Demand and opportunities grow for local telecoms providers in the Philippines

Lagging behind the region’s faster evolving markets when it comes to the provision and adoption rate of mobile broadband, data usage and mobile services in the Philippines are expected to grow as smartphones become more pervasive and the two leading operators continue to raise capital expenditure to upgrade existing networks and deploy 4G sites.

MARKET LAYOUT: Although considered a duopoly, with the two leading operators – Philippine Long Distance Telephone (PLDT) and Globe Telecom – controlling the majority of fixed line and mobile subscriptions, competition between the two is high. Each firm looks to capture shares from the other through aggressive promotions and new value-added technologies as profit margins on traditional voice calls and texting taper off. Beyond this though, the sector’s regulator, the National Telecommunications Commission (NTC), finds itself legislatively limited from ruling on issues such as interconnection rates, internet peering and mobile number portability. This inhibits its ability to intervene on matters that could promote competition or make a more compelling case for new entrants to feel confident enough to assertively roll out services and take on the entrenched incumbents.

If and when network capital expenditure and deregulation increases access and drives down telephony costs, the Philippines’s demographic fundamentals offer exciting prospects for advanced telecommunications being adopted. “There are 100m Filipinos with an average age of 26. Young people are quick adopters, so long as the price point is right”, Donald Felbaum, managing director at ICT consulting firm Optel, told OBG.

BYPASSING FIXED LINE SERVICE: As has transpired in many developing markets and throughout much of Asia, fixed line infrastructure, which until 1995 was exclusively the responsibility of the then state-owned monopoly PLDT, was relatively non-existent by the time mobile network technology was introduced. As such, much of the market leapfrogged directly into mobile communications, resulting in fixed line penetration remaining minimal. “Mobile telephony services really took off in the 1990s when submarine cables landed at the same time as the PLDT monopoly was broken up and the sector evolved into hyper competition,” Gillian Joyce Virata, former senior executive director at the Information Technology and Business Process Association of the Philippines, told OBG.

When new licences were first issued, based on an expectation that fixed line growth would be stagnant, especially for the residential segment, new carriers opted to focus their attention on the mobile space, allowing PLDT to continue its dominance over the fixed line market. For the first half of 2014, the firm reported to have 2.2m fixed line subscribers, indicating a penetration rate of around 2.5%. While subscriber numbers are waning, PLDT claimed a 6% increase in fixed line earnings over the period due to strong performance from its retail and corporate base.

MOBILE CONSOLIDIATION: Mobile penetration for 2013, according to the International Telecommunications Union (ITU), stood at 104.5%, an increase of some 10% from the year prior. While it is difficult to ascertain official figures, unique penetration, when discounting the common practice of multiple SIM card ownership, industry players estimate this to be around 80%.

Following a period of consolidation that began around 2008, when average revenue per user (ARPU) took a hit from the detrimental impact of the global financial crisis on the local economy, the mobile sector has evolved into a two-horse race, with PLDT holding 63.4% of the market and Globe Telecom responsible for the remaining 36.6%, as of the first quarter of 2014.

PLDT-owned Smart Communications kicked off a series of industry consolidations when it acquired Pilitel in 2009. Digitel, a successful company that had launched its mobile phone service under the brand Sun Cellular in 2003, was subsequently acquired in 2011 by Smart at a price of P74.1bn ($1.67bn). In September 2013 rival Globe Telecom received approval from a regional trial court to acquire debt-ridden Bayan Telecommunications. “Bayan has a strong enterprise business and a solid broadband subscriber base. Their nation-wide fibre network provides us with a strong back up,” Jomari Fajardo, investor relations director at Globe Telecom, told OBG. Both Globe Telecom’s consolidation of Bayan and the PLDT’s absorption of Sun Cellular have been slowed by appeals and contestations over if and how the frequency allocations inherited in the deals should be publicly re-auctioned (see IT overview).

