Broadening bandwidth: Investing in infrastructure as mobile growth and internet penetration rise

The telecommunications sector continues to evolve with the emergence of new technologies, fierce competition between existing operators and the entry of new service providers. Mobile handset penetration is at a saturation point and while profit margins on voice calls and text are tapering off, the country is seeing rapid uptake of mobile data and services, with mobile broadband now set to drive the growth of telecoms. At present, there are just two companies providing mobile services, the government-owned Philippine Long Distance Telephone Company (PLDT), which is the market leader, and privately operated Globe Telecom. The sector regulator has paved the way for new entrants in the mobile services segment, though operations have yet to be rolled out.

The mobile segment has been subjected to fierce price competition between the two service providers, which has resulted in the decline of average revenue per user (ARPU) even though profit margins remain attractive at over 60%. According to a report by PricewaterhouseCoopers (PwC), the ARPU of the Philippines telecom industry was just $3.25 in 2012 compared to $13.20 in Malaysia and $6.66 in Thailand. The telecoms sector is still dominated by traditional voice and messaging services but data services such as 3G are growing. There is stiff competition for data services frequencies as operators lay out plans to drive growth via high-quality services based on 4G technology. “There is significant demand for data that can be monetised in many different ways, especially with the multiple applications already created and others yet to be created for very hungry customers,” Elie Hanna, president and country unit head for the Philippines and Pacific Islands at Ericsson, told OBG. “Broadband, mobile internet and cloud are the three main enablers for the networked society in the Philippines, where everything that benefits from being connected will be connected.”

PENETRATION RATE: Over the last decade, the number of mobile phone subscriptions has increased rapidly as uptake of voice and text messaging services has increased. The mobile penetration rate stood at 107% at the end of 2012, with a subscriber base of 103m, according to the International Telecommunication Union (ITU). However, with a large proportion of the population using multiple SIM cards, the actual rate of mobile usage is more likely some 80%. By early 2013, the number of people using mobile broadband had reached some 14% of the total mobile subscriber base.

Meanwhile, fixed-line phone subscriptions have been declining as broadband subscriptions steadily increase. According to data from the ITU, the number of fixed-line telephone subscribers stood at 3.9m in 2012, down from 4.1m in 2009, translating into a penetration rate of just 4.1%. The number of fixed-line broadband subscribers was more than 2.1m as of 2012, with a growing number of homes having personal computers that are used for a range of data services.

TELECOM CHRONOLOGY: The telecom sector has gone through several phases of development through its history. PLDT and Globe Telecom, which currently dominate the market, were both established in 1928 and since then have been instrumental in the roll-out of telecom services throughout the country. During the early years, lack of investment and the problem of covering a large non-contiguous archipelago proved to be impediments in widening the coverage of telecom services and providing faster access to people. PLDT was the monopoly operator during this period with the largest number of fixed-line subscribers and a nationwide telecom backbone. However, due to the lack of competition and tight regulations, teledensity remained low. It was under the governments of former presidents Corazon Aquino and Fidel Ramos in the 1990s that laws were enacted to enhance competition in the industry, licences were granted to operators other than PLDT and roll-out of services began in earnest.

The Aquino administration granted licences to operators such as Globe Telecom, Islacom and Smart Communications in 1992 with the objective of breaking the monopoly of PLDT. In the same year, the Cellular Mobile Telephone System Policy was enacted and mobile phone services were opened up to competition. Subsequently, in 1993, Ramos’s government passed two executive orders that lowered telephone subscription rates for customers, mandated interconnection among telecom companies and established the service area scheme (SAS). SAS had a positive impact on fixed-line teledensity, which increased from 784,000 in 1993 to 6.6m in 1998. During this period, a universal access programme was also launched which compelled all sector players, even mobile operators, to make fixed-line technology investments. For instance, any company seeking a mobile licence had to install 400,000 fixed-line connections to qualify. Moreover, any company looking to access an international gateway to route international calls needed to install at least 300,000 fixed-lines.

But the government eventually scrapped the SAS in 2002 after finding that fixed-line regulations were not resulting in a substantial increase in subscribers in rural areas. The landline provisions were also found to be more expensive to implement than mobile. Mobile phones made a late entry in the country but have made rapid strides over the last decade. The era of the backward and expensive copper landline technology has passed, and the country has moved on to the mobile phone. The last decade has also been a period of consolidation in the industry which has resulted in the emergence of two key players, PLDT and Globe Telecom.

