel good for competition in Jamaica?, we noted the transaction would effectively reduce the number of mobile operators from three to two – Digicel Jamaica and LIME Jamaica. However, since at that time the deal would have been subject to ministerial/regulatory approval, we also highlighted key regulatory issues that ought to be considered, such as the impact on
- competition in the mobile/cellular market
- retail pricing
- radio spectrum and
- the numbering resource.
The approval of Digicel’s acquisition of Claro Jamaica was issued in late August 2011. Initially the then Prime Minister, Hon. Bruce Golding, included a proviso that two separate and independent networks should be maintained (Source: The Gleaner), but a subsequent change in party leadership resulted in that condition being eliminated. Hence by late November 2011, Digicel was able to announce the completion of its acquisition of Claro Jamaica, and its intention to merge Claro Jamaica with its own operations.
While Digicel was in the process of facilitating the transition, in late December 2011, the Fair Trading Commission (FTC) in Jamaica – the equivalent of the Salvadoran Superintendence of Competition – filed an injunction to block the merger. As was noted in our post, Will the FTC’s final bid to stop the Digicel-Claro merger be successful?, the FTC was of the position that the merger would lessen competition in the island’s mobile/cellular market and was in breach of the Fair Competition Act 1993 as amended.
The merger of Claro’s operations with Digicel Jamaica was completed by February 2012, but preliminary hearings for the injunction were finally concluded in May 2012, where the judge upheld that
…the FTC has jurisdiction over the Digicel/Claro acquisition agreement; and that the Fair Competition Act (FCA) does apply to the agreement. This means that the FTC can proceed to trial to have the substantive issue heard as to whether the agreement between Digicel and Claro adversely affects competition in the telecommunications market… (Source: FTC)
Hence pending any appeal from Digicel, court proceedings for the injunction have been scheduled for May 2013.
Has the horse truly left the stable? What has Jamaica lost due to the sale?
As it currently stands, the merger of Claro and Digicel Jamaica has been completed, but the court case to block the merger will be heard in mid-next year. Even if the FTC is successful in its lawsuit, it seems unlikely to change the status quo into the foreseeable future. Moreover, the FTC has offered no explanation as to why it took so long to challenge the sale – nine months after the initial announcement, and after the purchase was completed. Having said this, the Salvadoran regulator’s position on the proposed merger does highlight two major consequences that the Jamaican mobile/cellular market has begun, and will continue, to experience.
- A marked change in the competitive dynamics. In a summary of its ruling, the Superintendence recognised Digicel El Salvador as an “economic agent that injects competition”. Hence although the Salvadoran market comprises five mobile/cellular companies, the regulator was unwilling to lose Digicel El Salvador, which has played the critical role of promoting rivalry and competition whilst benefitting consumers (Source: Superintendence of Competition).
Although Claro Jamaica was a smallest and newest player in the market, and Digicel jamaica the largest, there had been active jostling between the two companies, which ensured a degree of dynamism among providers, which benefited consumers. The loss of Claro has changed the competitive posture of both LIME Jamaica and Digicel Jamaica, which are well established in the market.
- Limited prospects for a new entrant. The challenges to a prospective new entrant were key considerations in the Salvadoran ruling. The Superintendence noted that there were strategic, economic and technical barriers to entry, among others, which made new players less likely (Source: Superintendence of Competition). Additionally, and similar to the Jamaica situation, one provider (in the Salvadoran case, América Móvil, and in the Jamaica case, Digicel) would have a considerably larger assignment of radio frequency spectrum than other licensees, potentially resulting in an unfair advantage.
Similarly, in a mobile/cellular market that is as well developed as in Jamaica, a prospective telco might be reluctant to enter such a mature industry. Moreover, it is not clear the extent to which critical resources, such as frequencies and numbers, are not only available for a prospective new entrant, but also offer similar advantages to that which has already assigned.
In summary, Jamaica’s current focus appears to be on establishing frameworks for number portability and for the take-up of the frequencies in 700 MHz band, through which it plans to promote competition in data communications/mobile broadband, and specifically, the introduction of Long Term Evolution (LTE). Although mobile broadband technologies can support voice communications, most operators consider voice calling as a premium service, and frequently charge for it separately from data services. Hence telcos tend to overlay another (less advanced network, such as GSM, a second-generation mobile/cellular technology) on their data infrastructure, to support voice.
Finally, historically, Jamaica has struggled with establishing a strong third mobile/cellular operator. Claro Jamaica may have made the greatest inroads to date. Nevertheless, regardless of the outcome of the 2013 court case, which is likely to be appealed, the Claro Jamaica -Digicel merger has already irrevocably changed the landscape of the Jamaican telecoms market. However the new focus on wireless/mobile broadband may offer some opportunities for competition in the mobile/cellular market, which remain to be seen.