TEXTING PREVALENCE: Labelled by some as the “texting capital of the world”, Filipinos are among the world’s most prolific senders of text messages, with estimates that nearly 2bn SMS messages are sent every day, accounting for around 10% of global text traffic. The propensity for high texting rates stems from the fact that voice calls are prohibitively expensive for many lower income citizens. In recognition of the reliance on SMS for the poorest segments of society, in early 2014 the NTC ruled that the interconnection fee per text message between the two main operators be dropped from P0.35 ($0.0079) to P0.15 ($0.0034). “We would like to do the same for voice, but by law we are not empowered to do so as the interconnection rates are negotiated by the two operators. The only way we can intervene is if one party asks us to mediate, and so far this has not happened,” Edgardo Cabarios, director at the Regulation Branch of the NTC, explained to OBG.

At present, subscribers calling between networks incur an interconnection cost of P4 ($0.09), whereas in most countries this cost is between $0.03) and $0.05. “I believe we have the second highest interconnection rates in the world after Brazil, and a voice call to the US from the Philippines can often end up being cheaper than a local call as a result,” Cabarios said.

POST-PAID CONVERSION: Most active consumers hold dual SIM cards that they switch between in order to avoid hefty interconnection charges, as well as take advantage of “on network” promotional deals. Some 97% of SMART subscribers are pre-paid, with the same holding true for 95% of Globe Telecom’s subscribers. Enticing more customers to convert to postpaid plans is one way for operators to ensure that their SIM card becomes the primary one.

“Although our prepaid subscribers dwarf our postpaid subscribers in sheer numbers, revenue wise, postpaid monthly ARPU is around P1200 ($27) versus around P150 ($3.37) for prepaid,” Fajardo told OBG. “The postpaid segment, growing at around 18%, is one of our main growth drivers. The aim is to convert the higher spending prepaid users into postpaid subscribers. While part of their motivation to switch is to take advantage of a subsidised handset, the main appeal is the convenience of not having to frequently recharge a SIM and being able to customise the services one needs.”

GOING MOBILE: According to the ITU, 2.6% of Filipino households in 2013 had installed broadband, while 27 out of every 100 Filipinos had access to mobile broadband. This translated into the country ranking 110th (out of 190) globally for fixed broadband penetration and 79th for mobile broadband penetration. Collective internet penetration of 37% placed the country 106th in global rankings. While personal broadband access is considered to lag the regional average, it is trending upwards at a fast pace, with global consultancy PwC predicting 3G subscriptions to grow at a compound annual rate of 12.7% over the period 2012 to 2016. “Three to four years ago, 70% of internet access by Filipinos occurred at cyber cafes,” George Royeca, a business development associate at technology conglomerate IPVG Corporation told OBG. “As mobile broadband expands and gaming switches from PCs to mobile devices, we are converting the internet cafes we own into mobile phone retail outlets.”

The demand for mobile data services is expected to be robust in the future, driven concurrently by the proliferation of more affordable smartphones hitting the market and the finalisation of operators’ rollout of 3G networks, and eventual moves towards the full-scale commercial deployment of 4G networks beyond Metro Manila’s central business district and some key tourist destinations. “Our legacy network needed to be modernised, as it was geared towards SMS and not data. We are betting big on future data demand, and as we want to make sure our network is future proof, we are advancing right into 4G compatibility even though the country’s 3G networks are not yet fully saturated with traffic,” Fajardo told OBG.

HOME GROWN SMARTPHONES: The Philippines offers one of the world’s more exciting markets when it comes to smartphone adoption. While ownership penetration of 15%, as measured in a 2014 study by mobile market research firm On Device Research, was the lowest in South-east Asia, penetration is expected to leapfrog to 50% by 2015. Data from research firm IDC Asia/Pacific shows that for the third quarter of 2013, smartphone shipments to the Philippines expanded 75% year-on-year, compared to flat growth for Malaysia, 4% in Thailand, 1% in Vietnam, 12% in Indonesia and 14% in Singapore. “Price points for entry-level smartphones are dropping dramatically and we have reached the inflection point and will witness a huge upgrade cycle over the next five years,” Royeca said.

Somewhat unique to the Philippines is that the upswing in low-cost smartphone purchases is not limited to cheap Chinese imports, as three homegrown brands – Cherry Mobile, MyPhone and Starmobile – are capturing a substantial chunk of the market traditionally dominated by Nokia (at 28% market share) and Samsung (24%). In an early 2014 survey conducted by rewards platform Jana, 85% of respondents indicated a willingness to purchase a local smartphone brand. The Jana report places Cherry Mobile as the third most popular smartphone brand (17% market share) while MyPhone is fifth, with a 4% share. The positioning of local brands, which offer Android-based devices at a price point as low as $50, is not all bad news for the established high-end foreign smartphone makers, as the market as a whole is growing and early adopters are expected to upgrade devices over time as their usage requirements transition from more basic applications to video-streaming and mobile gaming.

