STAFF REPORT Assessment of Competition in the Mobile Telecommunications Market November 2, 2020 Public version FAIR TRADING COMMISSION 30 Dominica Drive, Unit 42A New Kingston Business Centre Kingston 5, Jamaica Telephone: 876.960.0120 [email protected]| www.jftc.gov.jm https://www.facebook.com/FTC.Jamaica Table of Contents I. BACKGROUND ....................................................................................................................................... 1 II. MOBILE SPECTRUM ............................................................................................................................... 1 III. ANALYTIC FRAMEWORK ........................................................................................................................ 2 IV. DESCRIPTION OF COMPETITIVE BENCHMARK ...................................................................................... 3 V. METRICS OF COMPETITION................................................................................................................... 4 A. Anticompetitive Unilateral Conduct ................................................................................................. 4 B. Anticompetitive Coordinated Conduct ........................................................................................... 12 C. Regulatory Framework .................................................................................................................... 12 VI. THE SCOPE FOR SAFEGUARDING COMPETITION ................................................................................ 14 VII. SUMMARY & RECOMMENDATIONS ................................................................................................... 16 i I. BACKGROUND 1. On May 14, 2020, the Spectrum Management Authority (“SMA”) requested that the Fair Trading Commission (FTC) conduct an assessment of competition within the Telecommunications sector. 2. The SMA made the request pursuant to its ongoing exercise to determine whether the Aggregate Spectrum Cap Policy (“Cap”), which is currently used as a measure to safeguard competition, should continue. 3. The Cap limits overall spectrum holdings of mobile operators to 120 MHz with respect to the 700 MHz, 850 MHz, 900 MHz, 1800 MHz, 1900 MHz and the 1700/2100 MHz (AWS) bands. 4. In conducting the assessment, the FTC benefitted from information provided by the SMA, the Office of Utilities Regulation (OUR), Digicel Jamaica Ltd (‘Digicel’), and Cable and Wireless Jamaica Limited (‘FLOW’). II. MOBILE SPECTRUM 5. Spectrum refers to radio frequencies, measured in Hertz (Hz), allocated to the mobile industry and other sectors for communication over airwaves. Mobile spectrum is a critical input for mobile telecommunications services. Mobile telecommunication services refer to telecommunication services delivered to a device that may be moved around freely rather than remain fixed in one location. Mobile telecommunication service providers compete primarily on their ability to deliver data at high speeds (capacity) over a given geographic region (coverage). 6. Spectrum bands have different characteristics and may be used for different purposes when maximizing efficiency. High bands spectrum (i.e., frequencies above 1 GHz) is best suited to meet the operator’s need to build capacity.1 Low bands spectrum (i.e., covers frequencies below 1 GHz) is best suited to meet an operator’s need for wider geographic coverage. 7. The mix of the various spectrum bands assigned to a particular operator has significant implications for the cost of deploying mobile telecommunication services. FLOW advised the FTC that a single cell site that utilizes low band spectrum provides 15 to 20 times the coverage of a cell site that utilizes high bands such as 1.8 GHz. This means that the cost of offering a given coverage is significantly greater if fewer low band frequencies are utilized. Similarly, a 2015 IDB Report indicates that if the 800 MHz band requires 2,000 cell sites to provide given coverage in 1 One MHz is equivalent to One Million Hz. Also, One GHz is equivalent to One Thousand MHz. 1 over a given geographic area, then the 1.8 GHz band would require 10,000 sites and the 2.6 GHz band would require 20,000 sites.2 III. ANALYTIC FRAMEWORK 8. The primary purpose of this study is to assess the extent of competition in the mobile telecommunications market in Jamaica. The analysis was conducted through a benchmarking exercise. 9. Step 1: The initial step in such an exercise was to identify appropriate benchmark—the ideal benchmark would be countries in which the telecommunications market are known to be competitive and the conditions of demand and supply are comparable to the test market (Jamaica) in all material respects. 