Buy Digitel’s assets but not its franchise

WE RECEIVED a letter from Mr. Ray C. Espinosa, a PLDT director and head of its Regulatory and Policy Affairs, commenting on our May 27 column which criticized the recent acquisition by PLDT/Smart of rival Digitel, and warned that if the National Telecommunications Commission (NTC) allowed this to go through, it would undermine the power of Congress to grant franchises for the use of radio-frequencies. PLDT can buy the assets, facilities and equipment of Digitel, I said, but that does not include the franchise which will have to go back to the State and must be reassigned by Congress to another telecom operator.

What would happen, I asked, if this mega-deal were allowed and the giant PLDT gobbled up all the competitors by offering to buy them at prices they could not refuse? Then we would be back to the dark days of the PLDT monopoly, when Filipinos waited for years to get a telephone line and many hours for a dial tone.

Competition is the best reason for good service as witness now the ease with which we can communicate even with our relatives and friends abroad through the cell phone. If there was only PLDT/Smart serving our cell phone needs, do you think it would be this easy?

Alas, the comments of Mr. Espinosa did not even touch on this concern. Instead he quoted many people as saying that the PLDT/Digitel merger would “not lead to a monopoly.” Famous last words.

But in fairness to PLDT and in the interest of fair play, I will quote extensively from Mr. Espinosa’s letter. You may or may not choose to believe it.

“Let me start with the question you raised with respect to the legality of the transaction,” Mr. Espinosa begins. “I just wish to emphasize two points. First, PLDT and Digitel have been fully transparent and have made timely, substantial disclosures regarding the nature and terms of the agreement. Second, we have complied with all the applicable laws and legal precedents.

“The core of this transaction involved the acquisition by PLDT of 51.55 percent of the shares of Digitel stocks which will be paid in the form of new PLDT common shares. Share-swap transactions are quite typical in the telecommunications industry and usually do not generate much controversy. A case in point is the acquisition by Globe Telecom of then rival Isla Communications, Inc. back in 2000-2001.

“In that transaction, Globe acquired 100 percent ownership of Islacom—also through a share-swap deal. After signing an agreement with the sellers, Globe applied for and obtained the requisite regulatory approvals from the NTC, the Securities and Exchange Commission (SEC) and the Philippine Stock Exchange (PSE). They did in fact obtain NTC approval in February 2001 and subsequently got the nods of both the SEC and PSE. They did not however seek congressional approval.

“Second, we wish to assure you that fears the Digitel deal will restore monopoly are misplaced. The completion of the investment will indeed enhance PLDT’s market position. But by no means will the transaction make PLDT the only player in town. In fact, Globe remains a strong competitor and the San Miguel group has been very vocal about its plans to join the fray. These are both capable and well-established business groups with well-funded foreign partners. It would be foolish for PLDT to expect competition to weaken.

“It is interesting to note that the initial, spontaneous—and arguably the more truthful—reactions of top Globe officials to the transaction were in fact supportive of the view that competition in the industry would remain robust and active. For example, Globe president Mr. Ernest Cu was interviewed on ANC on the day the deal was announced. When asked if he had foreseen the transaction, he said matter-of-factly: “Consolidation certainly should be expected in a maturing market.” That comment is not surprising given that Globe itself had tried, but was unable, to acquire Digitel.

“Asked if the deal would lead to a duopoly and lesser or greater competition, Mr. Cu said: ‘I wouldn’t exactly call it a duopoly, given the presence of alternative players in the market. We mentioned the names of Google who is coming into the space of telcos, as well as Skype and Facebook. Competition is expected to continue.’

“And as regards competition remaining strong, Mr. Cu pointed out that in the past, ’Even when there were (just) two players in the market—PLDT/SMART as well as Globe—competition was still fierce and consumers still took advantage of the competition to gain better pricing.’

“In another interview by print reporters, Mr. Cu stressed that: ‘The Digitel and PLDT merger will not fundamentally change our strategy. We stand ready to compete, and to defend and grow our market share. This industry has always been intensely competitive, and we have been a strong challenger to a dominant incumbent all this time.’

“As for the San Miguel Group, the president and CEO Ramon Ang told reporters upon the announcement of the Digitel transaction that his group was undaunted and would pursue its plans to build its own telecommunications business.

‘SMC is now in full swing to build a brand new mobile broadband network that will be robust and reliable,’ Ang said. ‘We will try to give the consumers a better price and quality of service.’

“Indeed, we expect the telecom industry in the country to remain very competitive, as it was even before the entry of Digitel/Sun. And consumers will continue to benefit from this rivalry.

“…Let me conclude with the message that PLDT and Digitel have consistently conveyed to the public since we announced the transaction: This is a sound business investment that benefits our subscribers and the general public and complies with the laws of the land.”

(Not with the law on franchises—NHC.)