NEED FOR SPEED: In anticipation of mobile data being demanded at faster speeds, both Globe Telecom and PLDT (through Smart), in addition to expanding their 3G network coverage, are devoting substantial capital to installing 4G-enabled sites situated across the country. “As screens and offerings on phones get better, this will spawn a whole new way of consuming content on mobile devices, and we are preparing our network to cope with this growth,” Ernest Cu, president and CEO of Globe Telecom, told OBG.

A 2014 report by global market research firm Nielsen on Filipino internet habits reveals that 33% of users are online for more than two hours per day, 95% visit social networking sites and 44% play online games. “Filipinos love videos and music, and we are a very social media engaged country. Operators’ moving to 4G and long-term evolution (LTE) makes sense and will present a big future market for mobile advertising and e-commerce,” Royeca said. Out of 34m Facebook accounts in the country, only 20% were estimated to be accessed through mobile devices in 2013, indicating high potential to divert traffic from fixed to mobile broadband.

MONETISING NEW TECHNOLOGIES: The rapid uptake of smartphone applications and the country’s social media savvy population is resulting in a high propensity for data users to take advantage of IP-based messenger apps like WhatsApp and Viber for their communication needs as a means of reducing expenses for traditional voice calls and texts. Operators, accordingly, are grappling with this new reality and are strategising over how over-the-top (OTT) applications can be leveraged to create, rather than erode, revenue streams.

“We have opted to bundle OTT apps like Spotify as part of our data promo offers to encourages more use of the network. The alternative is to try and develop competing apps ourselves, but we prefer to partner with best in breed, as their developers have spent years perfecting their product,” Fajardo said.

In a race to incentivise their subscribers to become more accustomed and adept at accessing the internet on mobile devices, promotional access to popular OTT applications and social networking sites has resulted in a case of one-upmanship that some observers have dubbed the “free internet war”. At various points in 2014, Globe Telecom has offered its subscribers free uncapped Facebook access, while Smart has countered with promotional periods offering 30 MB worth of free daily surfing and unlimited access to select sites like Wikipedia.

“In the past, most internet browsing was done at internet cafes where you paid by time surfed. So we have to educate consumers that if they do very basic browsing on their phones, it is a manageable expense. But if they want to stream and download, it will naturally end up costing more,” Fajardo said.

A WAY TO PAY: Considering that only 10-15% of the population has access to formal financial services, whereas cell phone penetration exceeds 100%, the telecoms sector has emerged as a viable alternative distribution channel for banking the unbanked. Both network operators are looking to extend offerings to include mobile banking and electronic payment solutions. “Some 95% of the country’s subscribers are prepaid and accustomed to loading credit as a way of life and entering pins and codes. So it’s a natural transition for phone credit to become a payment method,” Royeca said.

Globe Telecom is working with its parent company Ayala Corporation’s banking subsidiary, the Bank of the Philippine Islands (BPI), to attach bank accounts to its SIM cards and cross-sell microloans and insurance. As part of a consortium with BPI and Smart, it has been awarded a contract to handle the new smart card ticketing system for Metro Manila’s light rail and bus transit systems. The consortium aspires to create an ecosystem similar to what Hong Kong has achieved with its highly regarded Octopus Card, where the top-up metrocards can be used to transact at retail outlets and a host of other merchants.

A significant challenge facing Filipino small and medium-sized enterprises is an inability to afford the hardware and establish the necessary arrangement with a bank to accept credit card payments – a barrier that mobile money could help overcome. Another segment standing to benefit from mobile money is the country’s over 2m overseas foreign workers, who through mobile money can send remittances electronically by phone to family members who might not have a bank account.

