New telecoms provider increases competion in the Philippines

The Philippines’ telecoms sector is preparing to welcome a possible new player into the field in 2016. The likely new telco provider will be established by San Miguel, a Philippine conglomerate mostly involved in food, beverage and packaging, but also telecoms. However, the country’s two major telcos, the Philippine Long Distance Telephone Company (PLDT) and Globe Telecom, are opposed to the new entrant for several reasons – some obvious, and some less so. The new telco could make its debut via San Miguel’s Bell Telecommunications Philippines and will reportedly focus on the pre-paid mobile broadband market, which is the largest in terms of market share.

Initially, a joint venture – worth A$3.5bn ($2.5bn) – between San Miguel and Australia’s largest telco, Telstra, was set to take place, but failed after Telstra pulled out in March 2016, saying that they could not get their risk-reward balance right. However, according to Ramon Ang, San Miguel’s president and COO, Telstra will provide “technical work design and consultancy support”. Additionally, Ang said that with or without a partner, “Nobody can stop this anymore”, and that the service would be rolled out “very soon”.

Pricing

A third telecoms provider would likely benefit consumers. Increased competition will lower consumers’ costs and, in the long run, the industry will benefit overall from the addition of much-needed infrastructure, resulting in lower operating costs. In addition to the private sector, the government also has a role to play in bringing down prices, according to Edgardo Cabarios, the director of the National Telecommunications Commission (NTC). In November 2015 Cabarios said, “If we leave it purely to the private sector, prices will come down because of competition, but not to a level the same as Singapore because they have subsidy. So government should, in the same way, intervene so that prices can go down.” Cabarios did not specify how or when the government would intervene to lower prices or subsidise the sector.

Powerful Spectrum

In November 2015 the International Telecommunications Union (ITU), of which the Philippines is a member, formally moved to allocate the 700 MHz band – specifically 694 to 790 MHz – to the global mobile industry. Previously used to broadcast analogue television, the powerful 700 MHz frequency can penetrate buildings and walls, cover larger areas, and reach farther than other bands. Furthermore, the capital spending requirement to use it is lower than for other bands. It has been used by mobile wireless service providers in other countries to provide mobile broadband services. According to GMSA Intelligence, the Philippines is one of only two countries in the region that is not using the frequency for mobile data services.

Because the 700 MHz band has a long range, it can be particularly beneficial in providing access to underserved rural areas. “It goes a long way in enabling bridging of the digital divide, while fully protecting the other services currently operated in the band,” said Houlin Zhao, secretary-general of the ITU.

Telecoms sector analysts agree with the ITU’s secretary-general on the frequency. “The 700 MHz digital dividend band is key for expanding mobile broadband into the outlying islands and rural provinces in the Philippines, carrying substantial socio-economic benefits while enabling operators to reduce capital and network costs, thereby accelerating rollout and lowering prices for end users,” GMSA said in a 2014 analysis of the Philippines’ telecoms sector.

Key to its value is the fact that San Miguel holds the rights to 90 MHz of the 700 MHz band in the Philippines. In comparison, PLDT has the right to operate the 800 MHz, 900 MHz, 1800 MHz and 2100 MHz bands, while Globe has rights to the 900 MHz, 1800 MHz and 2100 MHz bands.

Frequency Issues

What was originally framed as a public-spirited move to provide communications to rural and underserved areas has now developed into a heated debate among the Philippines’ current telecoms companies, which are vying to have the rights to operate on the 700 MHz frequency band reallocated. PLDT – which owns mobile phone and internet provider Smart Communications – and Globe have asked the NTC for the reallocation, calling for an auction of the rights to the mobile frequency band that is part of the 700 MHz spectrum.

The NTC’s Cabarios raised the stakes in comments made in November, 2015. Cabarios said that it would be “difficult” for the regulator to recall and reassign the 700 MHz frequency, raising questions for PLDT and Globe about the NTC’s neutrality. On December 1, 2015, Ray Espinosa, PLDT’s director of regulatory affairs and policies, said his group was considering pursuing sanctions against Cabarios for his comments. San Miguel, however, has no intention of willingly sharing the 700 MHz band with its future competitors. During a stockholders’ meeting in November 2015, Ang commented on the frequency sharing controversy, saying, “they [Globe and Smart] have more than enough frequency between them. They have almost 300 MHz of LTE [long-term evolution] frequency; why do they need more? All they need is to improve and fine-tune what they have. They want what we have, so that we could not operate.”

Regarding reallocation of the 700 MHz frequency, in November 2015, Yolanda Crisanto, senior vice-president of corporate communications at Globe, told local press, “Our position is clear: we will continue to pursue the 700 MHz band, and we will continue to urge the government to harmonise the frequency.”

Deep Pockets

Against this backdrop, Telstra, which has a partnership with Ericsson, may be able to assist San Miguel to provide 4G LTE services – such as IP telephony, high-definition mobile, TV, video conferencing and cloud computing – to its customers. However, because the Philippines’ mobile market is still largely 2G-oriented, many local mobile devices are not 4G LTE-enabled. The impact of the availability of 4G LTE on profitability will likely be greater over the medium and long term than the short term. Indeed, the services would be able to give the new firm an advantage on its competitors. Any bottom-line growth based on 4G LTE services will have to wait until the devices’ capabilities catch up, which should not take long once the technology is available – so long as it is affordably priced and comes with appropriately value-adding content and services.

Limited Impact

Despite all the apparent advantages a third mobile network service may have, Fitch Ratings agency is not forecasting much upheaval in the domestic telecoms market as a result of the new entrant. In a November 2015 note, Fitch Ratings said it expects such an entry “to have limited impact on competition in the telecoms market over the next two years”. Fitch based its reasoning on the assertion that, because infrastructure sharing is not mandatory in the Philippines, any new entrant would face difficulties in providing regional mobile coverage and would also experience a “large cash burn” on capital outlay and competition to build a subscriber base.

In anticipation of a third telecom, PLDT and Globe are likely to invest in greater capacity, according to Fitch, which also predicted that capital expenditure by the telecoms industry would rise to about P85bn ($1.9bn) in 2016. The ratings agency also flagged fast-tracking user migration onto higher data plans and monetising data as high priorities for PLDT and Globe in the run-up to the entry of the third operator.

Some industry analysts believe that the recent chaotic environment in the sector may have created confusion and lack of confidence in the minds of domestic and foreign investors in the country’s telecoms sector. It is therefore crucial that a final decision on the allocation of the 700 MHz frequency is made quickly for the sector to move into the future with confidence – a future that, with a third operator, will almost certainly look almost nothing like the past.