Competition in the Philippines’ telecommunications sector is heating up as the two main players in the market battle for subscribers. While both firms are likely to benefit through an increase in the number of consumers, this may come at a cost if profit margins are deeply impacted, as is expected.
Mobile phone penetration rates are likely to break through the 100% barrier by the end of 2012, according to Smart Communications, a local wireless company. Service providers will need either to offer an improved and expanded range of products if they are to build on their client base or cut tariffs to attract new subscribers. Following the release of third-quarter results from the two largest telecoms firms, it appears that both companies have adopted a two-track policy of lower fees and improved services.
On November 8, Globe Telecom, the second-largest telecoms firm, announced it had posted a 26% year-on-year (y-o-y) drop in net profits to $44.6m, compared to $61m for the same period in 2011. While service revenues increased to $502m from $414m, the company’s operating expenses – including outlays to upgrade its network – and subsidies climbed 42% to $270m from $190m.
Globe has been striving to ensure customer loyalty and woo clients away from rivals with subsidies by offering cut-rate services to subscribers. It is a strategy that may be paying off, as Globe said subscriber numbers reached 32.1m at the end of the third quarter, a rise of 9.8% since the beginning of the year.
Though its performance was down – Globe’s nine-month revenue declined by 15% – Ernest Cu, the CEO of the company, said the result was to be expected in an increasingly tight market.
“Despite the very challenging competitive environment, our business remains fundamentally strong,” Cu said in a statement accompanying the quarterly report. “We expect competition to escalate, particularly after the gains we have realised, but we are prepared for the challenge.”
The Philippine Long Distance Telephone Company (PLDT), the country’s largest telecoms firm by stock market value, also reported a decline in profits for the opening three quarters of 2012. In a statement issued on November 7, PLDT said the lower profit returns were mainly due to the high level of industry competition that cut into its margins. The company’s net profit for the period was $700m, down 6.2% y-o-y, despite a 13% increase in revenue, which rose to $3.1bn.
Like his Globe counterpart, Manuel Pangilinan, the chairman of the PLDT, attributed the weaker performance to the fierce rivalry in the marketplace. “We continue our steady financial performance as we wait for the industry situation to stabilise,” he said in a statement issued on November 6. “We hope to provide a better indication of when we can expect to return to the profit growth track when we announce our year-end results next March.”
Again in line with Globe, the PLDT also saw customer numbers rise, with subscriptions reaching 68.6m, an 8% increase since the beginning of the year.
Both market leaders are working to increase their product range, with the PLDT having held talks with GMA Network, a media content provider, to expand the scope of material on offer to its subscribers. Though these talks have been cut off, the PLDT has made it clear it is looking for media tie-ins for its smartphone and internet services.
Globe is also looking to expand its market reach by taking over one of its rivals, Bayan Telecommunications (BayanTel). On November 6, Globe informed the stock market that it has tabled an offer to buy out up to 100% of BayanTel’s debts, which total some $200m. BayanTel has been in rehabilitation since 2004, paying off the interest and some of the capital of its debts to creditors, a process set to last until 2023. However, if Globe gets creditor backing for its debt buyout, BayanTel could be given a clean slate, and the way also cleared for Globe to take a major stake in the firm.
In October, the two companies agreed to share 10 MHz of frequencies assigned to BayanTel, which will increase the scope of Globe’s network and enhance its service quality.
A buy-in to BayanTel would give Globe a strong data-based revenue stream, with 55% of the firm’s revenue coming from corporate data services, as well as reinforcing access to the additional frequencies.
It is likely to be some time before the dust settles in the Philippines’ telecommunications market, with Globe and the PLDT set to continue their efforts to win subscribers through price-cutting and broader services. However, with the economy continuing to expand and demand for higher-quality phones and services rising with it, the two should be able to maintain steady growth, even while paring back on profits.
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