DUO DOMINANCE: While competition between PLDT and Globe Telecom is intense, many argue there is still room for additional market players. Supporters of this position highlight the fact that the Philippines is Southeast Asia’s second-largest population, with just under 100m people, and therefore should be able to sufficiently support multiple operators. The Philippines lacks clear-cut laws prohibiting anti-competitive behaviours, and the sector regulator, by its own admission, lacks the legislative powers to intervene on certain matters without parliament passing it into law. In addition to an inability to rule on voice interconnection rates, other regulatory measures in place in other markets to bolster competition that have been debated but so far have not been instituted in the Philippines. These include measures for tower sharing, mobile number portability and internet peering (see IT analysis).

POTENTIAL CHALLENGERS: The NTC has not been averse to issuing new licences or permitting acquisitions by new entrants, and although the sector has shaped into a duopoly, things could structurally be set to change. Brewing giant San Miguel Corporation (SMC) – following the extension of a 3G licence and LTE-compatible spectrum to its subsidiary, BellTel, in 2012 – announced that it would launch its mobile brand in 2014. However, so far the conglomerate has yet to commence with commercial operations. “Some are asking us to impose a ‘use it or lose it’ principle on [SMC’s] licence” Cabarios told OBG. “However, as there are already two very entrenched players, we have to allow SMC proper time to assess the market conditions before committing huge sums, and it would not be right to force their hand into moving any faster than they see fit.”

SMC, with aggressive management, a recognised brand name and established distribution channels could present itself as a formidable challenger. However, rolling out a national network is a costly and challenging affair. Analysts estimate that SMC would need to invest around $2bn a year on infrastructure to catch up with the incumbents, and would likely face struggles in securing viable base station sites and accessing the required environmental approvals from government agencies, as well as “right of way” permission from local communities. “With market at saturation, the only way for a new entrant to gain customers is to steal market share. Considering all the risks and cost involved, it is an unenviable proposition,” Felbaum explained.

Joining SMC as a potential market disruptor is media conglomerate ABS-CBN Corporation, which in May 2013 signed a network-sharing agreement with Globe Telecom to create a new cellular telephony brand, ABSCBN Mobile. The firm has announced plans to launch a mobile SIM that will extend a number of services to subscribers in addition to traditional media content. The SIM will provide voice, SMS and various other online services. “Aside from the obvious advantage of avoiding spending on building its own network, the agreement gives ABS-CBN the capability to not only offer traditional telecom services, but also, more importantly, allows them to further leverage their library of proprietary and exclusive content to be re-purposed for viewing on a mobile phone screen. By being able to extend their reach to a different screen, this also gives their advertising clients more options,” Fajardo told OBG.

NETWORK UPGRADES: As the debate over the degree to which the market stands to benefit from a major shake-up rolls on, both PLDT and Globe Telecom are undergoing substantive network modernisation programmes to enhance their offering. “It’s not always about the number of competing players, but the level of competition between the players,” Royeca said. “Their ARPUs are relatively small compared to their regional peers, so it is hard to accuse them of profiteering. Nor can one accuse either player of not investing in infrastructure. PLDT has certainly matured from exhibiting monopolistic to market developmental traits.”

PLDT, for its part, was expected to have committed P32bn ($720m) over the course of 2014 towards ensuring its 3G network reached 100% coverage by year-end, and its LTE network was being extended to cover all major cities and reach around 50% of the population. Its national fibre network footprint, meanwhile, was being expanded from 78,000 km to 90,000 km.

Globe Telecom, in late 2011, launched a $790m programme to modernise its services, including the roll out of 4G LTE. The modernisation, which involved the upgrading of 100% of its cell sites, was completed in 2013. In 2014 capital investment in excess of $200m was earmarked to further expand the data network and build additional capacity, which is becoming more important given high-end customers’ growing mobile data needs. According to Fajardo, total capital expenditure for 2014 was to reach $650m, and expected allocation for 2015 is between $700m and $750m.

OUTLOOK: Although ARPU growth has tapered as voice and data revenues decline, the two operators are looking to combat this trend by selling more data, for which demand is set to increase as smartphones become more accessible and customer sophistication and requirements rise. Overall, the Philippine’s young population and expanding economy makes it an attractive market for telecoms firms to play. Despite the two incumbent operators enjoying an entrenched market position that makes them difficult to challenge, the propensity for Filipinos to consume online content and engage in social media presents opportunities for a range of technology firms involved in delivering media content, gaming, e-commerce and digital advertising.