INDUSTRY CONSOLIDATION: Since 2002, when the mobile phone segment started witnessing rapid growth, competition for subscribers and market share intensified among telecom operators. This period of intense price war benefitted the consumer and ultimately led to industry consolidation. The larger operators slashed rates to attract subscribers, which eventually led to a sharp fall in ARPUs and cash flow squeeze for smaller companies. For instance, the strategy to cut rates substantially was first employed by Globe Telecom, which resulted in a jump in demand for its services. Average tariffs for international calls subsequently fell to just $0.40 per minute from more than $3 per minute. Unable to face competition and seeing deterioration in its financial position, telecom operator Piltel sold its fixed-line business to PLDT in 2008 and its mobile business to PLDT-owned Smart Communications in the following year. Digitel, a successful company which had launched its mobile phone service under the brand Sun Cellular in 2003, was acquired by PLDT in 2011 from parent JG Summit Holdings at a price of P74.1bn ($1.8bn). Falling ARPUs, cash squeeze and a lucrative offer from PLDT facilitated the acquisition.

In September 2013, Globe Telecom got the go-ahead from a regional trial court to acquire Bayantel, which is currently facing financial difficulties. The acquisition will be through a debt-to-equity conversion deal that allows Globe Telecom to acquire a 57% controlling stake in Bayantel. Bayantel has been facing cash problems due to the decline in its traditional fixed-line business as well as higher market competition. This has also driven a decline in revenue generation and increased the debt burden. Globe Telecom has already purchased 96.5% of Bayantel’s outstanding debt, which will be converted to equity to complete the acquisition. There is also a plan to restructure $423.3m of Bayantel’s debts so the firm can meet its payment obligations.

DUOPOLY MARKET: PLDT, the government-owned firm, holds 70% of the mobile market, while privately operated Globe Telecom controls 30%. In the fixed-line segment, which has been stagnant alongside the rapid growth in mobile services uptake, PLDT remains the dominant player followed by Globe Telecom and Bayantel, which is set to be acquired by Globe. According to a report by PwC, the three companies jointly control 68% of the fixed-line segment.

PLDT has been the leading telecom operator in the country since it was established in 1928. Starting off as a public utility, which was controlled by US entities, the company subsequently turned into a Filipino-owned enterprise providing fixed-line telephony. Currently, 34.5% of the company is held by foreign investors, including marquee names such as JP Morgan Asset Holdings and NTT Docomo of Japan. Acquisition of Digitel in 2011 allowed PLDT to become the dominant mobile services provider in the country. Apart from its dominance of the voice and texting services, PLDT’s extensive infrastructure is expected to help the company route increasing volume of data through its network. This is important because of the potential high growth of data services based on new technologies such as mobile broadband. In 2013, the company sold SPi Global, a large business process outsourcing (BPO) subsidiary, to CVC Capital Partners for $300m. The firm’s revenues rose 13% year-on-year to $3.1bn from 68.6m subscribers, an 8% increase since the start of 2012, with 3.2m broadband users as of June 2013.

Globe Telecom started in 1928 as Globe Wireless. Local conglomerate Ayala Corporation holds 31% of its equity while Singapore-based Singtel holds 47%. Public investors own the remaining 22%. The company’s net profits stood at $44.6m in the first three quarters of 2012, a drop of 26% from the previous year. Revenues increased to $502m from $414m over the year, but operating expenses increased 42%, chiefly because of the higher cost of network upgrades. As a general rule, the company has looked to subsidise its services and attract customers through low prices. As a result, its number of subscribers rose 9.8% to 32.1m since early 2012. The firm’s broadband subscribers stood at 1.8m in the first half of 2013. To further extend its reach, Globe Telecom has been expanding its mobile WiMAX system infrastructure to provide innovative services to customers. This has also allowed the company to curtail the cost of laying ground-based infrastructure. PLDT, on the other hand, has been conducting talks with GMA Network, a provider of media content, in order to expand its product range for customers.

PRICE WAR: The industry has witnessed an intensification of price wars between PLDT and Globe Telecom as both companies have worked to attract more subscribers by lowering prices. As a result, ARPUs have declined and the profitability of both companies has been affected. Smaller operators were hit harder by the competition: Bayantel, which had been facing rising debt problems and was acquired by Globe Telecom in November 2013, is a major operator in the fixed-line segment and also provides corporate data services. The firm was awarded a mobile licence in 2000, but it was unable to roll out full services by the November 2013 deadline set by the National Telecommunications Commission (NTC). Despite this failing, its mobile licence was not revoked, as the NTC had originally threatened.

NEW ENTRANTS: Though the telecom sector is dominated by PLDT and Globe Telecom, it could witness new entrants in 2013 (see analysis). The NTC intends to enhance competition in the sector and has been paving the way for new companies. In 2012, the regulator granted a three-year mobile licence extension to Belltel, a subsidiary of local conglomerate San Miguel Corporation (SMC). Belltel was expanding its network and services to customers as of June 2013. Media conglomerate ABS-CBN Corporation is also looking to enter the market through a network sharing agreement with Globe Telecom. The company has distributed an initial 100,000 SIM cards in the weeks following Typhoon Haiyan and plans to launch a mobile SIM as well.

