What to do about Dominant Carrier Regulation in Colombia?

Posted on Tuesday, June 26, 2012

I recently had a chance to review America Movil/Comcel’s economic testimony used in their bid to avoid or mitigate Dominant Carrier Regulation in Colombia. As might be expected given the financial resources of the company, it was prepared by recognized economic experts who argued their points well. I have some technical quibbles with the statistical analysis by the Latin American group NERA but even then I’m not sure correcting these would have changed the conclusions.

Full Disclosure: I left Comcel as President in December of 2001 having spent 13 months working for America Movil. Since I left, I have on occasion provided advice to the group mostly in regulatory issues. I have advised principal competitor Telefonica through my association with Yankee Group.

I don’t think it worth discussing whether Comcel is in fact dominant or whether dominant carrier regulation is necessary. Regions as diverse in their economic policies as the United States and the European Union think it necessary to take action when one player has more than 60% market share in a multiplayer market. As well, the Colombia-US Free Trade Agreement requires both parties to have effective dominant carrier regulation. Comcel sticks out like a sore thumb with its above 65% Line Market Share.

The CRC has tried to address this by forcing a narrowing of on-Net/off-Net tariff differentials which are presumed to be the reason why Comcel has achieved and maintained its high market share.

My argument is that the CRC has been manifestly ineffective and their strategies might even make the presumed “problem” worse because they fail to attack the core reasons why Comcel has had the success that it has had.

The CRC has been ineffective:

  • Market Share measures (Lines, Revenues, Voice Minutes, EBITDA) remain essentially where they were before the CRC took action in 2009;
  • Theoretical arguments (as advanced by Comcel’s economic consultants) show that taking this kind of regulatory action can only result in HIGHER prices for consumers – not the lower prices that presumably is the objective of dominant carrier regulation;
  • I believe that in a multi-SIM environment such as we have in Colombia, lowering on-Net/off-Net differentials removes the customer incentive to have extra SIMS and thus could easily result in the disconnection of second and third-player extra SIMs reinforcing the “dominant” carrier’s position;
  • Voice revenue – while still representing over 50% of revenues in Colombia – is in decline so using voice tariffs to control the industry structure will be increasingly ineffective.

The core reasons why Comcel has been so successful in terms of Line Share have to do with handsets, distribution and a fundamental aspect of consumer behavior – what I call the “Winner Effect”:

  • Share of Sales = Share of Stores: aka “A bigger net catches more fish”— Comcel had always emphasized having a massive distribution network and America Movil – which had the same philosophy – accelerated investment in sales points. I wrote a long paper for Yankee Group proving the validity of this “theorem”. So long as Comcel has a broader network of sales points than its rivals, it will continue to lead in share of Gross Adds and so maintain its current Line Market Share.
  • Controlling the supply of “hot handsets”. The industry – and especially telecom regulators – see the market in terms of telecom services. But what drives Line Market Share is sales and what drives sales are handsets. (Voice and other tariffs impact prepaid behavior and to some extent postpaid churn but what brings consumers in the door is a hot handset.) Handset vendors want to sell the maximum number of phones. Winners have faith in their marketing capabilities to handle large volumes of sales. Thus operators who have already achieved the leading position are prepared to commit to large sales volumes in exchange for exclusivity or at least a “headstart” like a period of exclusivity for a number of months. And handset vendors, to achieve their sales targets more easily, have no problem extending this exclusivity even at the expense of their relationships with the number two or three operator in a market.
  • Once a winner, always a winner. A leading brand attracts criticism but also admiration. Consumers often hope some of the winning brand’s success rubs off on them. The leading brand also leads in “Top of Mind” surveys for the obvious reason that more consumers are their clients. Being the winner (for whatever reason) impacts important mobile market purchasing drivers like coverage and technological leadership. The winner is presumed to have both of these (whether they actually do or not). Massive distribution strategies reinforce coverage leadership since an operator is presumed to have coverage where they have distribution (whether they actually do or not). And vice versa: it is easier to attract distributors – and dictate commission terms – if you already have the leading market share.

(I have a long – very long – version of this note that develops these ideas in greater detail. Contact me if you want to see it.)

Thus the CRC’s chosen tools are ineffective and repeated application can only continue to be ineffective. Madness is repeating the same action and expecting a different outcome.

At best they may achieve a transfer of wealth from Comcel’s shareholders to those of its rivals but so far that hasn’t happened either. Furthermore, I don’t believe any telecom regulator has the right or the obligation to directly impact shareholder outcomes: their only legal scope for action has to be on consumer outcomes.

To exert effective control over Colombian market outcomes – and again assuming that something must be done if only to maintain the countries obligations to the US – then action has to be taken in the DISTRIBUTION (including handsets) market, not in the market for voice services.

This is probably impossible. My contention that the naturally-evolved structure of the mobile handset market creates distortions in the market for telecom services would create a field-day for Colombia’s lawyers.

Besides, America Movil is about to do the CRC’s work for them. Retiring Colombia’s most valuable brand – Comcel – to introduce an essentially unknown brand – Claro – and merging it with a so-so brand like Telmex will do the company untold damage.

It might even get them below 60%.

Bottom-Line: Colombia at least will continue to experiment ineffectively with voice tariff interventions trying to “correct” a situation nearly impossible to correct – Comcel’s “north of 60%” Line Market Share. That “horse left the barn” a long time ago (nearly 10 years ago in fact) and there is little that can be done now. Intervention in the mobile handset market might have an impact but that is no doubt politically and legally impossible.

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