Competition Policy and Regulation in Philippine

Telecommunications

Epictetus E. PatalinghugProfessor Emeritus

University of the PhilippinesDiliman, Quezon City

Telecommunications Summit 2017: “Telecommunications for Nation Building – National Consensus for Solutions and Progress”

Philippine International Convention Center, Pasay CityMarch 10, 2017

Defining Competition Policy (CP)} CP consists of measures intended to promote a more

competitive environment, as well as measures designed to prevent a reduction in competition.

} CP pertains to all laws, government policies and regulations aimed at establishing competition and, having done so, maintaining the same. It includes measures aimed at promoting , advancing, and ensuring competitive market conditions by the removal of control, as well as addressing anti-competitive results, of public and private restrictive practices.

Objectives of Competition Policy} To safeguard, protect and promote competition and the

competitive process.

} To ensure that the market is able to function effectively and bring about economic efficiency.

} To correct market failure.

} To achieve higher economic growth.

Elements of Competition Policy1. Policy towards monopoly

2. Policy towards mergers

3. Policy towards restrictive and anti-competitive practices

4. Policy towards state entry barriers

5. Policy towards consumer protection

6. Policy towards liberalization, deregulation, and privatization

Policy Towards Monopoly} It tries to prevent monopoly abuses such as:

– imposition of unfair prices– limitation of production– tie-in sales– restriction of technology transfer

} The target of this policy is to regulate behavior of monopolies that exclude competition by eliminating rivals, designing tie-in contracts or practicing predatory pricing.

Policy Towards Mergers} This policy takes a balanced consideration of two factors:

(1) competitive risks, and (2) efficiency advantages

} A merger leading to a monopoly position is no longer automatically considered as a monopoly abuse.

} Greater emphasis is now placed on analysis of the potential effects of mergers on competition.

} In sum, the detrimental impact of mergers on competition must be more than offset by considerable gains in efficiency.

Policy Towards Restrictive and Anti-Competitive Practices} It refers to agreements between firms that have the effect

of reducing competition (restrictive practices), or

} Activities undertaken by an individual firm which restrict, distort, or prevent competition (anti-competitive practices)

} Examples of these practices: price agreements, market-sharing agreements, refusal to supply customers, tie-in sales, predatory pricing, uncompetitive discount prices, and forcing the customer to stock the entire product range.

Policy Towards State Entry Barriers} It covers all measures aimed at removing government-

imposed obstacles (deliberate or unintentional) to the operation of the competitive process.

} This includes support (e.g. grants, loans, guarantees or tax concessions) given by the government to its domestic firms.

Policy Towards Consumer Protection} It includes all laws and regulations that insure truthful

advertising about products, truthful information about the cost of credit, the risks of injury associated with consumer products and the workplace, and about protection of the environment in general.

Policy Towards Liberalization, Deregulation, and Privatization} It includes all policies to liberalize entry into restricted

sectors or sectors dominated by monopolies (either public or private).

Promoting Competition Policy in Philippine Telecommunications} NTC is mandated to maintain effective competition in the

use of communications, radio, and TV broadcasting facilities (EO 546).

} NTC accepts the need for a competition policy framework to promote competition and the efficient functioning of the market (Consultative Document on the Development of a Competition Policy Framework for the Information and Communications Technology Sector, 2005).

Promoting Competition Policy in Philippine Telecommunications} The Consultative Document on Competition Policy

(2005) recommended that NTC assume a proactive regulatory stance on competition-related issues.

} But a World Bank (2005) study concluded that NTC has limited capacity and resources to set and implement spectrum management policies. This lack has led to a largely passive mode of regulation.

Philippine Competition Act (RA 10667)} Powers and Functions

– advocate pro-competitive policies of the government by:

1. reviewing economic and administrative regulations, motupropio or upon request, as to whether they adversely affect relevant market competition,

2. advising the Executive Branch on the competitive implications of government actions, policies, and programs, and

3. charging reasonable fees to defray the cost of the services rendered.

Philippine Competition Act (RA 10667)} Prohibited Acts

– anti-competitive agreements

} Abuse of Dominant Position

– if one or more entities engage in conduct that would substantially prevent, restrict, or lessen competition such as selling goods/services below cost, tie-in sales, predatory pricing, etc.

Philippine Competition Act (RA 10667)} Relevant Product Market comprises of:

– all those goods/services which are regarded as interchangeable or substitutable by the consumer based on their characteristics, prices, and intended use, and

– the area in which the entity concerned is involved in the supply and demand of goods and services.

Consultative Document on Significant Market Power} It advised NTC to define markets as basis for regulatory

intervention, and

} determining if one or several operators in the defined markets have the degree of market power that merits regulatory intervention (USAID, 2006)

Identifying the Relevant Market

Retail WholesaleMobile Services– Prepaid– Postpaid

Fixed Voice Services Fixed Voice ServicesFixed Broadband Services Fixed Broadband ServicesMobile Broadband Services Mobile Broadband Services

Interconnection ServicesPatalinghug, et al. (2017).

Four Classes of Market Structure and Intensity of Competition

Name of Competition

Range of HHI Intensity of Price Competition

Perfect Competition Usually below .2 Fierce

MonopolisticCompetition

Usually below .2 Maybe fierce or light, depending on product differentiation

Oligopoly .2 to .7 Maybe fierce or light, depending on interfirmrivalry

Monopoly .7 and above Usually light, unless threatened by entry

Besanko, et al. (1996).

HHI by Type of Service, 2016

Service HHI

• Prepaid Mobile .5

• Postpaid Mobile .51

• Fixed Broadband .46

• Mobile Broadband .5

• Fixed Voice .56Patalinghug, et al. (2017).

Structure, Conduct and Performance} The Philippine Telecom market is highly concentrated

} The industry is characterized by a mixture of buffet pricing and bundled products

} PLDT/Smart’s and Globe’s pricing and offering are similar.

} Competitive pricing resulted to declining revenues per subscriber

} EBITDA margins and return ratios are healthy for the period 2011-2015, driven by broadband and data.

Is There a Need for a Third Player} The intensity of competition did not change drastically

from an industry with three players to an industry with two players.

} Cash-flow margins were negative for a third player that resulted to its exit from the industry.

} Telecom is capital-intensive and high-sunk-cost industry that requires both concentration and gross margin must be relatively high to be viable.

} A third player will face late-mover disadvantage, but only a government-backed firm is likely to be a third player.

Spectrum Management Analysis} There seems to be a lack of transparency in how

frequencies are allocated and valuated by the NTC.

} A transparent allocation process with clear set of criteria, a mechanism for the valuation of the spectrum, and a publicized allocation process must be established.

} The reassignment of frequencies from low value to high value application must likewise be done.

Conclusions} The present structure of the industry leaves Globe as the

only player that can restrain PLDT from an unhampered exercise of market power.

} An application of the SCP paradigm shows that the industry is highly concentrated.

} An analysis of industry performance using a metric appropriate for an industry characterized with sunk costs and economies of network size shows that players do not exercise abusive market power.

} The present duopoly structure is characterized as fiercely competitive.

Conclusions} An effective spectrum management system is needed in the

country.

} A national broadband policy is needed to possibly design a middle ground between a vertically integrated structure and an open access system.

} The optimal number of players in the industry is determined by a national digital strategy.

} The average number of players in ASEAN and OECD countries range from 3 to 4 players.

} At present it is extremely difficult for a privately funded firm to be financially viable. Only a cost-insensitive, subsidy-dependent public firm is the most likely to enter as a third player.

Thank You.