Gov’t only ‘realistic’ 3rd player in local telco industry – study

The government would be the only “realistic” third player in the local telco industry as any new entrant may find it extremely difficult to achieve financial viability given the dynamics of a very mature market.

This was the conclusion of a study entitled “Assessment of the Structure, Conduct, and Performance of the Philippine Telecommunications Industry” undertaken by Epictetus Patalinghug, Wilfred Manuela, Jr. and Regina Manzano-Lizares.

“The present two-player structure is characterized as fiercely competitive. However, the market realities of capital intensity, sunk costs and economies of network size prevent a realistic entry of a private third player. Only a publicly-owned third player, that builds a ‘last mile’ network that is financially not viable for private operators to build, can complement the coverage gap in the present network,” the study said.

According to the study, “a company’s success is explained by its own market share and not just by industry concentration. Only when a firm is efficient or innovative is it profitable to expand in a market and make the market concentrated. Brand creation can make industry and this adds to the substantial sunk costs and big-scale economies to be hurdled by a new entrant.”

“If competition is tough and leads to a low price, entry is discouraged and industry concentration is higher. This may describe the Philippine telecommunications industry,” the study emphasized.

The study further pointed out that “although globally most telecommunication markets are having three to four competitors, a third player may have a difficult time attaining financial viability in the short run due to its late-mover disadvantage and the need to penetrate underdeveloped areas whose deployment cost is higher than the almost saturated urban markets dominated by the incumbents.”

“The only realistic third player is the government because it has the capacity to pour investments in ‘last mile’ and high-cost areas to build ‘last mile’ network that complements with existing networks,” the study emphasized. However, the entry of the government as a third player in the telco industry creates an opportunity for active government intervention. Also this could lead to “false expectations of improving quality of service at a lower price when the reality is that high quality can only be produced if the acquisition of expensive infrastructure investments will earn an attractive or competitive rate of return.” Also, “there are many historical examples of government failures in operating public utilities,” the study added.