The PLDT-Globe-SMC telco deal

The Philippine Competition Commission (PCC) is a quasi-judicial body mandated by law to protect the interests of consumers and legitimate businesses from monopolization, unfair competition and other forms of corporate malfeasance.

The PCC is staffed by highly capable professionals with established credentials.

The Court of Appeals, by comparison, has the constitutional mandate of seeing to it that justice is served in all facets of our economic, political and social lives.

The CA is comprised of 69 Associate Justices and a Presiding Justice that are of impeccable qualifications.

Nonetheless, we believe that the CA has absolutely no business in constraining another agency of government in doing what it is constitutionally mandated to do, as it did when it recently issued an edict preventing the PCC from pursuing its investigation of PLDT and Globe Telecom for their recent purchase from San Miguel Corporation of the rights to the 700 Megahertz spectrum owned by one of its subsidiaries.

The action of the CA has effectively preempted the  PCC in pursuing its case, arguing that preventing the purchase of the asset by PLDT and Globe Telecom would be prejudicial to the two companies whose share prices are expected to be adversely affected.

At issue here is whether the anticipated decline in the market values of Globe and PLDT as a result of the banning of the transaction outweighs the potential negative impact the impending duopolization of the industry would have on the public interest.

Another issue that remains to be resolved—presumably by the Supreme Court — is whether SMC in fact had the legal right to the telco asset in question, considering that frequency bands are part of the public domain that are typically auctioned off by the state to potential exclusive users.

Then again, perhaps the CA justices to whom this case has been assigned have more economic savvy that we thought.

Let us look into this matter from a somewhat different economic perspective.

We believe that the PCC, for its part, should proceed cautiously in handling the telco deal entered into between Globe Telecom and PLDT on the one hand and SMC on the other.

In today’s knowledge-driven world, the age-old textbook concepts of monopoly and monopolization need to be rethought in regard to their effect on consumer wellbeing.

The product in question in this deal are the telco assets previously owned by SMC (through its subsidiary Vega Telecom Inc.) in the form of rights to the 700 Megahertz spectrum which allows a much faster and cheaper Internet services than are currently unavailable in the country.

If they owned the 700 MHz frequency band, PLDT and Globe contend, they could provide internet services to their customers much more efficiently than they do now. They claim further that there is no room for a third major player in the ISP business.

Perhaps they have a point!

Internet services belong to a class of economic goods called information goods (IG), defined as those the market values of which depend on the knowledge and information that are embedded in them.

These include digitized entertainment goods such as DVDs and eBooks, computer software and applications, all types of electronic gadgetry, online financial services – and certainly, the services of Internet Service Providers (ISP) such as PLDT, Globe and SKYbroadband.

IG have the distinct characteristic that the more widespread their use, the more valuable they become, the consequence of what are known as “network effects.” Another unique attribute of IG in general is that the larger the volume of accumulated output, the lower the cost of producing additional quantities. While the prototypes of most IG (blockbuster drugs, for example) are costly to produce (due largely to developmental costs), additional units entail smaller and smaller costs (that is, they are subject to increasing returns).

These distinguishing properties of IG give a clear advantage to firms like PLDT and Globe that are the first to enter an industry, and to those that are operating at relatively large scales.

It goes without saying that our industrial policy should allow such firms to exist in the economy for the economic benefits that they provide to their customer in the form of better quality products and services at lower costs – not to mention the returns that they generate for their owners.

They are what one may call “natural monopolies” and require only that they be monitored closely by the appropriate regulatory agencies – PCC included.

At the very least, allowing Globe and PLDT exclusive rights to jointly operate the 700 MHz band will deprive these companies of any excuse for offering the lowest Internet download speed in the region!

(This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines. The author is a retired U.P. Professor, and until recently was Professorial Lecturer at the U.P. School of Economics. Feedback at <[email protected]> and < [email protected]>.  For previous articles, please visit <map.org.ph>)