10. Step 2: The next step was to identify the relevant metrics to be compared. Since the objective of the study is to assess the extent of competition in Jamaica, the metrics selected in this study are known to reflect the competitive environment in market. 11. Threats to competition may arise from three sources: (i) The conduct of a given market player acting unilaterally (unilateral conduct); (ii) The conduct of two or more market players coordinating their conduct (coordinated conduct); and (iii) The regulatory framework. The benchmarking exercise utilises metrics to account for threats to competition arising from these sources. 12. The Structure-Conduct-Performance paradigm in the economics literature maintains that competitive markets can be identified using either the structural characteristics or the observed performance of the market. Regarding structural characteristics, it has been demonstrated that the prospects for competition increases as markets become less concentrated or conditions of entry become easier. Accordingly, metrics such as market concentration levels and conditions of entry are therefore two useful metrics for the benchmarking exercise as they are useful measures of threat to competition arising from unilateral conduct. 13. Similarly, there are many structural characteristics which have been found to facilitate coordinated conduct (‘collusion’) in markets. This exercise describes key differences between the test market and the competitive benchmark regarding factors which are known to promote collusive conduct. Finally, the exercise identifies key distinctions between the test market and benchmark as they relate to the regulatory environment in which mobile telecommunication services are offered. 2 Zaballos, Antonio Garcia and Nathalia Foditsch (2015). Spectrum Management: The Key Level for Achieving Universality. 2 14. Step 3: Data was then collected from the markets in Jamaica and the benchmark countries. 15. Step 4: Another important step in the analysis was to account for material differences in market conditions between Jamaica and the selected benchmark markets. To the extent that the benchmark and test markets differ in material respects, the appropriate adjustments were made when comparing the metrics. 16. Step 5: The final step was to conduct the analysis. In instances where the metric was found to be at least as favourable to competition in the test market as it is in the competitive benchmark, the analysis concluded that the test market is competitive; otherwise the result was described as being inconclusive. IV. DESCRIPTION OF COMPETITIVE BENCHMARK 17. There may be many candidate competitive benchmarks for the mobile telecoms market in Jamaica—none, however is ideal. Among the most appropriate candidates, would be the countries located within Latin America and the Caribbean, which is comparable to Jamaica regarding population size, GDP, culture, etc. (demand conditions) as well as topography, regulatory framework, population density, etc. (supply conditions). 18. The FTC selected as the primary competitive benchmark, the telecommunications market in Jamaica, during a period in which the market was demonstrably competitive. The period chosen was August 2007 to June 2010 when two of the three market participants, Claro and Digicel, actively competed in the market. 3 [For a detailed description of this market, see FTC (2011), Investigation into the acquisition of Oceanic Digital (Jamaica) by Digicel Jamaica Limited, Case no. 6997-11: available at https://jftc.gov.jm/wp-content/uploads/2017/08/Case-No.-6997- Proposed-Acquisition-of-Claro-by-Digicel.pdf]. 19. Claro entered Jamaica in August 2007 through the acquisition of Oceanic Digital Jamaica Limited. At that time, there were two other mobile telecommunication operators: Digicel, which had entered the market in 2001, and Cable and Wireless Jamaica Limited (now trading as FLOW), which was the statutory monopoly telecommunications provider up to 2000. 20. Subscribers benefited tremendously from the price competition between Claro and Digicel. Consumption of mobile voice services increased by 39 percent while consumers paid 2 percent less. Immediately before Claro’s entry, Digicel was the significant market leader despite having relatively higher prices than LIME. Digicel responded almost immediately to Claro’s entrance by reducing their effective tariffs. In particular, Digicel’s average transaction prices for mobile voice services declined from to per minute during the period. Subscribers would have also 3 The third operator was LIME, presently operating as FLOW. 3 benefitted from the technical innovation spurred by Claro’s entry. Within twelve months of entering Jamaica, Claro became the first operator to offer 3G technology services in Jamaica; LIME