REGULATIONS: The NTC was created in 1979 to regulate the telecom sector. At present, in order to offer fixed-line and mobile services, telecoms operators need to secure legislative franchises subject to further authorisation by the NTC. The NTC also approves tariffs, which are linked to market prices, for local exchanges and mobile services. “Our task is to encourage orderly development of telecommunications,” Edgardo V Cabarios, the director of the regulations branch at the NTC, told OBG. “Consumers should benefit from regulations that foster competition and help deliver quality services.”

Foreign ownership in a telecom company, including a public utility, has been capped at 40% of the subscribed capital stock. Recently, the Securities and Exchange Commission (SEC) of the Philippines issued a directive retaining the 40% cap on foreign ownership in companies, including in public utilities. This was related to the ownership structure of government-owned PLDT. A legal case concerning PLDT’s sale of shares to foreign entities had earlier resulted in a debate surrounding foreign ownership in Filipino companies. Since the SEC’s ruling, PLDT has given its backing to rules that cap foreign ownership at 40%. Currently, Filipino investors currently own over 60% of the company’s voting shares. Steps have also been taken by the company to reduce foreign ownership by issuing 150m preferred voting shares to BTF Holdings, a unit of the PLDT Beneficial Trust Fund, which limited the proportion of shares in foreign hands to 34.5% from 58.4% earlier.

NEW TECHNOLOGIES: The government started attracting bids for five new 3G licences in 2005 with an aim to meet growing demand for mobile services. Four licences, along with the bandwidth, were given by the NTC to Globe Telecom, Connectivity Unlimited Resource Enterprise (CURE), PLDT-owned Smart Communications and Sun Cellular of Digitel, which was subsequently acquired by PLDT. The fifth licence has not been awarded as yet, with Bayantel and Extelcom appealing in the courts against it. The licence awarded to CURE, which was acquired by PLDT-owned Smart Communications in 2008, was later relinquished by PLDT in 2011. This was due to the fact that NTC had laid down the condition that PLDT would divest the 10 MHz 3G licence in order to complete the acquisition of Digitel in 2011. Currently, the NTC is in discussion with the Government Procurement Policy Board to decide how rebidding for the licence should proceed.

The uptake of 3G has been slow, despite telecom operators rolling out comprehensive services with the objective of earning rich dividends from their offerings. The relatively low penetration of mobile phones which are equipped to work on 3G technology has affected the demand for 3G services. However, with the growth in relatively low-cost smartphones, the demand for mobile data services based on 3G technology is expected to be robust in the future. According to a report by PwC, 3G subscriptions will grow at a compound annual rate of 12.7% over the period 2012 to 2016, and PLDT and Globe Telecom have started providing services based on 4G or long-term evolution technology, while a mobile WiMAX network has been established.

TEXT MESSAGING: Filipinos are prolific users of text messages. The use of short message services (SMS) in the country is so widespread that the Philippines has acquired the moniker “texting capital of the world”. The NTC estimates that an average of 1bn text messages are exchanged in the Philippines every day. Because SMS use is so widespread there was a proposal from the administration in 2009 that sought to change tariffs imposed on the texting service. This proposal specified a new tax that would charge P0.05 ($0.001) per message. It was estimated the tax would help the government gain revenues of P36bn ($867m).

However, the proposal was subsequently rejected by Congress. Multilateral organisations such as the IMF have argued that imposing a small tax on SMS services could help the Philippines improve its budgetary position. As of November 2012, operators such as Globe Telecom and Smart Communications were resisting the NTC’s order to refund subscribers for overcharged SMSs. The companies also intended to move to the courts to settle the dispute and have argued that messaging is a deregulated service and that the NTC should step in only in the case of an extreme distortion of tariffs. Despite the popularity of SMS, other methods of communicating are becoming more popular with the growth of mobile internet. New technologies, facilitated through the usage of smartphones, for example, are enabling Filipinos to network, chat and share messages online and this is poised to grow further in the future. This could affect the popularity of text messaging, which for the moment is still widely used.

OUTLOOK: The future of the telecom sector in the Philippines holds promise for sophisticated technologies such as mobile broadband. Fixed-line telephony, which is stagnant, will likely decline further even as fixed-line broadband usage increases with more subscribers accessing internet at home. With smartphones becoming more widely available and uptake increasing, the popularity and coverage of mobile broadband based on 4G technology is poised to expand. Indeed, telecoms operators are already expanding mobile WiMAX networks to drive expansion in the service segment.