I was asked today by a reporter whether the Sri Lanka market could support another entrant. I answered, but wasn’t sure it would be carried accurately. Therefore, here is the answer.
The market should determine the number of suppliers in a market, not government officials. This requires two things: (1) an orderly policy on market exit, whereby, for example, suppliers have clear rules on what can be done about the assigned spectrum, existing customers, and so on; and (2) transparent license and renewal procedures that allow for as many licenses to be issued as possible within the constraints of spectrum.
Most developing countries lack both elements. Some like to issue licenses without addressing the need to allow for orderly market exit if the market cannot sustain the higher number of suppliers.
Another market indicator for adding another supplier would be the “return on investment (ROI)” of the existing suppliers in the market. In most countries the regulator does not monitor this aspect, or it fails to monitor due to lack of information on profitability. In Sri Lanka the gap is really wide.
Further, in Sri Lanka, there is no standard definition of measuring the subscriber base of each supplier. Some quote the number of SIMs activated in the MSC, some count the number subscribers took a call in last 30 days. Regulator needs to standardise this if the correct number of subscribers are to be measured. This is important in calculating industry ARPU, PRE & POST mix, average MOU, Effective Rate/Revenue per minut etc,. Operators need plan for capacity when they invest in a country, therefore these indicators will guide the scale of the investments. In the absence of this information the new entrant can only rely on sample checks which can go wrong. In telecom it can be a costly mistake. In the Sri Lankan context, we see many Operators (existing) publish PR articles promissing big values of investment. But, in reality only a part of the promised value is dumped into the market, after realising the hard facts. I believe the same will apply for a new entrant.
Funny argument. Market deciding the number of suppliers is like lunatics deciding the number of doctors at the asylum.
Guess lunatics decided how many computer firms there will be; how many Thai restaurants should be permitted in a city; and so on.
The last attempt at government bureaucrats setting the number of suppliers in all markets was called GOSPLAN. It was the centerpiece of the late Soviet Union. It brought down the Soviet Union.
Markets do decide the number of suppliers in most markets. What is special about telecom markets is the scarcity of spectrum. Because of that governments have a role to play. But they can do that by setting the rules of market entry and exit, not by setting actual numbers.
http://print.dailymirror.lk/business/127-local/36420-bigger-challenges-ahead-for-celcos-report-.html is the story that gave rise to this post.
Tell me which country regulates computer firms or Thai restaurants (except food quality). The existence of the regulator per se is adequate proof that market cannot decide on the number of telecom operators. Try Economyths, David Orreal.
A policy-maker/regulator can set a number. There is no objective basis for this other than the ROI method Jude brought up. The problem with that approach is that the policy maker/regulator then assumes the role of cartel manager. It is not the government’s job to safeguard ROIs.
Instead, if the policy maker/regulator allows as much entry as possible within the constraints of spectrum while also allowing for firms that cannot function efficiently under competitive conditions to exit in an orderly manner, the optimal outcome will emerge.
In the US, the threshold for competition review is an HHI of 1700. In several Asian markets, mobile markets have HHIs of less than 1700, even though they are regulated. Others are pretty close to 1700. Therefore one should not think about mobile markets as having similarities with say, the market for electricity supply. These are competitive markets that are subject to regulation only because of the scarcity of spectrum and the problem of interconnection.
To allow government to set the number of suppliers, creates conditions for rent seeking. Firms wishing to enter the market will bribe the decision makers; firms wishing to keep new entrants out will also bribe the decision makers. The number of suppliers is likely to be set not by fancy ROI calculations, but by the bidding war between the two sides.
I do agree with the above facts. But, I believe it is correct only from a regulatory point of view. Telco industry gives a substantial contribution towards the overall economy (I do not have figures to say how much). Therefore the government has a natural responsibility to safeguard the ROI, if not, in the long run FDI attractiveness will decrease. But it should NOT go to an extreme where only the profitability of the firm(s) is focused. It’s a thin line, difficult to manage. But it’s true that bribery decides the fate in the end in developing economies.
From an operator’s point of view, to take part in a bidding war, the investor/new entrant & the existing operators need to pre plan. Investment scale will be decided based on ROI. In a competitive market, it is the basic even to put a simple coverage site, “No return, No coverage”. This is why most operators doesnt show any interest in serving the rural BOP segments, at least they’re slow in doing so. Existing firms will have an advantage in this process as they have existing data / trends to support their decisions in a bidding process. This is where the regulator needs to play the umpire role by making accurate information available to support the decision making process. If the data shows negative trends, it can also de-motivate the bidders. This can be a reason for hiding information.
My argument is that adding another supplier in an oligopoly structure need to be evaluated from all angles, not only from consumer / regulatory point of view. The aim should be to make the market function efficiently in the long run.
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